Big Data is a term used to refer to data sets that are too complex and large that they cannot be managed by just standard software alone. The financial market produces some of the biggest data of all with the trades, quotes, consumer research, earnings statements, polls, news articles, and official statistical releases involved.
When things go crash people go crazy.
Different generations of HFT have their different approaches as demonstrated by the unsophisticated speed exploits price discrepancies that the first generation of HFT had. Recent profits, in comparison with 2009, from the ultra fast trading firms were reported to be 74 percent lower by the Rosenblatt Securities, proving that being very fast is simply not enough now. Lawrence Berkeley National Laboratory’s Marcos Lopez de Prado have argued that more and more HFT companies are putting their hopes on what is called “strategic sequential trading” which consists of algorithms that analyse financial Big Data in order to identify footprints left by certain market participants. For instance, when a mutual fund executes large orders in the first second of every minute before the closing of the market, the algorithm will be able to detect that pattern and anticipate that the fund will continue following that trend for the rest of the trade.
The bad news is that addressing this problem will need the ability to understand the mutating Big Data brings. The good news, on the other hand, is that regulators entirely acknowledge the need for the market to adapt to this problem. Commissioner of the Commodity Futures Trading Commission (CFTC) Scott O’Malia recently said in a Big Data Finance Conference that something needs to be done about the fact that “reckless behaviour” is now used in exchange of “market manipulaton.” Even though trading using information collected from social media may be accepted, pre-loading sweeping market orders just because an algorithm detected something different is considered reckless.
The question now is how can regulators make sure that trading participants use Big Data in a responsible way? The CFTC have considered before whether regulators should start certifying the algorithms of traders. This, however, posed the potential for interference and intellectual property theft. A compromise proposed was for market participants to set real-time indices that track what is deemed reckless behaviour instead. Once a trader crosses thresholds, he would be prosecuted. These indices, of course, will evolve with the market and can be defined in consensus by the market participants.
Big Data has been transforming markets the past few years. However, there is also the need to transform with them, especially when it comes to their appropriate regulation. This defines the challenge for those who find themselves lagging behind the speed of these changes, with government naturally amongst them.
Article Written By: Mark Nicholls.
Managing Director, Information Professionals. Mark is one of Australia’s most trusted IT Change Management advisors. He also has other entrepreneurial business interests that he operates through MaidenVoyages.If you liked this blog check out our other material atInformpros.com
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Labels: Big Data, CFTC, Finance, Flash Crash, Hash Crash, HFT, intellectual property, IT, market manipulation, Obama, Regulators, scott o'malia, Stock Market
