The European Parliament has requested order-to-trade ratios for all trading venues and has asked for a deeper investigation into high-frequency trading (HFT) as part of its suggestions for the Market Abuse Directive (MAD).
The amendments to MAD, made by the Parliament’s Economic and Monetary Affairs Committee (ECON), follow similar proposals for MiFID II announced last week and further demonstrates Brussels' intent to better control and curb HFT.
ECON has suggested operators of trading venues ensure a fee is in place for members which exceed an order-to-trade ratio of 250:1, with the charge to be determined by the markets themselves.
Market participants are content with the proposed ratio but have cautioned its exact impact will depend on the details of implementation.
“On a consolidated basis, a message traffic ratio of 250:1 for equities would appear reasonable,” Kee-Meng Tan, managing director and head of agency broker Knight Capital’s trading group in Europe, told theTRADEnews.com. “However, if this ratio is implemented on a stock-by-stock basis it could lead to wider spreads in less liquid stocks as quotes in these securities require a higher frequency of quote updates in order for market makers to maintain tight spreads. But in truth, this ratio may suit some asset classes better than others.”
Market participants have suggested new platforms wanting to attract liquidity may need an initial order-to-trade ratio of at least 250:1 for market makers to build up liquidity and quote the tightest spreads possible. Commentators have also asserted that instead of bilateral rules, venues should decide the best limit for their particular market based on the differing technology capabilities of each trading venue.
Recently, the use of order-to-trade ratios as a way of controlling HFT activity has gained popularity in Europe, with Borse Italiana this week introducing a tiered levy based on a ratio of 100:1.
The Parliament has also recommended that securities watchdog the European Securities and Markets Authority (ESMA) should create an advisory committee comprising national experts to determine the types of HFT which could constitute market abuse. ECON said the committee, to be established by June 2014, would increase ESMA’s knowledge of HFT and provide a list of abusive HFT practices, including spoofing, quote stuffing and layering.
ESMA has already devised a set of guidelines related to automated trading, covering the operation of electronic systems by trading venues and direct market participants. The guidelines will come into force from May.
As part of amendments to MiFID, MEPs have proposed a new tougher regime on HFT. This included a minimum order resting period of 500 milliseconds, a ban on direct electronic access and the most detailed attempt at high-frequency trading by European policy makers to date. MiFID II is scheduled for implementation by 2014 at the earliest.
To better account for a fragmentation of liquidity which was caused by the first iteration of MiFID, ECON has also proposed to develop cross-market surveillance capabilities. Under the addition to MAD, trading venues would be required to provide order book data to their national regulator, which would then make the data available to third-parties for monitoring purposes.
Meanwhile, the UK's Financial Services Authority has fined Ian Hannam £450,000 for market abuse perpetrated when he was chairman of equity capital markets at J.P. Morgan Cazenove. The charges relate to two instances of improper disclosure concerning a potential takeover and oil find by one of the firm's clients, Heritage Oil.