Know thy counterparty


Will Psomadelis

Will Psomadelis

Global Head of Electronic Trading Research, Head of Trading; Australia

The global debate about High Frequency Trading (HFT) being beneficial or detrimental for markets is ongoing. The concern for institutional investors should not be about the legitimacy of HFT, rather it should be about identifying, measuring and minimising transaction costs no matter the source. With the explosion of HFT volumes over the past five years, it is impossible for the buy side to accurately measure transaction costs without properly understanding the nature of the counterparty, to what is now a significant portion of their trades. During this paper we examine some wider relationships between dark trading and HFT covering several topics as background before moving on to provide data from conducted primary research.

The paper decomposes HFT into two distinct subsets, those being “microstructure arbitrage” and “high frequency quant” to identify how both sources of cost can be measured and handled. Empirical evidence of systemic losses in certain Australian dark pools is provided along with a study of lit market order book cancellations and the impact on prices immediately after a cancellation event. A framework for the measurement of market impact including trade reversion after the order has completed is also provided.

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