The impact of algorithmic trading onmarket dynamics is yet to be fullyunderstood. Questions persist arounda number of issues. For instance, howdo markets in which computers tradeagainst other computers differ frommarkets with human traders? Whatare the implications for pricebehaviour, market regulation andfinancial stability?

These questions have raised concernsfor regulators, market participantsand risk managers. Therefore a keymotivation for developing this eventwas that because mathematicalmodelling has historically played avital role in financial risk managementand in the development of algorithmictrading, it was felt that the subject stillhas a lot to contribute to this debate.

Some of the issues specificallyaddressed at the workshop included:• The role of algorithmic trading in

managing large institutionalportfolios;

• Flash crash: algorithmic tradeexecution and intraday marketdynamics;

• High-frequency cross-markettrading: model free measurementand applications.

CHALLENGES

BACKGROUND

The emergence of newtechnologies and theadvent of computerisedtrading have changedthe landscape offinancial markets inrecent years, but thereare concerns about theeffect this is having ontrading behaviours andmarkets.

Algorithmic trading,automated tradeexecution and high frequency trading (HFT) at themillisecond time scale are now prominentcomponents of all major financial exchanges.Hailed by some as a source of market liquidity,

algorithmic trading hasbeen criticised by others asa mechanism for marketinstability and volatility.

Whereas there have beennumerous HFT events, thisNewton Gatewayworkshop was radicallydifferent because itbrought togetherperspectives from a rangeof experts, allowing for amore complete and

balanced view. These included academics,regulators, practitioners (both investors andtraders) to share knowledge and insights on thisimportant area.

CASE STUDY

Algorithmic Trading: Perspectivesfrom Mathematical Modelling

“It was wonderful to have theopportunity to bring togetherexcellent participants fromacademia, industry andregulators to discuss the veryimportant topic of algorithmictrading”.ADRIAN WELLERUNIVERSITY OF CAMBRIDGE

Newton Gateway to MathematicsIsaac Newton Institute, 20 Clarkson Road Cambridge, CB3 0EH, UK tel: 01223 765580 email: gateway@newton.ac.uk web: http://gateway.newton.ac.uk

One of the aims of this one-day workshop was todisseminate the latest advances in quantitativemodelling and empirical studies on the impact of HFT andalgorithmic trading on markets, with an emphasis onemerging phenomena and implications for riskmanagement and policy. It was attended by over 100delegates, with well over half that number from thebusiness and public sectors.

The development of this event, in keeping with otherNewton Gateway activities, had included a rigorous peerreview process, with inputs from experts in bothacademic and financial sectors. Consequently, the talkswere chosen and the discussion session structured insuch a way as to help highlight potential strategies whichcould mitigate against negative effects and risks ofalgorithmic trading in the future.

The programme of talks included leading academics –Rama Cont (Imperial College London), Albert Menkveld(VU University Amsterdam) and Matthew Baron (CornellUniversity). Phil Allison of KCG presented a practitionertalk from a HFT perspective, whilst Yazid Aharaiha ofNorges Bank Investment Management gave insights intothe management of large investment portfolios. Fromthe UK’s regulatory body, the Financial ConductAuthority, Matteo Aquilina’s talk focused on cross-venueevidence from the UK market on whether high frequencytraders are anticipating the order flow. Cantab CapitalPartners LLP’s Hasan Amjad presented a hedge fundperspective and Evangelos Benos of the Bank of Englandtalked about the systemic risk angle from a central bankpoint of view.

One of the main impacts of this eventwas its success in bringing togetherbalanced perspectives from a rangeof experts and to enable all marketparticipants to come together andshare knowledge and insights.Providing such an event in thecontext of expertise in mathematicalmodelling, brought a distinctiveflavour and made it particularlyattractive for those from theinvestment business community.

There are clear advantages of HFT tothose who can best deploy them,such as, for instance, being able toimplement clever algorithms withextremely low latency. However, thishas also stimulated an escalation incompetitiveness to be fastest, withthe winner making the most money!Perceived disadvantages of HFT arethat it can be a source of marketinstability and volatility and possiblylead to problems such as an increasein systemic risk in financial systems.

The talks and discussion sessionswhich took place clearly helped tostimulate greater understandingbetween all market participants. Viathe various talks and the panelsession at the end of the day,speakers and participants were ableto discuss the many interestingquestions relating to the perceivedadvantages and disadvantages ofHFT. Issues such as what evidenceexists on the positive and negativeaspects of HFT, what possibly causesthem, and how much trading can becontrolled so as to reduce risks, werediscussed.

Some challenges that werehighlighted by participants were:• Accounting for the dynamic nature

of liquidity provision and itsimpact on market quality,functioning and volatility.

• How HFT could be applied to othersectors.

• What could be the impacts of highvalue trading on the world’smajority of poor citizens?

• Fast debugging of recurrent nets;explanations of model decisions.

Overall, feedback indicated that theeffort to form synergies betweenacademics, regulators and theindustry were appreciated.Participant comments reflected thattalks were highly relevant andthought provoking, giving goodoverviews of current practice andmodels, and although some contentwas fairly technical, speakersmanaged to translate this sufficientlyfor the audience to make itcomprehensible. Speakers focusedon real-world issues as examples.The programme covered a widerange of issues across HFT andalgorithmic trading.

ACTIVITY

IMPACTS

JULY 2017