Winning the Customer

November 27, 2015
/   Spotlight

It’s exhausting just trying to keep pace, let alone stay ahead. Every provider in every business feels the pinch.

Five ways payments will be different in 2024

November 24, 2015
/   Voices

Predicting the future of cash and card payment volumes is arguably a fool’s errand – but Payments UK, Britain’s new trade organisation for the industry, is in a good place to have a go...

Contactless cards: Opt-in or opt-out?

/   Voices

Australia is toying with the idea of creating an opt-in function for contactless cards, in a move that highlights the problems around coping with new payment technology and how fraud risks are handled.

Five EMV lessons for the US

/   Voices

The EMV liability shift has occurred in the US, so what can we expect to see happen in the coming months and years as a result of this change?

Cause and Effect: If you build it, will they come?

July 23, 2014
/   Spotlight

Many financial institutions assume that digital banking is lucrative because the most valuable customers happen to bank online. While there is certainly a correlation between online bankers and higher profitability, quantitative evidence suggests that...

Fast Facts: Student Loans

January 22, 2013
/   Insights

The Financial Services Roundtable recently released another iteration of its Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more.  Below are some updated Fast...

Intuit 2020 Report: The Future of Financial Services

April 11, 2011
/   Insights

Today, Intuit released the latest edition of the Intuit 2020 report, Intuit 2020 Report: The Future of Financial Services, which identifies and examines four key trend areas that will  transform the financial services industry...

The Top 10 Trends in the Digital Banking Industry

December 18, 2013
/   Spotlight

2014 is rapidly approaching and as the year wraps, the Digital Insight team has pulled together the top 10 trends in the digital banking industry based on data and trends from studying financial institutions....

Making Banking Fun: Gamification in Financial Services

August 5, 2013
/   Insights

Recently, the team sat in on American Banker’s webinar, “Gamification in Financial Services: Five Proven Ways to Get an Edge,” which shared how leading brands in financial services have applied gamification to reach...

Technology M&As: The Beats Go On

May 29, 2014
/   Insights

The ongoing fascination with Apple’s $3 billion purchase of Beats Electronics is entirely understandable, because it’s a cool story. However, it also says a lot about what’s going on between finance and tech.

Small Business: Perception vs. Reality

November 21, 2012
/   Insights

In the most recent election cycle, like most others before it, the one sector of the economy that got the most attention was small business.  This is the future, we were told by every...

What We’re Reading

May 5, 2011
/   Spotlight

Below are interesting stories the staff has been reading over the past week. What have you been reading? Let us know in the comments section below. Virtual Banking Worlds Provide Tangible Lessons American...

What We’re Reading: Thanksgiving Edition

November 22, 2012
/   Spotlight

Below are interesting stories the staff has been reading over the past week. What have you been reading? Let us know in the comments section below or Tweet @bankingdotcom. Mobile Thursday? Plans for Thanksgiving...

Anybody remember the last time Brad Pitt showed up in a big-screen movie that didn’t have much blood and gore? Animation aside, that would probably be Moneyball, an absorbing analysis of the moves made by Oakland As manager Billy Beane to rely more on technology-driven data than old-school scouting to put together his 2002 roster. The process didn’t remove all human elements, of course—each selection was very much his call—but it did send a shudder down the spine of every baseball traditionalist. Since then, numerous other teams have (publicly or otherwise) gone down a similar path, which builds on sabermetrics to more accurately gauge true on-field potential.

Odd as it sounds, it’s worth keeping this episode in mind when evaluating the ongoing embrace of (or hostility toward) high-frequency trading, or HFT. For now, the biggest news regarding HFT is that there probably won’t be real news for a while—it’s being reported that for now, at least, the Securities and Exchange Commission (SEC) won’t institute a new set of regulations to curb alleged violations in this contentious arena. Instead, the agency may be working on a broader set of reforms that take on not only HFT but other structural issues as well.

