A high-frequency trading (HFT) lobby group has welcomed
recent national-based regulation in Europe and has urged regional European policy makers
to take a similarly nuanced approach.
A draft law in Germany addressing HFT closed for feedback last week and will pass through the country's parliament this year, joining a recent spate of
regulatory initiatives by individual states ahead of MiFID II.
The German law will compel trading venues to set their own
order-to-trade ratios (OTR), mirroring similar rules that were launched in Italy in April.
Remco Lenterman, chairman of HFT lobby group FIA European
Principal Traders Association and managing director at Amsterdam-based HFT firm
IMC, warned European regulators that are currently debating MiFID II to take
note of exemptions for market-making activity included in German and
Italian rules. The French financial transaction tax (FTT) that imposes a 0.2% charge on net buys of French blue-chip stocks, was introduced on 1 August also includes exemptions for market making activity.
“The French have decided to exempt market makers from
their FTT regulation, for example, so it’s good to see there’s an understanding
that liquidity and market markers depend on each other,” Lenterman said. “The
problem with the current drafting of MiFID is that it’s looking to impose a
one-size fits all order-to-trade ratio, and it will harm competition,
especially exchange-traded derivatives.
He argued that if a blanket approach to controlling message traffic was implemented
across asset classes, market makers would simply price in the risk to the
quotes they provide, leading more market participants to trade off-exchange. Further, Lenterman added that new multilateral trading facilities (MTFs) need more leeway in OTRs in order to build up quality liquidity and effectively compete with established players.
"For exchange-traded funds, the average OTR is about 1,000:1 in Europe and in options, it can be up
to 10,000:1," he said. “For an upstart MTF, a normal OTR could be 1,000:1, so it’s all fine for Borsa Italiana to put in an order to
trade ratio of 100:1, because they have 80% of the volume of Italian shares,
but if the regulator tries to do this for new entrants – venues like BATS,
Chi-X, Turquoise – then it will limit their ability to compete,” Lenterman said.
As a key vote for MiFID II was delayed in July until after
the summer, a growing number of states have pre-empted the impending rules, and
Lenterman said the updated MiFID rules should focus on provisions for different
venues and asset classes, instead of across the board rules.
Lenterman said while the market was unclear about how
exactly the new state-led regulation would impact on trading, the recognition
of liquidity providers was a positive sign for HFT firms.