13. High Frequency Trading: Market Structure Matters

See, e.g., Pagano and Roell [14] or Jain [15].

See [16].

In the last 5 years, Sponsored Market Access has emerged as an extension to DMA. Sponsored Market Access enables Buy Side clients with latency sensitive strategies to connect to the market via their broker’s membership and identification but omitting the broker’s technical infrastructure in order to achieve latency reduction. In this concept, brokers’ risk management only relies on automated pre-trade risk checks—e.g., by setting the maximum number of orders in a predefined time window or a maximum order value—that are implemented within the exchange software and administered by the respective broker. Naked access describes a setup without these pre-trade risk checks and therefore enables only for post-trade monitoring. Due to the possible devastating impacts by erroneous orders and orders submitted by flawed algorithms, the SEC banned “naked access” in 2010 and requires all brokers to put in place risk controls and supervisory procedures relating to how they and their customers access the market [17]. In Europe, naked access is also prohibited.

In case of retail order flow, the electronification of the Buy Side to Sell Side interaction also refers to retail investors using the World Wide Web to route orders via online-brokerage accounts.

See [16].

See [17‐20].

See [21].

See [21].

See [21].

See [22].

See [23].

See [24].

See [25].

See [26].

See [27].

See [28].

See [29].

See [30].

See [31].

See [32].

See [33].

See [29].

See [30].

Systematic Internalisiers up to 2014 achieved no relevant market shares (below 3 %; see [34]) and only 12 investment firms are registered as SI [35].

See [32].

See [17‐20].

The Securities Industry and Financial Markets Association (SIFMA)—the member-driven trade association—representing a collective voice of market participants reveals that the system operating the SIP is outdated and “suffers from a lack of transparency and competition, questions of underfunding, and insulated governance” [36]. This statement followed after the event of August, 2013 when the SIP operator for Nasdaq listed securities experienced a significant system overload facing 26,000 quote updates per available port per second. The internal error in the SIP software code lead to delay of system output messages. In order to prevent information asymmetry, Nasdaq OMX decided to halt trading for 3 h explicitly denying the fault of HFTs [37]. Also SEC head, Mary Jo White, addressed the problem of consolidated data latency which turns out to be inferior to the latency of direct data feeds [38]. Moreover, she admits that the standards of SIPs robustness and resiliency shall be improved.

See [29].

See [30].

See [30].

See [32].

See [39] or [40].

See [41].

See [42].

See [43].

See [44].

See [17].

See [38].

See [18].

See [19].

See [19].

See [45].

See [46].

See [47].

See [30].

See [48].

An Organised Trading Facility OTF is a new multilateral trading venue category introduced by MiFID II for non-equity instruments that tries to cover all organized forms of trading that are not organised as a RM or MTF.

See [38].