Harsh curbs on high-frequency trading (HFT) activity proposed in the European Parliament’s version of MiFID II could damage liquidity and raise costs for end investors, market observers have warned.
A 500 millisecond minimum resting time for all orders was included in the version of MiFID II crafted by MEPs in the Parliament’s Economic and Monetary Affairs Committee (ECON) but HFT firms argue it would damage liquidity provision.
Mark Spanbroek, vice chairman of the Futures and Industry Association’s European Principal Traders Association, a HFT lobby group, believes the minimum resting time proposal risks shifting liquidity off-exchange.
“This is bad for the end consumer and creates another tech race around 499 and 501 milliseconds. More business will flow to the OTC and internalised markets, which is not what MiFID intended and not what the end customer wants,” Spanbroek said, adding that liquidity levels will also be adversely affected.
“Liquidity providers will disappear and the market structure will change toward aggressive orders only. The end customer pays the price and flow will move elsewhere.” Spanbroek said.
Alasdair Haynes, CEO of Aquis Exchange,
which will seek approval from the UK’s Financial Services Authority to launch
as a multilateral trading facility (MTF) in Q2 2013, believes the resting times
may not make it into the final legislation.
“A 500 millisecond delay for all orders is an arbitrary figure and I would be surprised if this makes it into the final version of MiFID II.
“The focus should really be on preventing abusive HFT strategies using the Market Abuse Directive and analysis of the wealth of data that regulators have access to, rather than attempting to curb HFT via MiFID,” Haynes said.
Simon Garland, chief strategist at software provider Kx Systems, which supplies tools for HFT firms to build algos, added that a minimum resting period may necessitate substantial programming changes and could make some algo strategies unworkable.
“Amending algos to take into account the resting time may only take a few minutes’ work, but once the change is in there, it will potentially invalidate quite a few algos, which will then need to be completely revalidated though extensive testing,” Garland said.
Maker-taker conflicts
Outlawing maker-take pricing structures – a mechanism used by HFT firms to profit from posting passive liquidity – was also included in the ECON draft of MiFID II to address potential conflicts among market participants.
“I think it is possible that maker taker pricing could be banned in Europe because of the perceived conflict of interests it raises between the buy-side, sell-side and high-frequency trading firms that have stakes in the markets they trade on,” Haynes said.
After a plenary vote on ECON’s version of MiFD II scheduled for this month, MEPs will be required to reconcile their amendments with a version of the directive proposed by the Council of the European Union, with input from the European Commission. The implementation of MiFID II is expected in 2014-15.