The Futures Industry Association’s European Principal Traders Association (EPTA) has drafted a best practice document to help high-frequency trading (HFT) firms prevent market manipulation.
The EPTA, an industry body comprising proprietary trading firms that account for a large proportion of trading activity on European trading venues, said the document includes recommendations for hiring and training employees; detecting market manipulation through monitoring, alerts, record keeping and internal reviews; access and oversight of systems; pre-trade risk management requirements and; trade and post-trade risk management issues. It follows two previous sets of guidance covering risk controls led by the Proprietary Trading Group – the US arm of the organisation – and change management; best practices related to software development, release and testing.
The organisation said its paper was intended to help firms establish internal policies, procedures and codes of conduct, and build on a similar guidance from the European Securities and Markets Authority (ESMA) that came into force in May.
The ESMA guidelines cover the use of electronic trading systems, including algorithms, by investment firms and the provision of direct and sponsored access.
“These guidelines can be used by regulators as the basis for related areas of supervision and are intended to go deeper than existing regulatory and industry guidance,” Remco Lenterman, chairman of the EPTA, told theTRADEnews.com. “We’ve drafted these best practices to help firms prevent market manipulation and manage risks. Market manipulation is not only morally reprehensible, but also carries a hefty price tag for the market, in particular for those that are providers of liquidity.”
In addition to the ESMA guidelines, European policymakers are considering curbs on HFT activity through MiFID II. These may include a ban on direct access to markets, minimum resting periods for orders and order-to-trade ratios for exchanges. The EPTA has backed the use of order-to-trade ratios, subject to close industry collaboration, but has raised concerns that the imposition of minimum resting times could damage the quality of liquidity.