The UK’s chief financial regulator, Martin Wheatley, has underlined the benefits of high-frequency trading (HFT) to the equity markets and suggested there will be no change to the UK’s current risk-based approach, despite a recent increase in concerns about the practice.
Speaking yesterday at the Global Exchange and Brokerage Conference in New York, the CEO of the Financial Conduct Authority said current supervision of HFT was appropriate to the UK market.
“It is important to take a step back, and reflect on automated trading coolly and not get carried away by headlines,” he said. “We do not want to be in a position where acting in haste precedes repenting at leisure.”
In the US, both the Financial Industry Regulatory Authority and the Securities and Exchange Commission have confirmed this year that they are increasing efforts to monitor algorithmic and automated trading activity. Germany has introduced a law to register HFT firms and to charge for excessive system usage and to limit order-to-trade ratios. Italy’s financial transaction tax is higher for firms that trade above a specific order–to-trade ratio. Hong Kong has introduced rules which require algorithms to be registered and for users and suppliers to attest to their competence. Concern about HFT in particular has been heightened by reaction to Michael Lewis’s ‘Flash Boys’ book, which suggests end-investors are being disadvantaged by HFT.
Wheatley said that questions over the right level of oversight and monitoring of HFT were challenging for regulators and market participants alike, adding that “significant progress” has been made by the watchdog.
“What we have now in the UK is a mix of exchange-led monitoring, with the regulator analysing risks such as cross-market techniques on the one hand. On the other, industry itself reporting suspicious activity – so the challenge here becomes a shared one,” he said.
Monitoring of HFT would become easier across Europe, Wheatley asserted, under MiFID and the Market Abuse Regulation, which will improve data collection. He said revisions to MiFID would make the European financial system more resilient to risks posed by HFT.
“There’ll be significant strengthening of algo testing prior to deployment between firms and venues. There’ll also be more focus on systems and controls in firms, with the objective of making sure they understand and take responsibility for the risk they import to the market,” he said.
“On top of this, venues and firms will be required to have circuit breakers, or ‘kill switches’, to stop runaway algos. And, to mitigate the risk that HFT’s high messaging rate overloads the system, European regulators will impose order-to-trade ratios and minimum tick sizes: helping to control noise created by ephemeral orders.”
Wheatley cited evidence presented in the UK government’s 2012 Foresight report as evidence that HFT could be beneficial to financial markets.
“There are undoubted benefits to HFT,” he said. “Most notably, the link between competition and market efficiency, as well as liquidity from reductions in bid/offer spreads and reduced transaction costs.”