Friday, November 02, 2012 11:47:25 AM

HFT crackdown is greatest risk to European liquidity – The TRADE Poll

Equity market participants believe planned new rules restricting high-frequency trading (HFT) are the biggest threat to liquidity across European markets, according to the latest poll results from showing traders' continued concern of impending regulation.

The October poll gauged readers’ opinions on the factors most likely to limit equity market growth in Europe, with results suggesting closer attention than ever is focused on rule-makers in Brussels.

While new rules limiting HFT topped the list with 44.58%, reduced portfolio turnover before year-end came a close second with 42.17%, and reduction in choice of dark pools trailed third at 13.25%.

Paul Squires, head of trading at AXA Investment Managers, believes the results may indicate a skewed reality, driven by the increasing hype both regulators and the media have given to HFT.

“I can understand why risks to HFT have led the results, but I would suggest this is due to the amount of attention HFT is getting at the moment, rather than 

the likelihood that it is really the biggest threat to liquidity,” said Squires, although he concedes cracking down on the practice will inevitably hurt liquidity.

“I welcome more governance being applied to HFT, but there is a risk you penalise it too arbitrarily, and squeeze some of that liquidity out of the market, which is a problem to long only investors,” Squires said.

According to Squires, the uncertain macro-economic environment in Europe is the single biggest threat to liquidity and the problem for institutional turnover right now. 

“The absence of any kind of continuity or momentum which would provide confidence to invest cash and in turn drive turnover,” Squires said.

Tony Whalley, head of dealing and derivatives at Scottish Widows Investment Partnership, believes the results show the industry finally concedes the benefits HFT provides in a low-liquidity environment.

“There are a number of market participants who want to get rid of HFT traders because apparently they don’t believe that they add to liquidity, and these results show that those who responded to the survey realise that if there’s less HFT activity, it will damage liquidity,” Whalley said.

While Whalley sees a possibility that changes to the fee structure of  exchanges and multilateral trading facilities may occur next year, which may alter the destination chosen by the market participants, he doesn’t think a reduction in dark pools is likely, but registered lower turnover as the chief factor concerning buy-siders in Europe.

“Historically, there has tended to  be reduced portfolio turnover before the year’s end, because trading is quiet before Christmas. The rationale behind this is that either you’ve not made your targets and you’ve got nothing left, or you’ve made them and you’re not likely to trade aggressively and risk damaging performance that has been achieved year to date,” Whalley said.