In truth, high-frequency trading (HFT) has been prominent feature of the financial markets for years, although it remained the industry’s best-kept secret for a considerable portion of this time. Leveraging powerful computer networks, it has the capacity to complete a high volume of transactions simultaneously and incredible speeds, while it uses complex algorithms to analyse real-time market conditions and identify profit-making opportunities.

This definition does not do justice to the impact and notoriety of HFT, which came to the attention of the mainstream after an event in the autumn of 2014. During 12 short but frantic minutes on October 15th, the yield on the 10-year Treasury Note dropped to record lows before surging inexplicably back to its previous levels. This captured the attention of investors and promoted a government investigation, thanks to the sensitive nature of the asset and its reputation as a stable, benchmark security.

The appeal of HFT and its controversies

While this was not the first time that the financial market had experienced such unusual activity, it was arguably the first instance that involved the flipping of government debt. It was also an event that brought HFT into the mainstream, as a computerised process that large corporations used to trade their own capital. Similarly, it highlighted to core appeal of HFT, such as its sophisticated nature and ability to drive huge amounts of profit within a very short period of time.

The way in which the Treasury Note yield fluctuated so violently also highlighted that havoc that HFT could wreak within the financial marketplace, raising huge regulatory and ethical issues concerns. After all, if a such as secure asset (that is largely considered as a consistent safe haven for investors and a pivotal tool for implementing US monetary policy) was vulnerable to high frequency trades, then the impact on traditionally volatile markets such as the foreign exchange could potentially be catastrophic.

Of course, some argued that the emergence of algorithm based trading represented a natural evolution within the financial marketplace, following on from the establishment of online forex brokerage platforms, real-time trades and even mobile phone trading. The issue was not initially with the technology, however, but more how it was manipulated by aggressive algorithmic trading firms that sought to exploit technical gaps and market failings to further their own gains while putting traditional investors at a considerable disadvantage.

The last word

This issue has raged to this day, as the world’s leading nations and financial bodies have grappled with the idea of regulating this practice. Most have developed caps on the number of transactions that can be completed at any given point in time, tackling the voluminous nature of HFT and creating a fairer more stable market. This does not necessary tackle the firms that continue to manipulate HFT at the expense of other investors, while it has entirely dealt with the marketplace volatility that can arise as a result of high frequency orders.

One country to buck this trend is Germany, which has taken the altogether more ambitious and complex approach of targeting financial algorithms rather than simply regulating the speed and volume of orders. The HFT Act has achieved some impressive results, thanks primarily to an algorithm-tagging rule that lists the program and identifies the strategy behind it. This means that authorities can then determine which are fair and which are designed to wreak havoc in the market, creating a more stable climate and more stringent regulations for the future.