Two-thirds reject EC's high-frequency rules – The TRADE poll

Market participants remain doubtful that proposed MiFID II rules on high-frequency trading will ensure market safety, according to the results of the February poll on
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Market participants remain doubtful that proposed MiFID II rules on high-frequency trading (HFT) will ensure market safety, according to the results of the February poll on

A total of 65% of survey respondents said MiFID II rules on HFT would not make markets safer, while 35% asserted that they would make a positive difference.

The consultation document on MiFID II that the European Commission (EC) released in December 2010 suggested several measures to deal with the perceived threat to market stability posed by greater levels of high-frequency trading, including an obligation for HFT firms to provide liquidity in times of market stress; a requirement for all HFT firms above a minimum size to be registered; an obligation to inform authorities of algorithms used with detail on how they function; and the introduction of either proportional limits on order cancels or minimum ”resting times' that orders would have to spend on order books.

Despite overall scepticism, market participants were positive in their responses to the proposal on registration. “It makes sense,” Kee-Meng Tan, managing director and head of agency broker Knight Capital's trading group in Europe told “It allows regulators to better keep tabs on who is doing what. A three-man shop could probably do just as much damage as anyone.”

However the other provisions met with far more criticism. Some observers suggested the measures did not go far enough, while others rejected them outright.

“The minimum exposure period, the order-cancel ratios and the requirement for detailed disclosure – those proposals are not going to improve safety, and could have quite a detrimental effect on the market, increasing risk and costs for market participants,” commented Denzil Jenkins, director of regulation at pan-European multilateral trading facility Chi-X Europe.

Jenkins suggested that the EC should go further, by requiring all market participants that use direct market access to be registered and regulated.

Valerie Bannert-Thurner, executive director at risk management and surveillance technology firm FTEN Europe, called into question the relevance of the new proposals, adding that “many of the complaints” commonly levelled against HFT firms concerned activities that are already illegal. Citing buy-side fears that HFT firms might try to detect other trading patterns and then adjust their own behaviour to profit, Bannert-Thurner suggested that MiFID II should not be driven by issues that are already addressed under existing rules, and pointed out that the new legislation was “unlikely” to make the markets significantly safer.

Some of the harshest criticism however was reserved for the proposals to limit order cancels or impose order resting times.

“Having a minimum time is certainly not going to help,” said Tan. “It will make things worse – people who are posting liquidity in the marketplace are going to be held at a significant level of risk. If I post an order, and something changes in the marketplace and I can't cancel it, people are just going to come in and take me out very quickly.”

Tan is convinced that the most likely effect would be to cause trading firms to reduce their participation in the market.

The suggested introduction of proportional limits on cancels also met with criticism. Both Tan at Knight Capital and Jenkins at Chi-X Europe agreed that it would most likely remove liquidity from the market as HFT firms reduce the number of orders they place and the number of venues they use. Tan added that the proposal to disclose information on algos would also be difficult to implement.

“Am I going to end up sitting on my hands while you review my algo? That's additional cost; and what if I change it, do I need it then checked again? It is impractical and reduces the responsibility of the firm – where responsibility should properly rest – to get it right in the first place,” said Tan.

A lack of support for the EC's proposed rules was also evident at the ”Hifreq Trade 2011' conference held in London on 24 February. Speaking at a panel discussion on regulation, Piebe Teboom, a policy adviser AFM, the Dutch financial regulator, expressed dissatisfaction with the proposed measures, describing them as addressing “symptoms but not causes”. TABB Group analyst Will Rhode likewise suggested obliging HFT firms to provide liquidity regardless of market conditions was “disingenuous”.

The EC is currently expected to issue a new version of the directive in Q2 2011, following the end of the consultation on 2 February 2011; the draft legislation will then be considered by the European Parliament and the European Council. The legislation is not expected to become law until 2013.