A high-frequency trading (HFT) lobby group has welcomed recent national-based regulation in Europe and has urged regional European policy makers to take a similarly nuanced approach.
A draft law in Germany addressing HFT closed for feedback last week and will pass through the country's parliament this year, joining a recent spate of regulatory initiatives by individual states ahead of MiFID II.
The German law will compel trading venues to set their own order-to-trade ratios (OTR), mirroring similar rules that were launched in Italy in April.
Remco Lenterman, chairman of HFT lobby group FIA European Principal Traders Association and managing director at Amsterdam-based HFT firm IMC, warned European regulators that are currently debating MiFID II to take note of exemptions for market-making activity included in German and Italian rules. The French financial transaction tax (FTT) that imposes a 0.2% charge on net buys of French blue-chip stocks, was introduced on 1 August also includes exemptions for market making activity.
“The French have decided to exempt market makers from their FTT regulation, for example, so it’s good to see there’s an understanding that liquidity and market markers depend on each other,” Lenterman said. “The problem with the current drafting of MiFID is that it’s looking to impose a one-size fits all order-to-trade ratio, and it will harm competition, especially exchange-traded derivatives.
He argued that if a blanket approach to controlling message traffic was implemented across asset classes, market makers would simply price in the risk to the quotes they provide, leading more market participants to trade off-exchange. Further, Lenterman added that new multilateral trading facilities (MTFs) need more leeway in OTRs in order to build up quality liquidity and effectively compete with established players.
"For exchange-traded funds, the average OTR is about 1,000:1 in Europe and in options, it can be up to 10,000:1," he said. “For an upstart MTF, a normal OTR could be 1,000:1, so it’s all fine for Borsa Italiana to put in an order to trade ratio of 100:1, because they have 80% of the volume of Italian shares, but if the regulator tries to do this for new entrants – venues like BATS, Chi-X, Turquoise – then it will limit their ability to compete,” Lenterman said.
As a key vote for MiFID II was delayed in July until after the summer, a growing number of states have pre-empted the impending rules, and Lenterman said the updated MiFID rules should focus on provisions for different venues and asset classes, instead of across the board rules.
Lenterman said while the market was unclear about how exactly the new state-led regulation would impact on trading, the recognition of liquidity providers was a positive sign for HFT firms.