What will the of increasing global OTC derivatives clearing be on high-frequency trading (HFT)? As speculation mounts about the impact of centralized clearing on pensions and hedge funds, attention has naturally turned to high-frequency trading.
Cleared Derivatives Geared to HFT?
Even as the impact of OTC derivatives clearance on pensions and hedge funds is heavily debated, analysis on the relation between cleared derivatives and HFT is just getting started.
Jez Bezant, and independent consultant who specializes in OTC derivatives, believes that central clearing will have a net positive impact, especially for HFTs.
“Rather than diminish activity for hedge funds I think it will open up opportunities since cleared OTC derivatives (and their listed OTC lookalikes) will be attractive to arbitrage strategies and possibly high-frequency firms because they are easier to trade,” Bezant told the Financial Times.
Bezant’s argument hinges on the idea that, in a cleared environment, document production and automation are standardized. This leads to lower overhead and easier trading. The accumulated benefit of OTC may ultimately outweigh margin costs.
Automation and standardization also pave the way for algorithmic trading. “When you can see prices and have liquidity, you can profit from using investment strategies used in other liquid markets,” Bezant says. “It’s easier to implement such strategies in an electronic environment.”