Europe Weighs in on ‘Flash Boys’

Terry Flanagan

Mark Hemsley, chief executive officer of Bats Chi-X Europe, said he disagreed with claims in Michael Lewis’ new book that markets are rigged and said any new review of market structure would need to include all constituents.

Best-selling author Lewis has highlighted high-frequency trading in his new book, Flash Boys, and alleged that exchanges favour HFT firms at the expense of other traders.

Hemsley said in an email to Markets Media: “We disagree with Michael’s claims that markets are rigged. Certainly, we should continuously try to improve market structure but we shouldn’t over-extrapolate based upon anecdotal observations. Detailed analysis, design and consultation is required. The huge advances in technology used by sophisticated market makers have increased liquidity, reduced costs and tightened spreads for all trading participants.”

Shareholders in Bats Chi-X Europe’s parent, Bats Global Markets, include high-frequency trading firms Citadel and Getco.

In his book Lewis features the new IEX dark pool which has rules to combat high-frequency traders gaming its orders. Last week, Brad Katsuyama, the chief executive of IEX, had a heated argument live on air on CNBC in the US with William O’Brien, president of Bats Global. O’Brien accused Lewis and Katsuyama of scaring millions of investors in order to promote a business model while Katsuyama accused O’Brien of being part of the rigging.

Mark Spanbroek, vice chairman of the FIA European Principal Traders Association, told Markets Media: “The idea that markets are rigged and that HFT firms can see incoming orders coming is utter nonsense as this is not allowed and not made public by any exchange in the world. We represent around 25 of the largest HFT firms in Europe who do not have access to any customer flow as they do not handle any client money.”

Spanbroek added that Flash Boys covers US-centric issues and the association does have concerns about the number of US exchanges and where this number of trading venues is going to end.

HFT enables some in the US to exploit the millisecond differences between the time taken orders reaching the multitude of exchanges.

“Europe has a completely different market structure with less venues and we welcomed the fragmentation introduced under MiFID as it is the only way to create real competition, break monopolies, improve clearing and risk systems and bring costs down tremendously for all end users,” added Spanbroek.

He also pointed out that banks who cross client orders against their own trade flow have potentially larger conflicts of interest than HFT firms.

“In contrast to HFT firms, internalisers can potentially look and delay incoming orders across their whole platform and investors are lucky if their order is routed away so that they get the best price,” Spansbroek said.

Hemsley added that if European regulators choose to look into market structure again, any process would need to be broad in scope and take into account the views of all market constituents.

“Any solution would also need to refine the market as a whole, and not just focus one or two elements,” said Hemsley. “If the approach is too focused on one heated topic at the expense of others, the unintended consequences will only cause more trouble further down the line.”

European regulators have also taken different approaches to HFT. In Germany, the HFT Act came into force last year requiring HFT firms to be licences, properly control their trading systems and to maintain an adequate ratio of orders to executed trades in addition to giving regulators the right to review trading algorithms.

Other countries have proposed taxes on financial transactions while the UK government’s report into the Future of Computer Trading in Financial Markets, in 2012 said HFT provided liquidity, reduced volatility, encouraged price discovery and reduced costs.

The FIA Principal Traders Group said in a statement that it  had great respect for Lewis’ ability to describe complex aspects of the financial system in a lively and entertaining style.

The statement said: “Going forward, we urge regulators to conduct a thorough and comprehensive examination of all aspects of market structure. This examination should be based on empirical data and analysis, and we applaud the Securities and Exchange Commission’s initiative to publish comprehensive data on orders and trades through its Midas website.”

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