Last month in "What Can Possibly Go Wrong? The ‘Flash Boys’ Arrive In China, [11]" we expressed our amusement at the prospect of HFT algos embedding themselves in the middle of China’s volatile, margin-fueled equity bonanza.
"The rapid liberalisation of Chinese derivatives markets has attracted a new breed of creative traders employing complex trading strategies that can generate quick profits - and an extra dollop of risk - in China's runaway stock boom," Reuters noted, adding that Chinese “brokerages and fund managers are investing in mathematics whizzes and hardware, and moving servers onto trading floors to gain precious microseconds dealing in new options and futures contracts, helping China's CSI300 index become the world's most traded equity futures."
Coincidentally, Chinese stocks witnessed a veritable collapse shortly thereafter as an epic unwind in backdoor margin lending channels shaved some 30% off the market’s (previously) world-beating rally, and while this particular meltdown might have had more to do with cascading margin calls and a sudden shift in the mentality of the country’s semi-literate day trading hordes than it did with hair trigger algos all chasing down the same rabbit hole, you can bet that future bouts of volatility and harrowing rollercoaster rides in EM equities will be exacerbated by the presence of the machines because as Bloomberg reports [12], the Flash Boys are coming to Mexico, Turkey, South Africa, and "beyond". Here’s more:
Exchanges around the world are avidly wooing high-frequency traders, those controversial speed demons of Wall Street.
Despite the often explosive debate over this kind of trading in the U.S., bourses in Mexico, Turkey, South Africa and beyond are trying to lure HFT types to boost business.
The message is clear: whatever the perceived risks, algorithmic robot traders -- algobots -- are marching steadily across the globe.
"We are welcoming foreign investors, and that includes HFT firms," says Muammer Cakir, managing director at Borsa Istanbul.
For many exchanges, the attraction is obvious. Algobots buy and sell faster than a blink, boosting overall trading volumes. Higher volumes, in turn, help attract investors, creating a virtuous circle that benefits the exchanges.
Borsa Istanbul also is letting traders place their computer servers next to exchange systems -– a practice known as co-location -– to facilitate HFT trading. The ultimate plan is for more institutional and foreign trading, and it’s betting that HFT activity on its venues will help make that happen.
The Tokyo Stock Exchange is taking similar steps. TSE officials last month visited New York to let the HFT industry know about upgrades due in September to its Arrowhead trading engine. Arrowhead already matches orders more than 1,000 times faster than was possible five years ago.
Tokyo has been helping high-speed traders in other ways. In the past two months, Susquehanna International Group and KCG Holdings Inc., gained "remote membership" at Japanese bourses, the first approvals since authorities opened up the possibility in 2009. The distinction allows firms to place buy and sell orders directly on the exchange.
In places like Tokyo, exchanges are still largely monopolies. More than 90 percent of Japanese stock trading takes place on the TSE, for instance. And the single market hasn't kept HFT out, which makes up about 44 percent of transactions.
The dominance of a single exchange in many Asian markets may have helped high-frequency traders avoid some of the controversies that have dogged them in the U.S.
"They’re not necessarily bad," says Eduardo Flores, vice president of market supervision at Comision Nacional Bancaria y de Valores, which regulates Mexico’s financial system. “They’re market makers and in a certain form they help it so there’s more liquidity."
As you can see, the HFT lobby has managed to perpetuate the "liquidity provider" lie, proving that the world's moment of inconvenient "truthiness" precipitated by the publication of Flash Boys has long since passed or else never made it to emerging markets where regulators apparently still believe that allowing HFTs to place themselves between every buy and sell order somehow adds a level of efficiency to the market. Of course in reality, the proliferation of the algos will simply do to these markets what it has done in the US - exact a tax on every trade, exacerbate volatility, and sap every last vestige of liquidity from the market.
So get ready Mexico, Turkey, South Africa, and "beyond", because you're about to get a (flash) crash course in spoofing, co-location, and a whole host of other fun terminology from the HFT lexicon, and as for the notion that exchanges will somehow be able to preserve monopolies and oligopolies in the face of an inexorable push towards the rampant fragmentation that facilitates pervasive vacuum tube frontrunning, well, good luck with that.
