These events have occurred in several key markets before with US equities in and US treasuries in being the most notable. There will be several contributing factors cited including thin liquidity, a high proportion of automated trading as well as liquidity provision by high-frequency trading HFT firms and phantom liquidity — the placing and cancellation of a high volume of orders by HFT firms. The reduction of traditional broker dealer liquidity will also be on the list.
It has been documented that the FX markets faced some of these circumstances on 7 Market liquidity hedging and crashes auto. The sterling crash was conducted in Asian trading hours when liquidity tends to be at its thinnest, exacerbating these factors.
For market liquidity hedging and crashes auto buyside FX trader, thinner sellside liquidity, the consequent potential for greater market impact and volatility, increase the importance of finding a wide circle of liquidity providers. There is enough flexibility in most e-trading systems for us to be able to choose whether or not we do an RFQ, whether we market liquidity hedging and crashes auto advantage of available liquidity at the time or whether we work an order into the system over specific parameters.
Where broker-dealers are falling back, electronic liquidity providers ELPs are moving in. Representing such a considerable chunk of actionable liquidity, makes HFT firms a potentially valuable counterpart for investment managers.
The heads market liquidity hedging and crashes auto trading on buyside desks have matured their ability to interact with HFT liquidity, often due to experience beyond the institutional investor market. The result is that relationships between buyside firms and HFT firms are getting stronger. From our perspective HFT is not bad for markets market liquidity hedging and crashes auto se.
But it is important to differentiate [between types]. He draws a distinction between electronic liquidity providers ELPs which offer automated market making and provide additional liquidity in markets, and firms that are active in markets with pure proprietary strategies like latency arbitrage and short-term momentum trading.
For traders seeking to avoid HFT altogether, some platforms offer mechanisms that limit the types of trading strategy that can be used, in order to remove the risk of any predatory practices.
However, this was not occurring in many instances. However, it is meaningless to those that come with a genuine trading need, who seek firm, executable liquidity and who compete on strategy.
The challenge firms have is not only the risk posed by counterparties, but how to determine real market liquidity, where a large volume of orders might be cancelled, creating a phantom liquidity picture and potentially increasing market impact for the unwitting. It noted that the decline was the first picked up in a report since While liquidity does not correspond directly with volume, a shallower market makes bigger orders easier to detect.
Working with non-bank sources of liquidity will help, but it will not be a salve. Given these circumstances, finding liquidity will be down to a combination of the right tools and platforms. There is a more radical option, notes Hooker. Tweet Best Execution About the author. You must be logged in to post a comment. Best ExecutionJanuary 12, Best Execution About the author.
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