CFTC and SEC swaps regulation created under the Dodd-Frank Wall Street Reform and Consumer Protection act may be a burden for many financial firms, but it benefits at least one industry subsection: high-frequency trading platforms and their support services.

Dodd-Frank requires that all trades be cleared via central platforms called Swap Execution Facilities (“SEFs”), a shift that will likely result in the standardization of the previously-bespoke swap style. Algorithms are an ideal method for participants to exploit subtle shifts in an increasingly homogenous market.

“We think this is the future,” Tim Carrington, global head of foreign exchange at Royal Bank of Scotland (RBS) told Risk.net. “In a world where more trading is done electronically and bid/offer spreads are compressed, dealers will be less able to differentiate themselves on price, and will instead have to focus on providing their clients with effective, convenient access to the market. Algorithmic execution, across all asset classes, is going to be a crucial part of that proposition.”

Though widely used in equities markets, electronic execution is only in use in about 5-10% of derivatives trades. Some of this new market will be snapped up by the SEFs themselves, but technology firms are eager to create a platform that meets the unique needs of the derivatives market. However, like the rest of the financial world, algorithm innovators have been delayed by the slow pace of regulatory reform. Even as Dodd-Frank creates opportunities, regulatory debates push them into an increasingly distant future. Will, for example, these platforms need to support a request-for-quote system? Or will the CFTC drop that clause of its proposed regulation? An RFQ requirement would demand creative thinking on the part of high-frequency trading engineers, who are accustomed to a tradeable pricing system.

Read more about Dodd-Frank and the future of algorithms.
photo credit: jared