October 1, 2012

Chicago Fed on Out of Control High Frequency Trading


Chicago Fed on out of control high frequency trading.
 

via Chicago Fed

No one knows what a trading firms exposure is - 
The study also revealed that there may be times when no single entity in the trade life cycle—trading firm, clearing BD/FCM, exchange, or clearinghouse—has a complete picture of a firm’s exposures across markets. For example, some trading firms and BDs/FCMs are unable to calculate their enterprise-wide portfolio risk. Trading firms and BDs/FCMs need to aggregate trade information from multiple exchanges in a central repository and calculate their overall exposures in the markets in a timely manner. However, the speed at which this calculation can be made depends on how quickly trading firms and BDs/FCMs receive drop copy information from exchanges. Some trading firms also use multiple BDs/FCMs to clear trades, which results in no single BD/FCM being able to see the trading firms’ exposures across markets. Many trading firms also trade at multiple exchanges, and trades are settled at multiple clearinghouses. This prevents any single exchange or clearinghouse from seeing the total positions amassed by the firm.

Incredible lack of control on the trading!  And, poorly designed systems.

It is amazing that such systems are allowed to trade.


Tags: hft out of control, high frequency trading out of control, chicago fed on hft, badly designed high frequency trading algo