Fidessa's Steve Grob looks at whether the industry will follow equities into a world of fragmented liquidity, smaller trade sizes and HFT.
The derivatives industry looks set to undergo a similar set
of structural changes to those experienced by the equity
markets over the past few years.
This had led some to look at the current shape of equity
markets as a proxy for what may happen in derivatives. In
particular, attention has turned to some of the more
controversial outcomes of multi-market trading, such as
low-latency, venue-based high-frequency trading (HFT).
The rise of this type of activity was an inevitable, if
unintended, consequence of the multi-market structures that
emerged in the US and European cash equity markets. This is
because when trading is spread over multiple venues, it enables
firms to exploit price differences in the same stock over
multiple venues or differences in the tariff charged by each
Those firms that can do this quickly (or at high-frequency) can
rapidly move liquidity between venues just ahead of the pack.
The net result is that average trade size tends to get smaller
and smaller, as the chart shows.
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