02.23.2012
By Terry Flanagan

Exchange Reels in HFT

The London Stock Exchange’s Borsa Italiana will look to introduce a new set of fees intended to cull high-frequency trading.

As European regulators continue to mull over the effects of high-frequency trading as it finalizes its regulatory framework, Italy’s Borsa Italiana will aim to limit HFT orders by charging traders if they send too many orders into its system. The new pricing system will be an update to a mechanism that was first introduced four years ago. This move is in response to the Italian markets regulator’s request last year to curb HFT and stabilize the markets.

The regulators will review the new tariffs over the coming weeks and may introduce the rule by the end of March.

There has been a lot of discussion as to whether or not high-frequency trading was introducing any significant volatility or instability to the markets, with proponents on both sides of the fence. According to a survey conducted by Liquidnet, institutional investors are concerned about the effects that high-frequency trading has on the marketplace. HFT supporters believe that the effects of HFT.

According to a report released by the Tokyo Stock Exchange in September, which refutes claims of high-frequency trading having detrimental effects on the marketplace, while the traditional buy-side was conducting mass sell-offs during the volatility seen in August, rapid-fire buy and sell orders from HFTs essentially had a net-neutral effect. The TSE classifies high-frequency trading as orders sent from its co-location facilities, which makes up about 30% of overall trading volume of its exchange.

Observers often note the irony, in that it was the advent of regulation, such as Regulation NMS and Regulation ATS, that gave rise to the high-frequency form of proprietary trading. Having 13 equities exchanges and well over 40 alternative trading systems has allowed these firms to arbitrage any price disparities between venues. In addition, the proliferation of maker-taker pricing, which gives rebates to liquidity providers, has allowed HFTs to further thrive.

HFT has been one of the scapegoats for the May 6, 2010 ‘flash crash,’ in which the Dow Jones Industrial Average plummeted nearly 1000 points during midday trading, before bouncing back almost immediately.

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