Congress Unlikely to Act on HFT
Congress is unlikely to take any legislative action against high-frequency trading according to analysts at KBW, the financial services boutique, while the European Union has agreed new trading regulations this week.
The debate around HFT intensified following the publication of Michael Lewis’s book, Flash Boys, but the amount of HFT trading has been falling according to KBW analysts. They estimated that HFT now represents just under half of of US equity volume, down from its peak of 61% in 2009.
The analysts said in a report that Congress is likely to raise HFT issues in hearings but is unlikely to directly intervene. They expect the Securities and Exchange Commission to act deliberately and methodically in reviewing Regulation NMS and HFT and said the regulator is most likely to introduce pilot programs and increased disclosure requirements which would not be unduly disruptive.
The report said: “We believe the most probable near-term action against HFT would come from the state Attorney General offices, most likely the NY AG, and would be targeted at specific market participants rather than the broader industry.”
The analysts said eliminating or reducing the number of HFT firms would not be devastating to exchanges due to their diversified revenue sources.
“However, the impact of this change would not be inconsequential on the exchanges, particularly CME and Nasdaq, which have a greater relative proportion of revenue from this customer group,” added KBW. “Additionally, even if HFT is not a big driver of revenue, the removal of this business stream could have the tertiary effect on a firm like Nasdaq by lowering demand for some services that other customers use in order to have similar access that the HFT community enjoys.”
Although HFT regulations are unlikely in the US, on April 15 the European Parliament voted to approve the revised Markets in Financial Instruments regulation which includes increased HFT oversight. MiFID II requires anyone undertaking HFT to be regulated and for algorithmic traders to inform regulators of their strategies.
Law firm Ashurst said in a report: “This will appear a most unusual development for those currently engaged in high frequency trading, where the proprietary rights around the algorithm are considered paramount.”
The Federation of European Securities Exchanges said it welcomed MiFID II as the original regulations, adopted in 2004, increased competition between European trading venues but also led to increased market fragmentation and complexity for investors and companies.
Judith Hardt, director general of FESE, said in a statement: “I would like to congratulate the European co-legislators for their excellent work and the determination they have demonstrated in dealing with equities market structure and the fragmented liquidity flow.”
Another requirement of MiFID II is for investment firms to undertake all trades in shares on a regulated market or MTF, or as a systematic internaliser, an SI.
Anne Plested, head of Fidessa’s regulation change programme, said in a blog that any firm dealing on its own account to execute client orders will be required to register and trade as an SI, subject to threshold criteria yet to be defined by regulators, and brokers crossing client orders will be obliged to trade on-venue, rather than reporting those trades as over-the-counter.
“Depending on where this OTC volume shifts to, the new dark volume caps could be triggered under MiFID II. With their pre-trade transparency rules SIs are out of scope for these caps, so while they were largely ignored last time around they may now become a safer harbour for the broker community,” added Plested. “That said, SIs are not a catch-all and firms’ business models will need to be aligned to meet the challenges of the new market structure under MiFID II.”
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