Europe’s Advocates Of HFT Make A Stand

Terry Flanagan

The debate over high-frequency trading continues to rumble on, but one European broker-dealer believes that opinions are changing and the region’s politicians will now face a tougher task in introducing any such measures to curtail the practice.

“The tide is turning somewhat on HFT,” Andrew Morgan, head of Autobahn Equity Europe, the electronic trading arm of Deutsche Bank, told Markets Media.

“The view that they are somehow engaging in nefarious activity is misleading. HFTs are conventional market agents making markets and improving price efficiency via arbitrage between different securities and venues.

“What is different is that they use new technology and techniques to execute their strategies. They are very effective at keeping prices in line and provide vital liquidity at a time when liquidity is scarce.”

In the past month alone, contradictory evidence has come out in Europe either supporting or discrediting the tactic used by super-fast traders.

A study by the Swedish regulator, Finansinspektionen, found that HFT and algorithmic trading contributes to, but is not responsible for, changes in trading. It said the negative effects of HFT were limited and the impact of HFT on trading was small, although the report did voice concerns over possible market abuse and supervision issues.

Last year, high-frequency traders doubled their market share on Nasdaq OMX’s Nordic markets to over 10%, while analysts estimate that up to a third of all trading on European markets is carried out by automated trades.

Meanwhile, an interim report last month by Professor John Kay at the behest of Vince Cable, the UK’s business secretary, revealed that the majority of British asset managers and pension funds polled by Kay were skeptical of HFT trading strategies. The final report is expected in the summer, from which the UK government will act.

Michel Barnier, the European Union’s financial services commissioner, believes more consultation is needed before acting on HFT. “I accept that we [the European Commission] are not going fast enough on high-frequency trading, but I have to be realistic,” he said.

While last week, Markus Ferber, a German member of the European parliament who is responsible for guiding the revised version of the Markets in Financial Instruments Directive (MiFID) through to the next stage of approval in Europe, hinted in a report at firmer proposals to tackle the growth of HFT.

In it, Ferber called for “a minimum period for keeping an order before it can be cancelled, a so-called circuit-breaker” as well as “additional cancellation fees ought to be introduced so ultra-fast transactions can be rendered less interesting and excessive speculation can be contained”. Ferber wants traders to keep orders for a minimum period, possibly at least 500 milliseconds, to make it more likely for a buyer to be found.

“We need to do some homework first,” said Judith Hardt, secretary-general of the Federation of European Securities Exchanges, which lobbies on behalf of 46 of the region’s exchanges. “I don’t think Ferber wants to kill the market but wants to be on the safe side.”

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