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Can Emerging Markets Resist The Algo Trading Bug in 2012?

As algorithmic trading continues to evolve, it is my view that we will start to witness more firms using their systems to trade equities not only from the U.S. and Europe, but also from the Middle Eastern, Latin America and Asian markets. The latest announcement that Colt’s sister company KVH will be expanding its low-latency network to Sydney, adding a new data and co-location centre, is indicative of the expansion of trading, and the rise in transaction volumes, across the Asia/Pacific region. New entrants, such as the Multilateral Trading Facilities (MTFs), are also bringing market liquidity and this in turn is drawing in more trading participants to the Asian markets.

However, it’s not all just about Asia; the Mexican Exchange will also be announcing the launch of a new internal trading engine, which has a reported throughput of more than 200,000 messages per second. Like KVH, the trading engine will be ultra-low latency, executing trades in round-trips of just 100 microseconds - an improvement of over 25 milliseconds on the Mexican Exchange’s legacy trading system.

As European markets continue to come under the regulatory spotlight, emerging markets remain in a perfect position to take advantage of regulatory arbitrage, a practice that enables organisations to capitalise on loopholes in regulatory systems.  A surge of regulatory arbitrage is already benefiting lightly regulated destinations such as China and Russia.

Regulated investment firms in the likes of Brazil and India will continue to develop smart order routing capabilities as they gear up for a surge in algorithmic trading. This will be driven in part by the organisations that have managed to slip through the Volcker Rule system, brought in post the sub-prime mortgage collapse to restrict the amount of money banks can invest in hedge and private equity funds in order to safeguard the system from risky market speculation. Therefore, by turning their attentions towards more sophisticated smart order routing technologies, investment firms in emerging markets can avoid this regulatory risk by using algorithms to get the best results without moving the market, enabling them to access hidden liquidity.

However, it is not all straight forward for those looking to get aggressive around HFT in emerging markets. The procedures for regulatory approval around algorithmic trades are highly complex in certain markets. Take the National Stock Exchange (NSE) of India.  An organisation trading at high-speed in India must prove to the NSE that they have certain risk precautions in place. This is in addition to fully demonstrating the full nature of the trade to the exchange.

It is a question of when, not if , emerging markets will fully embrace the benefits of algorithmic trading in 2012. In every emerging market, a growing proportion of trading is conducted at high-speed and nothing except a blanket ban will prevent the practice from being adopted elsewhere. While there are a few barriers to overcome for the likes of India, when it comes to algorithmic trading, the genie is well and truly out of the bottle. If the model continues to work in Europe, why should emerging markets not adopt the same approach as the search for more liquidity gathers pace?


Great article...

Just one question regarding the answer to Mr. Johnson... is as clear as you mentioned that HFT and Algo Trading reduces volatilty in the markets? For me is not that clear as far as algos are prone to join larger o smaller rallies and to emphasize peaks... isn't this exactly what volatility is? 

Many thanks in advance!




Having read this article, I feel rather as I did when I read that CERN was about to perform an experiment which just might, if they were extremely unlucky, create a black hole which would instantly destroy the entire Solar System. Maybe the banks in third world countries can't resist the algorithmic trading fad, but at least they could put up a struggle. Haven't I, an innocent party who had nothing to do with the banking debacle, just been put on an austerity programme because the algorobots just nearly destroyed the entire international capitalist system?

It’s been clear for the last two years that Algorithmic and High frequency trading has actually improved liquidity, and reduced volatility, in the capital markets. The crash in 2008 was largely driven by failures in property markets and property backed assets, and in the OTC derivatives, such as credit default swaps, which are not yet subject to algo trading. Despite continued negativity from certain sections of the media, algo trading also offers greater efficiencies for traders, with tighter spreads and better prices for all. To lose these benefits because of an inaccurate perception of the practice, and overzealous and politically inspired legislation, would be very dangerous for the health of the markets.

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