Letter from Brussels: HFT debate hots up
The debate in Brussels on high-frequency trading (HFT) is heating up. The main forum is the European Parliament’s economic and monetary affairs committee (ECON), which in July will clarify its position with a vote.
HFT is a subset of algorithmic trading where a trading system analyses data or signals from the market at high speeds and then sends, or updates, large numbers of orders just as quickly.
The matter comes under the umbrella of revisions to the MiFID Directive, which regulates the sales of financial instruments across the EU. Reviews of this ‘cornerstone’ financial package follow complaints of significant increases in market abuse (including by OTC trades) since its introduction in 2007.
Critics say HFT takes “advantage of short-term opportunities, which is large in scale and hard to detect”. The ECON committee refers to “tiny financial boutiques with billion euro turnovers”. MEPs have recommend cross-border collaboration and data-sharing among competent authorities as a solution, while MEP Arlene McCarthy says: “We need to be very tough on market abuse and market manipulation”.
Markus Ferber, the committee rapporteur for the revision of the MiFID, says he is “in favour of closing all gaps in the regulatory framework in order not to have parts of the market left unregulated”.
Ferber says potential risks from HFT include overloading of the systems of trading venues. They could create “a disorderly market”, and could “exacerbate volatility if there is a pre-existing market problem”. He concludes: “HFT can lend itself to certain abusive behaviour.”
Ferber suggests measures to slow down trading and order flows. All orders should be valid for at least half a second. He would like higher trading fees for placed and then cancelled orders. Likewise, market participants placing a high ratio of cancelled orders should be made to pay.
Swedish MEP Olle Schmidt disagrees with Ferber: “Regulation is [now] going too far.… We should not create regulations that might hamper the market.”
Antonio Reyes of Citigroup Global Markets says that although HFT is being blamed for market manipulation practices such as ‘spoofing’ or ‘layering’, where multiple orders are submitted to give a false impression about demand for a security, many market participants had surveillance systems to detect such patterns.
Further support for Schmidt comes from Remco Lenterman, chairman of the FIA
European Principal Traders Association (FIA EPTA). “HFT is not about a type of activity, but about the frequency and the speed of it. As a result, any definition is totally subjective,” Lenterman says. “There is no evidence of a link between market abuse and excessive order messages.”
Lenterman adds that HFT is used by many brokers, banks, hedge firms and principal traders. The whole idea that HFT adds to volatility is “false”. He says that many benefits accruing from modernisation - such as algorithmic trading - have been passed to other investors.
Lenterman adds: “Although high message rates are not market abuse, they are certainly inefficient message practices. But exchanges have developed effective ways to deal with this issue.” FIA says that “speed is an essential risk management tool for many market participants”.
Professor Philip Treleaven, director, UCL Centre for Financial Computing, scorns the use of “complex systems which do not actually improve situations”. And MEP Pascal Canfin proposes a minimum charge (perhaps €0.01) for orders modified or cancelled. He would also impose an order-to-trade ratio limit of 1:50.
ECON is digesting a series of proposals for amendments to the draft version of legislation from the rapporteur. The issue is likely to clear a European Parliament plenary session in September. National finance ministers could rubber-stamp the changes before the end of the year. However, as the matter rests within the directive (not the regulation), it could still be years before national jurisdictions would implement it.