Exchange Fee Structure May Save HFT From Regulatory Claws

Terry Flanagan

Exchanges in Europe continue to act pro-actively in a bid to curb the worst excesses of high-frequency trading but one senior lawmaker believes current regulatory proposals by the European Union to crack down on the practice are draconian and will lead to unintended consequences.

The Oslo Børs is the latest exchange in Europe to impose a fee on members that cancel a high proportion of their orders. From September 1, the Norwegian exchange will charge a fee where the number of orders relative to each trade carried out exceeds 70. The order activity that will be included in the calculation of this ratio will principally relate to orders that are cancelled or amended within one second, and where the change does not contribute to improved pricing or volume.

“A fee structure could be a way of doing things without having to legislate,” Kay Swinburne, a UK center-right MEP, who is also a member of the influential Economics and Monetary Affairs Committee at the European parliament, told Markets Media.

“Fee structures have already started to change and are now starting to reward people with some of the larger volumes of trades that are going through rather than the frequency of things being posted on the exchanges and MTFs. But sadly, I think HFT has become very political and there will be a lot of things in MiFID II [the regulation that will govern HFT in Europe].”

Proponents of HFT say that it lowers transaction costs and adds much needed liquidity but exchanges are looking to better monitor HFT as unnecessarily high levels of order activity reduces the transparency of orders and thus affects confidence in the markets. Institutional investors are wary of high-frequency traders as they find it hard to execute block orders without high-frequency traders moving the market against them.

Meanwhile, Markus Ferber, a German member of the European parliament who is responsible for guiding MiFID II, the regulation that governs European financial markets, through to the next stage of approval in Europe wants to introduce rules that will, to all intents and purposes, scupper most current HFT practices.

The German center-right MEP continues to adopt a tough stance on algorithmic trading, despite opposition from some other MEPs, and says that all venues should have meaningful circuit breakers in place, penalties for excessive order cancellations and that all orders should be valid for at least 500 milliseconds.

“Parts of the MiFID II proposals are a little more problematic and there are some of the political issues, especially HFT,” said Swinburne. “Under the proposals, anyone using an algo to trade would need to make a continuous market which, of course, doesn’t work as you have execution-only algos that the buy side use in order to put on or take off their positions. So you couldn’t possibly expect them to post continuous two-way prices.

“But the real main point of contention for me is to put minimum resting periods in. Ferber has proposed 500 milliseconds. Some of the amendments from some political groups take that up to a second. There are some very draconian proposals within the amendment on HFT and given that we don’t know how to distinguish at the moment between good and bad liquidity if indeed there is such a thing as good and bad liquidity then the unintended consequences here for the market could be very great.”

Italy’s Borsa Italiana was the first European exchange to penalize high-frequency traders when it introduced its own order-cancel fee threshold, of 100:1, in April. The Oslo Børs, meanwhile, says that orders that remain open in the order book for some time, or which are updated in a manner that makes a positive contribution to market quality by reducing the spread between best bid and best offer or by increasing order book depth, will not be subject of the new fee.

“Oslo Børs takes the view that high order activity is not in itself necessarily negative for the market, but we are keen to encourage a situation in which all types of trading contribute to maintaining confidence in the marketplace,” said Bente A. Landsnes, president and chief executive of Oslo Børs.

“It is in general the case that a market participant does not incur any costs by inputting a disproportionately high number of orders to the order book, but this type of activity does cause indirect costs that the whole market has to bear. The measure we are announcing will help to reduce unnecessary order activity that does not contribute to improving market quality. This will make the market more efficient, to the benefit of all its participants.”

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