HFT Firms Sniff Out New Asset Classes


High frequency traders deploy sophisticated computer programs and algorithms to hunt for temporary pricing differences across markets, completing trades in a fraction of a second.

The firms, which have in the past been blamed for creating market instability, have until now focused on the equities markets, where arbitrage opportunities have been easy to come by. However, Rob Maher, head of European advanced execution services sales at Credit Suisse in London, said declining levels of liquidity in equity markets in the US and Europe had led firms to focus more heavily on cross-asset class trading opportunities to boost profits. “This is a very competitive business. Everybody is always going to be looking for an edge [somewhere else] as some markets become more mature,” he said.

Bob Giffords, a banking and technology analyst, said high frequency trading firms were attracted by the possibility of exploiting the increase in asset correlation – whereby the prices of different types of listed asset across different markets are correlated to one another. Understanding when and how instruments respond to market events allows traders to access profitable opportunities that are less obvious to rival firms. Giffords said: “Some of these more complex correlations between different asset classes still have a lot of high return potential in them. This is where I see the interest in cross-asset trading coming from.”


The dearth of volatility in the equities markets is just one driver of this interest in new asset classes. Regulation is also playing a part. The European Commission’s review of the markets in financial instruments directive, introduced in 2007 and now being updated, will widen in scope to include the fixed-income, over-the-counter derivatives and foreign exchange markets, with the aim of increasing transparency and furthering opportunities for a wider variety of asset classes to be traded electronically.
Added to this is the greater capacity for Speed Traders to trade across different markets and asset classes as financial markets become more electronic and interconnected.

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