Europe’s HFT Community Fights Back Over MiFID II Proposals

Terry Flanagan

With the crucial vote on MiFID II now likely to be just days away, and the possible nightmare scenario that could be facing the European high-frequency trading community if the Brussels grapevine is to be believed, the debate around the merits of HFT has intensified as both sides of the debate jockey for position.

Speaking to Markets Media last week, Markus Ferber, the German MEP tasked with guiding the revised MiFID II—or Markets in Financial Instruments Directive to give its full title—through the European parliament, boldly claimed that the new regulation would “close the loopholes” of the 2007 original.

MiFID II promises to significantly alter the way financial markets operate in Europe and looks set to impose at least some far-reaching measures to curb the rise of high-frequency trading, which now accounts for some 40% of all trades in European equity markets.

Ferber suggested to Markets Media that measures such as minimum resting times for orders to remain valid on an exchange for at least 500 milliseconds, fee structures that are put in place every time you modify or cancel an order, order-to-trade ratios, the testing of algorithms and circuit breakers may well all make the final MiFID II cut.

If this happens, high-frequency traders would likely be forced to totally re-assess their business models.

“It is interesting because Markus Ferber has made a very premature statement,” Mark Spanbroek, secretary-general of Brussels-based proprietary trading lobbyist FIA European Principal Traders Association (FIA EPTA), which represents firms that trade their own capital on European exchange-traded markets such as Knight Capital, Optiver, Getco, Citadel Securities and Quantlab Financial, told Markets Media.

“He is rapporteur [of the Economics and Monetary Affairs Committee (Econ)] and he should be careful expressing a view like that. It is up to the committee. If I were a member of the committee, I would not like it if he speaks like that before the committee has actually decided. But if Ferber gets his way then obviously it will be bad.”

Econ is likely to have its new version of MiFID II ready before the end of this month before it will be put to vote at the European parliament. Over 2,000 amendments postponed the original vote on MiFID II in July.

However, Finance Watch, another European lobby group that sits on the opposite side of the HFT fence to FIA EPTA, is backing Ferber’s mission to slow HFT down.

“We support Ferber’s willingness to give the tools to supervisors to put a framework to HFT,” Benoît Lallemand, senior analyst at Finance Watch, told Markets Media.

“HFT is just not regulated and supervisors just do not have the tools to understand what is going on let alone take any measures to reduce it or look at the abusive practices before they happen. These measures will de-incentivize market abuse.”

Spanbroek, though, is more fearful of the unintended consequences to the financial markets—and thus all market participants and private investors—if Ferber’s proposals win favor.

“Obviously Brussels want to do something about HFT but they are not clear how their changes affect the market structure,” said Spanbroek. “The changes advocate take out orders and does not advocate passive orders; this will impact the structure completely and they are not clear what HFT actually does still.

“HFT is not about market abuse and that is what they have claimed it is about. Some have anticipated this and drafted language to clamp it down, but there is none by HFT. Libor abuse is the top ranked one we all paid the price for, but this one is not on Ferber’s hit list, it is remarkable it is not.

“HFT brings liquidity to the markets. Everyone takes it as a given but the Knight Capital debacle showed [when the U.S. market maker was left close to bankruptcy last month following erratic trading activity that left the firm with billions of dollars of unwanted securities] that if one liquidity provider is not around then markets are in deep uproar. They are missing the point on liquidity as we add a lot of liquidity. They should be really careful. If they put all these curbs in then liquidity will disappear and the end customers will be worse off.”

Spanbroek is especially critical of Ferber’s minimum resting time proposals, which he believes are ill thought out at best and will actually have an opposite effect to what Ferber actually intends.

“The technicians will love it,” he said. “It will make the rat race even worse. Everyone is going to pinpoint 499 and 501 milliseconds. And he has it completely wrong. People in the technical world like it and the rat race will be accelerated by it. It’s absolutely nuts and definitely the wrong purpose. This cannot be Ferber’s purpose. Liquidity providers do not like to see orders in a holding pattern as it increases risks, whilst the main topic is how to lower risk.

“A minimum order resting time is like telling a newspaper when they have news that you can’t put it out yet as we won’t allow you to. It goes against any democracy almost. You have something in your hand and you can’t make it public, whilst it’s got nothing to do with national security. We are dealing with public information and Ferber should realize that the information is already out there. If he is going to clamp down with 500 milliseconds he will serve a certain audience really well and another audience really badly. That is not a level playing field.”

Spanbroek also believes that the 500 millisecond measure will only benefit over-the-counter and off-exchange trading venues such as internalizers.

“Generally, the internalizers need 500 milliseconds to look at an order, pick off from the order then put it out in the market place,” said Spanbroek. “The customer will lose overview of where his order is at, how it was executed and what the best price was at the time. And it is not coincidence why Ferber comes up with 500 milliseconds—it is driven by internalizers. The price we will all pay is going to be high.”

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