Where Next For HFT as Russia Clamps Down

Terry Flanagan

High-frequency trading has come under the spotlight again this week for all the wrong reasons, as another European bourse says that it is going to crack down on the practice while the Nasdaq stock exchange in New York was earlier this week forced to cancel trades after an erroneous order brought about a steep and sudden rise in a share price.

Russia’s main exchange, the Moscow Exchange—the recently rebranded entity produced by the $4.5 billion state merger last December of the Micex and RTS exchanges—says that from next month it will be introducing an additional commission fee on its securities and foreign exchange markets.

“This will be applied to HFT traders creating unproductive loads on the trading system,” the Moscow Exchange said in a press release this week.

The Moscow Exchange says the fee, capped at around $9,500 per day, will be calculated on the ratio of commission paid by a trading member or its clients to the number of orders entered into the system by them. The additional commission fee will be charged for exceeding the ratio’s threshold by the end client.

The Moscow Exchange, which has seen a recent rise in HFT activity, undertook the rebranding exercise in a bid to open itself up to more foreign investors and wants to shake off its perception of being a specialist and hard-to-access market by upgrading its IT infrastructure and processes.

Since June, the Moscow Exchange has been running tests to find out how many firms were actually running “non-optimized algorithms”. It says that it has found 10 cases in the main securities market and one on its FX venue. The Moscow bourse says it is introducing the measures for the “improvement of market regulation, not income generation”.

However, proponents of high-frequency trading are in agreement that order limits should be in place at exchanges to improve transparency.

“I am always in favor of order-to-trade ratios,” Mark Spanbroek, secretary-general of Brussels-based proprietary trading lobbyist FIA European Principal Traders Association, 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.

“We emphasize that ratios are needed. One needs to control the messaging and the occupancy of the lines—certainly with new technology. Exchanges must have ratios purely because of the technology.

“In the past, exchanges have not pro-actively managed this. If you went over the ratios you would just get a slap on the wrists and nothing more than that. But you weren’t actually fined or your license taken away. If an exchange comes up with a realistic and dynamic order-to-trade ratio, then the next step is to punish the community if they are exceeding this as it is simply not allowed.

“But you have to look at what asset class you are in and what product class and recognize that there should be different order-to-trade ratios for different asset classes and products. ETFs, shares and options all trade differently, but this is the responsibility of the exchanges to do this.”

Some European exchanges, such as the Oslo Børs in Norway and Borsa Italiana in Italy, are introducing measures to penalize high-frequency traders by imposing fees on members that cancel a high proportion of their orders. While Germany is looking to curb HFT through legislation and France is opting to use a financial transaction tax as a means to reduce HFT in its markets. The European Union, through its MiFID II proposals, is also looking at cracking down on the practice.

Earlier this week, technology vendor TMX Atrium announced that it had opened a new high-speed fiber route to provide faster access to the burgeoning Russian financial market. The link, which has been established between Moscow and Stockholm but will also cut crucial milliseconds off the London-Moscow route, will provide access to key data centers in the Russian capital. TMX boasts as clients many of Europe’s leading high-frequency firms.

Meanwhile, Nasdaq and other exchanges were this week forced to cancel trades in Peet’s Coffee and Tea after the stock jumped nearly 5% on unusually high trading volumes in the opening two minutes of trading on Wednesday. The rise of automated and high-frequency trading increases the likelihood of mistaken orders occurring.

This is the latest in a string of high-profile trading errors. Earlier this month, a faulty algo nearly bankrupted U.S. market maker Knight Capital, while in May trading glitches marred Facebook’s initial public offering on Nasdaq.

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