HFT Chief States His Case as EU Politicians Continue to Meddle

Terry Flanagan

Proprietary traders are redoubling their efforts to debunk the myths of high-frequency trading, as European Union lawmakers seem set on introducing a raft of measures that will seriously curtail the practice in the region.

Coming under the umbrella of the updated Markets in Financial Instruments Directive (MiFID II), which the European Commission issued as a draft law in October last year that aims to tighten up financial regulation in Europe in the wake of the 2007 original, it now appears that the European parliament is looking to adopt an even tougher stance on HFT as MiFID II snakes its way through the corridors of power in Brussels.

Markus Ferber, a German center-right MEP responsible for guiding MiFID II through parliament, has adopted a tough stance on anything that resembles algorithmic trading, despite opposition from some other MEPs as well as many in the industry, and, in the latest amendments to MiFID II, Ferber, based on feedback from MEPs, has called for the introduction of a minimum resting time for orders to remain valid on an exchange for at least 500 milliseconds as well as penalties for excessive order cancellations. And HFT firms that deal on their own account will also, in effect, be forced to become market makers and provide continuous liquidity to the market.

“I cannot blame politicians for something that is not their expertise,” 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.

“Once they look into it, they get educated very quickly. But it is more about that HFT firms have never done this; we have never needed to in the past as we simply do not deal with the public. We trade with banks and other professionals and have not had to explain ourselves. If anything, we should blame ourselves as we should have done a better job as individual member firms over the years.”

Spanbroek, who retired from Getco in 2011 after serving for nine years as head of business development and market structure in Europe, is in favor of realistic order-to-trade ratios as long as they take into account different asset classes and product classes, says it is “absolutely wrong” and “anti-competitive” to introduce minimum resting periods. He says it was enforced in Amsterdam in the 1990s when a 30-second holding period was enforced.

“Joe Public hated it as you couldn’t trade for so long and prices froze up, but the professionals made a killing out of it,” said Spanbroek.

The FIA EPTA secretary-general also says that the EU’s current wording on continuous obligations to quote needs clarification.

“I am very skeptical with this specific language,” he said. “Most people read it that you have to be in the market on a continuous basis. It is like your wallet is at the table all day long. Or, to a less educated audience, if a bank opens its door at nine in the morning every single person who walks in will get a mortgage no matter what because the law says you have to provide a mortgage. That is suicidal. Liquidity will be hampered very quickly by this and the whole market model will change about 180 degrees. They don’t realize that this will happen with this.”

Spanbroek also argues that all of these measures will drive business over-the-counter or to internalizers, which makes the markets more non-transparent and volatile. MiFID was actually written to bring more business from OTC towards the regulated market, instead of driving it towards mostly non-regulated internalized platforms.

The House of Lords, the U.K parliament’s unelected second chamber, earlier this week also came out in defense of high-frequency trading in a critical report on MiFID II.

“High-frequency trading remains a deeply controversial activity, and there is a wide spectrum of views and evidence as to its utility,” the House of Lords’ European Union Committee said in a report entitled ‘MiFID II: Getting it Right for the City and EU Financial Services Industry’.

“Further research is needed in order to determine with any certainty the impact of high-frequency trading on financial markets and on the economy as a whole. In the context of such uncertainty, whilst there appears to be a strong case for such devices as circuit breakers, we are concerned that some elements of the Commission’s proposals may prove counterproductive.

“We are concerned that the scope of the Commission’s proposals is too broad, and that the distinction between algorithmic trading and high-frequency trading needs to be more carefully drawn. In particular, the proposal to require algorithmic trading strategies to be in operation throughout the trading day is likely to have a detrimental effect on financial markets. We urge that careful attention be given to the proposals and their likely implications in this complex and controversial field.”

Earlier this month, European parliamentarians on the Economics and Monetary Affairs Committee postponed a vote on MiFID II due to political wrangling, which will now take place on September 26. Once approved by the European parliament, it will then go before the Council of the European Union before it can become law. MiFID II had been penciled in to be introduced in 2015 although this delay could push things back.

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