Increased restrictions on high-frequency trading (HTF) were favoured by 68% of respondents to the October poll on theTRADEnews.com. But market participants remain divided over how best to regulate HFT.
The imposition of limits on cancels was the most popular measure, with 33% of readers' votes. However, almost as many (31%) thought that no further regulatory action should be taken at all. Some 19% opted for tougher pre-trade risk management, while increased trade reporting was supported by 16% of survey respondents.
Nevertheless, the findings of the survey suggested that an overall majority of respondents favour of some form of action, which comes as little surprise given continued high levels of media attention on low-latency trading strategies and buy-side unease at interacting with HFT flow.
In particular, some market participants may consider that high-frequency traders sending out large numbers of ”immediate-or-cancel' (IOC) orders with no intention of execution gives a false impression of liquidity in the market. Therefore a limit on cancels would seem a logical measure to reduce the dangers such a misleading impression might give.
In addition, sometimes IOCs can be used in ways that are ethically questionable. Practices such as ”quote stuffing', a method whereby a trader places very large numbers of quotes in a short space of time, forcing the IT systems of other market participants to slow down as they process the quotes, have brought low-latency trading under further scrutiny.
However, some respondents to the poll noted that limitations on cancels may do more harm than good, suggesting that liquidity and transparency would be reduced as the new rules deter market makers from testing displayed prices. Moreover, the orders are not necessarily cancelled in order to deceive the market in any case. Many HFT strategies work by placing large numbers of orders and profiting from tiny price movements, so high levels of cancellation are necessary to manage the attendant risk.
Meanwhile, US regulator the Securities and Exchange Commission (SEC) proposed in January 2010 a set of new rules to ensure that broker-dealers provide adequate risk management systems for orders executed in their name. The SEC also proposes that naked access – in which the client order is routed via the broker's infrastructure without any controls – be banned. HFT firms are not alone in routing their orders in this way, but tend to bear the brunt of scrutiny due to the greater perceived risk their large volume, high-speed trading characteristics.
The SEC is also considering the imposition of a large trader reporting system and consolidated audit trail to provide a clearer understanding of market events for analysis.