The TRADE 52 | Page 74

[ M A R K E T A N A LY S I S | H F T ] “Any time you have consolidation with one or two firms providing all of the liquidity, you’re more likely to see short-term volatility.” ROB D’ARCO, CEO, RIVAL SYSTEMS new markets such as India.” MiFID II bites MiFID II is also expected to bite the HFT industry hard. With stricter rules around dark pools and block trading, some foresee a separation between HFT and low latency trading among the big prop shops. “This trend is also likely to be exacerbated by the new rules due to come into force next year under MiFID II. In particular, new rules limiting the volumes of individual shares that can be traded through dark pools, the sort of venues HFT- led trading strategies reply upon,” 74 The Trade Summer 2017 says Misys’ Farley. “These will, in the future, have to be broken up into more manage- able blocks that keep transactions below the new limits, removing a valuable asset for HFT trades that often rely on simultaneous execu- tion in size to be effective.” For market making post-MiFID II, Farley explains some of the HFT firms could be encouraged to act as systematic internalisers (SI) for certain instruments, including derivatives. However, the problem here is that they would not be allowed to directly match buyers and sellers. “The consequence of this, howev- er, could be the disintermediation of many existing exchanges, some- thing the authorities will not want to see at a time where they are encouraging more transparency by forcing more OTC derivatives to be traded over these venues for better market surveillance,” Farley adds. HFT firms based in the US are also watching what is going on in Europe with MiFID II, and are preparing to make changes to their strategy. “There is a trend of firms getting out of heavy technology invest- ments because they have seen the experience in Europe and they want to limit their exposure to regulation,” says Sylvan Thieullent, CEO at Horizon Software. “Instead they are moving more into quantitative-based businesses as opposed to speed, with a heavy emphasis on forecasting analysis, so there is definitely a change in approach to technology for these firms.” Yet MiFID II is also presenting some opportunities, especially around agency execution and research. On Virtu’s first quarter earnings call, its CEO Doug Cifu explained MiFID II and unbun- dling requirements provided an opportunity to expand in Europe with the acquisition of KCG, which operates an established European market making franchise. “Europe is one of the key moti- vators for us wanting to get into the agency execution business and it was obviously our experiences with order routing for our own selves and how that value proposi- tion really translated to the agency business,” Cifu said. “With the advent of MiFID II and