The European Commission’s 2010 review of MiFID will take into account high-frequency trading and other market developments that have increased in influence since the directive’s introduction, a Brussels official confirmed yesterday.
Timothy Binning, a policy officer in the securities markets unit at the European Commission’s internal markets directorate, told a London audience that the growth of high-frequency trading to 30-40% of the volume on some European execution venues had raised a number of concerns for the Commission.
Acknowledging the capacity of high-frequency trading to increase available liquidity through electronic market making and to reduce both market volatility and spreads, Binning nevertheless voiced fears about the possibility of malfunctioning low-latency trading programmes spilling out thousands of erroneous trades into the market. “We are concerned about the risk of a system running amok,” he said. Additional risks cited by Binning included the capacity of European trading venues to handle sharp increases in message traffic and the potential for high-frequency trading to reduce average transaction sizes.
High-frequency trading strategies can send short bursts of many thousands of order messages per second to trading venues, even though a fraction of these are actually filled. A recent piece of research carried out by exchanges consultancy Mondo Visione for the Financial Times suggested that average transaction sizes have already halved over the last five years.
Binning added that the Commission would weigh the impact of high-frequency trading on other market participants, such as traditional retail and institutional investors, in reaching any conclusions on its benefits to the overall market. According to the official, some market participants had reported that their trading infrastructure is sometimes too slow to access prices.
Binning said that once a full assessment of the risks and benefits of high-frequency trading had been completed, the Commission would first consider whether MiFID’s existing provisions were sufficient to regulate the activity before deciding whether additional regulatory intervention was required.
Other issues that had emerged since the directive’s introduction in November 2007 which warranted the Commission’s attention during the forthcoming review included the use of dark pools and the need for “better quality and cheaper” consolidated post-trade data, said Binning.
He added that discussions with market participants to date had suggested a largely positive sentiment among market participants toward high-frequency trading. “Many seem relatively relaxed and see it as a natural evolution of computerised trading. But that’s not universally the case,” Binning said.
The European Commission is obliged to review the impact of MiFID on Europe’s securities markets before the end of the year. However officials have played down the prospects of a ‘MiFID II’, suggesting instead that the review is most likely to lead to relatively minor adjustments to existing rules and guidelines.
Binning was speaking at the HiFreq Trade conference at the Marriott Grosvenor Square Hotel in London.