Baldauf predicts there will be more and more activity in dark markets, which already account for over 35 per cent of shares being traded. The problem is, those markets rely on pricing from the traditional exchanges such as the NASDAQ and NYSE — but if fewer trades are happening in those arenas, the pricing may not be as reliable.
“If you take this to the logical extreme, and more and more trades occur in the dark, where do the prices come from? If they come from exchanges where fewer trades happen, they might be less representative prices,” he says. “So I think eventually there will be a limit on how many trades happen in the dark.”
Politics will also play a role, says Baldauf. Politicians including Hillary Clinton are voicing concerns over electronic trading, pointing to particular transaction patterns as indications that things are no longer functioning as they should. Many are calling for reform — things like introducing virtual speed bumps, or creating batch auctions, to slow the sizzling speed of automated transactions.
“The concern is there are a few market participants who benefit, and the vast majority lose out,” says Baldauf, explaining that billions of dollars can move in the blink of an eye. “But, there is a lot of disagreement about who are the winners and who are the losers with this development.”
So what does Baldauf see for the more distant future of automated trading? “I deal with nanosecond data,” he says with a laugh. “If I make a five-year prediction that’s already way out of my comfort zone.”