Is a Reward to Risk Ratio Inherently Better Than Another? How are price formed in the Stock and Forex markets? Peter Van Kleef, CEO of Lakeview Arbitrage, is currently leading a series of Marketcetera forex-Frequency Trading Experts Workshops in London, New York, Dubai, and Hong Kong.
Peter talks to FX Trader Magazine about his experience as a trader and explains the main benefits and risks involved in High Frequency Trading. How did you get into High Frequency Trading? Can you tell us a little bit about your background and experience as a trader? During my studies, I was doing a stint at Salomon Brothers in the equity derivatives team in Frankfurt, Germany. We were arbitraging the index future against its components in the old IBIS and DTB trading systems, which were some of the first platforms for electronic trading. I was also market making the DAX options. This was in the early 90s.
90s when markets first got electronic and I am sure it will end in a similar way. There seem to be cycles in the market. Can you explain what high frequency traders do and how they trade? Generally traders in this segment try to analyze the markets faster than their competitors and also exploit opportunities faster than anyone else. There are basically two distinct segments.
The first one is where people rely mostly on speed to get trades that, for example, correct mispricing across different markets. Those trades are nearly risk free for the fastest and therefore competition is fierce. What are the benefits of HFT for the markets? HFT certainly ensures that prices across venues stay in line.
Any significant deviation is arbitraged in split seconds. This is of course very valuable, as it ensures that differential pricing gets eliminated fast and people receive fair prices across venues. The second big advantage is that it makes it easier to provide liquidity to the market. What are the key risks involved in HFT today? And what should be done to avoid them? Key risks are basically poor design of the strategies and infrastructure. Routinely firms that skip on safety and don’t do things properly get carried out of the market.
Experience has significant value and getting people involved that have the necessary skills and experience certainly is worthwhile. Making sure that there is no single point of failure and starting small and in a controlled environment is also important. Why is there such a controversy surrounding HFT in the markets today? Because it’s always nice to have someone to blame to raise one’s profile, especially when most people don’t understand the subject matter. It’s very easy to point the finger when someone doesn’t have a large lobby group. It’s always been in fashion to blame people with superior knowledge and technology for the evils in the world.