Trading | HFT
“[The 23 May crash] looked like an error rather than malicious, but it could easily have involved more stocks, it could have been a bigger error or a programme trade that came through and where was the protection? Years after the 2010 flash crash?” Joe Saluzzi, Themis Trading
a programme trade that came through and where was the protection?” he asked. “Years after the 2010 flash crash?” However high-speed trading is not always HFT.
When the Australian Securities and Investment Commission (ASIC) investigated HFT and dark pools it found that HFT was not a major contributor to market disruption, while market fragmentation and dark pools were. In a report issued on 18 March 2013, it noted that a variety of automated traders could be found demonstrating behaviours that are complained about such as pinging, and that HFT firms do not appear to rest orders in the book for very short periods of time. “When we trade via algorithms the smart
order routers break up our block orders into small quantities: it is intended to look like any other (non-institutional) order flow to avoid attracting attention,” says Squires. “So I can understand why regulators might wonder – when asked how to define HFT – whether algorithmic trading is really any different.” Indeed the rules do not always distinguish
clearly between the two. For example, the European Commission’s draft proposal for MiFID II demands that firms trading with algorithms should provide continuous liquidity, in an apparent
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reference to market makers and defines HFT as placing large volume orders based on high-speed analysis of market data. The blurred line between HFT and other
electronic trading and a lack of empirical evidence to connect it with either market abuse or disruption, has stirred concerns among market observers about the effect of regulatory interference. Brad Wood, partner at GreySpark says, “I think
we have seen some knee-jerk regulatory responses to the flash crash made by politicians who frankly have no idea how these markets operate.”
The first step On 15 May 2013 the German market regulator BaFin created a regulatory regime specifically for HFT firms. It defines them as those which use co-location and high-bandwidth lines (10 gigabytes) to trade; which initiate orders without human intervention; with more than 75,000 orders placed per day; and with a high order cancellation ratio. These traders will have to be licensed by BaFIN if they are a participant with the German market either directly or indirectly, including firms that access the market electronically via other market participants.
Best Execution | Summer 2013
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