HFT Beginning to Succeed in Mission to Sway Europe’s Politicians
Suspicions surrounding high-frequency trading continue to dominate the thoughts of some of Europe’s leading politicians, but market participants believe that arguments put forward from HFT advocates are finally beginning to garner favor.
“It is good to see that the HFT community is finally starting to educate the regulators and policymakers,” said Steve Grob, director of group strategy at Fidessa, a trading and technology company.
Grob said that groups like the 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, Citadel Securities and Quantlab Financial, are finally getting their message across to legislators.
Nevertheless, Markus Ferber, a German center-right MEP responsible for guiding the new rules on HFT through parliament, seems hell-bent on strengthening a draft directive by the European Commission looking to increase its oversight of European markets that is known as MiFID II, or the updated Markets in Financial Instruments Directive.
Ferber has adopted a tough stance on anything that resembles algorithmic trading—despite opposition from some other MEPs—and, in the latest amendments to MiFID II, says that all market makers must be required to keep orders valid for at least 500 milliseconds and that there should be penalties for excessive order cancellations.
Remco Lenterman, the chairman of FIA EPTA, is optimistic that the minimum resting time rule will now be dropped by European lawmakers.
Grob at Fidessa added: “As we all know, the debate hinges on whether these firms are really acting as electronic versions of traditional market makers and, if they are, whether they should be subject to some of the same formal market making obligations.
“In particular, regulators have been gnashing their teeth over the fact that such firms are free to replace their quotes as often, or as ‘frequently’, as they like. The regulators argue that all this activity creates substantial noise that clogs up data pipes and distorts the true picture of the real price of a stock.
“In their defense, the HFTers argue that they have the right to re-price their ‘product’ just as often as market conditions dictate and that, anyway, they aren’t breaking any laws.”
Grob suggests that regulators will struggle to “impose an absolute time frame for quote validity in today’s world as any level is destined to be wrong in most cases, most of the time” and instead says that HFT firms should be allowed to pull their quotes at will as long as there is a minimum time period before they can resubmit a quote.
“Whilst it sounds like a subtle change, it would seem to provide a fair and equitable solution to the problems of both the HFTers (namely having to trade on a bad or stale quote) and the trading community at large (noise and clogged data pipes),” said Grob.
“Irrespective of the merits of this approach, solutions that are fair and equitable on all market participants should be the mantra of the regulators.”
Yesterday, though, European parliamentarians postponed a vote on MiFID II due to political wrangling over some of the key battlegrounds, including HFT.
It is estimated that about 35% of all trades on European equity markets are driven by computer algorithms, which investors use to quote, trade and hold positions for fractions of a second. Big institutional investors are wary of HFT as they find it hard to execute block orders without super-fast traders moving the market against them.
Finance Watch, another European lobby group that represents consumer groups, retail investor associations, trade unions, think tanks, NGOs and others, sits on the opposite side of the HFT fence to FIA EPTA. Finance Watch thinks that the practice “damages traditional investors’ trust in markets, drains useful liquidity and increases the potential for market abuse”.
However, Lenterman at FIA EPTA has said that principal trading firms give a boost to markets in terms of lower transaction costs and also of adding greater liquidity, while he believes that “market abuse, as well as being morally reprehensible, comes at a hefty price for the market”.
Meanwhile, it has been reported that Germany wants to introduce controls to better monitor HFT in its markets. The German finance ministry, led by Wolfgang Schäuble, wants to see HFT brokers obtain licenses to trade as well as imposing a minimum holding period of up to half a second.
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The analysis is based on transactions publicly reported by 30 European APAs and venues.
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