Dutch regulators weigh in on HFT debate

The Netherlands Authority for Financial Markets becomes the latest regulator to explore HFTs and concludes they do not use liquidity detection as a strategy.

The Netherlands Authority for the Financial Markets (AFM) is the latest authority to conclude high frequency traders (HFTs) do not use liquidity detection to execute trades.

An analysis of the trading conduct of HFTs found no evidence of liquidity detection strategies being used, which matches the UK’s Financial conduct Authority’s (FCA) findings.

In April, the FCA investigated the ‘predatory’ nature of HFTs, and concluded they do not anticipate order flow when executing trades.

AFM wrote in its report: “Recently the FCA concluded that liquidity detection does not occur systematically on their market. Our (fine-grained) data-analyses support this conclusion for the Dutch market situation.”

Liquidity detection is a trading strategy whereby HFTs respond to partial executions of an investor’s order, then race to trading venues predicting where the investor will enter next, snatching the liquidity before the investor, AFM explained.

It causes investors to “pay more when buying (or receiving less when selling) than would have been the case if HFT had not been present.”

The report also explored ghost liquidity and HFTs, although found further analysis of this is required due to today’s market structure.

AFM explained: “Fleeting orders by market-makers should not be qualified as (a form of) ghost liquidity but rather that the underlying trading patterns are a logical consequence of the application of market making strategies in a fragmented marketplace.”