A senior buy-side trading head has criticised European regulatory change, primary exchanges and the role of high-frequency trading (HFT) in securities markets.
Speaking at an event held by block trading venue Liquidnet in London to discuss institutional trading challenges, Adrian Fitzpatrick, head of investment dealing at Aegon Asset Management and non-executive director at Liquidnet, argued that MiFID has damaged the UK’s financial markets by fragmenting liquidity and increasing costs for end investors.
“We want to trade blocks, but the market has become a complete joke,” he said. “Trade costs have gone up, because the difficulty of getting a trade done is so much greater.”
While MiFID introduced competition to domestic exchanges in the form of multilateral trading facilities, Fitzpatrick asserted that the resulting fragmentation had produced unintended consequences that are harmful to end-investors.
Since losing market share to alternative venues, primary exchanges such as the London Stock Exchange Group are now increasingly focused on attracting HFT flow, argued Fitzpatrick.
This, he claimed, exposes many long-term investors to increasingly unstable markets. Pointing out that HFTs have been associated with abusive market strategies such as gaming, layering and spoofing, he attacked the exchanges, accusing them of irresponsibly pursuing the profits they made from HFT firms’ participation in the market without regard for long-term investors.
“High-frequency traders are vultures,” said Fitzpatrick. “They feed off institutional investors, but if there’s a problem in the market, where are they? It’s not real business – it’s just smoke and mirrors.”
The latest draft of MiFID II, as seen by theTRADEnews.com, does seek to impose restrictions on HFTs. The directive seeks to stem HFT by forcing market making algorithms to operate continually during market hours. According to the draft, “the trading parameters or limits of an algorithmic trading strategy shall ensure that the strategy posts firm quotes at competitive prices with the result of providing liquidity on a regular and ongoing basis to these trading venues at all times, regardless of prevailing market conditions”.
The debate on the value of HFT has been fuelled in recent months by a number of studies that have argued for and against the role of high-speed trading on volatility. Many of the studies stemmed from the extraordinary volatile market conditions experienced globally in August, with some arguing that HFT can actually have a calming effect on volatility.
Rebecca Healey, analyst at financial research firm TABB Group, suggested that MiFID has become too politically driven, with deleterious effects for the end-investor. But for Fitzpatrick at Aegon, the fragmentation of liquidity was the greatest problem. Arguing in favour of a round of global consolidation that would see two or three major exchange groups dominate the world’s securities markets, he suggested that US derivatives venue the CME Group provided the ideal model. “All the business is in one place,” he said. “That makes it easier to find liquidity and get the trade done.”
The final draft of MiFID II and the accompanying regulation – the Markets in Financial Instruments Regulation – are scheduled to be presented by the European Commission on 19 October. They will then go to the European Parliament and Council of the European Union, before implementation some time in 2013.