Proposed rules to curb high-frequency trading (HFT) in European regulation will harm market making operations more than predatory price arbitrage strategies, new research has shown.
The academic research examined data from Nasdaq OMX Stockholm, and found that HFT increased market stability and provided liquidity, but that both of these would be affected by curbs aiming to limit HFT in proposed European regulation including MiFID II and the financial transaction tax.
“A majority of the HFT volume and more than 80% of HFT limit order submissions are associated with market making strategies. Thus, any policy aimed at limiting the scope of HFT activity as a whole would primarily hit market making strategies,” the report states, adding that the implementation of order-to-trade ratios (OTR) could be particularly harmful to HFT market makers.
“High order‐to‐trade ratios associated with HFT is primarily a market-making phenomenon. In August, 2011, market makers had 40% higher order‐to‐trade ratios than opportunistic HFTs,” read the report, adding that OTRs would further increase for market makers if minimum tick sizes were imposed across trading venues, a feature of the European Parliament’s Economic and Monetary Affairs Committee (ECON) MiFID II version voted on by MEPs last month.
“Our results show that insofar such regulations would increase tick sizes, market making HFTs would increase their activity whereas opportunistic HFTs would decrease their activity.”
ECON has also proposed imposing a 500 millisecond resting period for all orders and banning maker-taker pricing, a key tool used by HFT firms to make their strategies profitable.
The report, titled ‘The diversity of high frequency traders’, was published by Björn Hagströmer Lars Nordén from the Stockholm University School of Business and attempted to differentiate market making HFT strategies from predatory strategies.
“Our results indicate that, as a group, the opportunistic HFTs contribute to market quality,” the report reads. The publication of the report comes weeks before an October plenary vote on ECON’s version of MiFD II is due. MEPs will then 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.