No short cuts to level playing field in US/EU markets
European legislators’ amends to
MiFID II and a US regulatory probe into high-frequency trading (HFT) aimed at
harmonising market access could have unintended consequences for liquidity,
In its proposed revisions to MiFID II, the European Parliament’s Economic and Monetary Affairs (ECON) Committee
proposed banning direct electronic access, a practice that allows trading firms
to gain speedy access to markets using a broker’s infrastructure. ECON also
states that co-location, i.e. placing trading systems as close as possible to
exchange platforms to gain a latency advantage, should be offered on a “non-discriminatory,
fair and transparent basis”. The ECON proposals impose a minimum resting
period of 500 milliseconds on all orders and cancellation fees for market
participants that cancel a high proportion of their orders. The document
also contained a detailed definition of HFT.
amendments are the latest sign of moves in the region to
moderate the rapid rise of HFT, which accounts for around 30% of overall
European trading volumes, and equalise market access for other market
“The aim essentially is to
level the playing field,” said Mark Goodman, head of Quantitative Electronic
Services at Société Générale Corporate and
Investment Banking. “There is a recognition that to some extent technological
innovation is driving changes to market structure faster than the legislative
process can handle.”
But Goodman cautioned that
some of these amendments, while well-intentioned, may not yield the benefits
that regulators expect.
“Some clauses, particularly a
minimum resting period have the
potential for unintended consequences,” he said. “Slowing
down orders in this way simply means quotes will rest for longer, offering more
opportunities for aggressive HFT strategies.”
Rebecca Healey, senior analyst
at consultancy TABB Group, said the proposals would hamper liquidity provision.
“You cannot categorise everyone into simplified
buckets,” she said. “A minimum resting period will restrict the ability of
traders to react to market conditions and will therefore act as a disincentive
to post liquidity.”
She added that the proposal could also favour
national exchanges that typically have the bulk of liquidity over alternative
venues because a minimum resting period could make likelihood of execution a
more important factor than price when deciding where to route orders.
Goodman also considered that legislative attempts
to temper HFT could easily impact use of algorithms provided by brokers to
their buy-side clients.
“Whilst there are clearer definitions between
the two there is still plenty of language which continues to merge the two
activities which will result in confusion,” he said.
Developments in Europe chime with work
reportedly being carried out by the US’s Securities and Exchange Commission (SEC)
into advantages to low-latency traders over other market participants arising
from existing market structure.
These include exchange order types that allow
HFT firms to effectively jump the queue when searching for liquidity, fee
structures that offer rebates and the relationship between HFT firms and
trading venue operators. Many HFT firms such as market makers GETCO and Citadel
also have strategic investments in alternative venues.
The SEC has been examining ways to better
control HFT and other forms of electronic trading since the flash crash on 6
May 2010, when a single algorithmic order sent US markets tumbling in the space
of around 20 minutes, before rebounding just as quickly.