11.03.2011
By Terry Flanagan

Less Regulation With Greater Impact

Market participants believe that enacting regulation that has a greater, more focused impact is the key to improving market structure.

“Everyone wants stable markets,” said Tom Chippas, global head of Quantitative Prime Services at Barclays Capital, during the FPL Americas Trading Conference. “Let’s make fewer regulations with greater impact instead of more regulations with less impact.”

Following last year’s “flash crash,” the markets have been under increasing regulatory scrutiny as many classes of investors shy away from the markets with volatility persisting and uncertainty continuing. Regulators have taken certain steps in an effort to rein in potential wild market swings. Single-stock circuit breakers were designed to prevent any drastic price changes by halting trading of a certain security if excessive price movements occur.

“The SEC is taking positive steps with how they view the market, with Regulation NMS and Regulation ATS, with a number of competing venues,” said Dmitri Galinov, head of liquidity strategy at Credit Suisse. “The liquidity that was concentrated on two exchanges is now spread all over 40 dark pools and new exchanges. Then we had the flash crash, the SEC reacted and came out with circuit breakers. With large trader reporting, the SEC will have a chance to see who’s behind these trading strategies and conduct research for policies.”

Chippas made reference to a report released by the Tokyo Stock Exchange in September, which refutes claims of high-frequency trading having detrimental effects on the marketplace. According to its studies, 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.

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