Unintended Consequences Facing HFT

Terry Flanagan

With the fate of high-frequency trading as we know it hanging in the balance in Europe, market participants believe that whatever the outcome in Brussels the rules of engagement will never be the same.

Markus Ferber, a German member of the European parliament who is responsible for guiding the revised version of the Markets in Financial Instruments Directive (MiFID II) through to the next stage of approval in Europe, the regulation under which HFT is covered, wants to introduce rules that will, to all intents and purposes, scupper most current HFT practices.

The German MEP continues to adopt a tough stance on algorithmic trading—despite opposition from some other MEPs and financial industry lobbyists—and says 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.

“Putting things in like you’ve got to wait before trading is going to cause other effects on the markets,” Tanuja Randery, chief executive of London-based MarketPrizm, a trading technology company, told Markets Media at WBR’s recent Trade Tech Europe 2012 industry event in London.

“Sometimes I’m not sure politicians think through the entire cycle of effects. Putting all these constraints on the markets will make us end up in the wrong place.”

While another school of thought is to just let market forces run their course and let the efficient market hypothesis iron out any problems.

“Maybe the regulators should let the market decide what is good or bad for us rather than agonizing over these issues on our behalf,” said Steve Grob, director of group strategy at Fidessa in London, a trading and technology company.

“Take HFT, for example. Whilst different definitions abound, electronic market making has just as much right to exist as any other business model in today’s trading ecosystem. If you don’t want to trade with them, then the answer’s simple–don’t.”

The deadline for MEPs on the European parliament’s Economic and Monetary Affairs Committee to table amendments on MiFID II is May 10 and negotiations will start once the parliament and Council of Minister have adopted their respective compromise positions. For both institutions, the earliest date for this to happen is in July.

Negotiations will, therefore, more likely begin after the summer recess and could last until the end of the year. The agreement between the parliament and Council of Ministers must be confirmed by a plenary vote in parliament and this could now take place around November or December so it is a little while yet before anything concrete may be in play.

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