However strict those pending regulations may be, there’s one undeniable truth that has to be faced, and perhaps faced down. While this blog has frequently explored the intersection of finance and technology, HFT takes the entire practice to a very different level.  HFT initiatives use sophisticated technologies and algorithms to move in and out of market positions at blinding speed, potentially capturing only a fraction of a cent in a given trade. Yes, human beings do set the proprietary strategies, but after that it’s all machine and no man.

By any definition, it’s much, much worse than the Moneyball metric could ever be for baseball fanatics. More to the point, this is a phenomenon that, despite intense opposition from many quarters, is simply not going away. And far from being relegated to a few outliers, it is increasingly making its presence felt in different sectors of the financial services arena.

To be clear, it’s not as if the regulatory bodies have kept their hands completely off this market.  In mid-October, the SEC put the hammer down on Athena Capital Research for making very large trades at the end—literally in the last two seconds—of every trading day for several months. The agency charged that the firm had “crossed the line” in its attempt to affect the closing prices of selected NASDAQ-listed stocks. This was the first true HFT manipulation case, but it’s safe to say it won’t be the last.

That said, the case richly illustrates the complexities inherent in pursuing HFT activities that might or might not violate existing regulations. For example, Athena is nowhere near the size of its brand-name counterparts on Wall Street, yet those few seconds of trading each day accounted for nearly three-fourths all Nasdaq stocks traded during that tiny period—a perfect example of sheer volume having a major impact.

It’s also fair to ask what exactly makes this manipulation in the legal sense. The SEC’s case got help from internal memos specifying that the firm would be “dominating the auction” and “owning the game,” but again, Athena was arguably servicing the needs of its investors. And in fact, unlike other recent settlements, the Athena case does not include an admission of guilt.

The complexities of this particular case aside, there is a larger question here that deserves debate.

For all the advances enabled by technology, many banking practices haven’t changed much—we do the same things we’ve always done, only more efficiently. Yet each advance, from instant online research to the wealth of mobile capabilities now available, has also delivered the potential for real transformation. High-frequency trading takes that variable far outside our comfort zone.

Investment banking has always mandated a measured approach—portfolio managers spend the time needed to study a particular market, analyze the business models and track record of each competitor and even spend time with management before passing it up to a committee that might make a recommendation. (Again, just like those old-time baseball scouts in Moneyball.)  But we live in a very different world now, where instant gratification is the norm and faster decisions can mean more than good decisions.

Despite its mushrooming popularity, HFT capabilities and analytics still seem worlds removed from banking as we’ve always known it. But it isn’t—in fact, perhaps even more than in areas such as mobile, HFT has the potential to drastically upend traditional investment practices everywhere, including the most staid and conservative organizations.

It would be nice if those changes happened on our terms. It would even nicer if regulators never had to step in, because we as an industry developed and implemented transparent rules around what’s legal, what’s ethical and what’s practical.

The future isn’t around the corner any more, it’s right here. Let’s hope we fit in.


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James W. Gabberty

Gabberty is a professor of information systems at Pace University in New York City. An alumnus of the Massachusetts Institute of Technology and New York University Polytechnic Institute, he has served as an expert witness in telecommunication and information security at the federal and state levels and holds numerous certifications from SANS & ISACA.

Brad Strothkamp

Marisa Mann

Marisa Mann brings over 15 years of experience in consulting and financial services industries to the Solstice team, working on large scale enterprise initiatives across many technologies, including specializing in the digital space – Internet and mobile. Mann is passionate about mobile and the endless possibilities for the enterprise, delivering business value through strong brand recognition and driving to excellence in the consumer experience. Prior to Solstice, Mann worked at JP Morgan Chase, Diamond Management and Technology Consultants, Washington Mutual, Inc, and Accenture.

Zachary Ehrlich

25-year-old writer, and as a native San Franciscan, I am unreasonably loyal to Bank of America, if only for their superhero-like origin story, involving the 1906 earthquake and Italian fruit vendors.