HFT – why legislative action is needed now

MiFID 2 legislators should equip regulators so they can address recurrent technological instability and restore end-user confidence

4 September 2012, Brussels

Finance Watch, the Brussels-based public interest advocacy association, believes MiFID 2 is a crucial opportunity for legislators to demonstrate that their G20 commitment to Financial Reform in the aftermath of the 2008 crisis is followed by concrete measures.

Algorithmic and high frequency trading have quickly become key features of financial markets. Increasingly frequent crashes resulting from ‘misbehaving’ algorithms and widespread experience of retail and institutional traders of being systematically penalized by predatory high-frequency trading strategies should be firmly addressed.

Benoît Lallemand, senior research analyst at Finance Watch, said:

“The crisis in confidence is the major challenge facing financial markets today, with corporations and end-users heading for the exits. This provides ample support for measures aiming to discourage parasitic and abusive practices, and curb mere volumes brought by high frequency trading – as an essential means to restore genuinely liquid, orderly and fair markets. Only such markets can serve the real economy.”

The European Parliament and Council will be aiming to finalize their positions on MiFID 2, including provisions related to high frequency trading, in the coming weeks. In an apparent attempt to influence this process, the UK government-led Foresight Project into computer trading in financial markets last week published an interim paper purporting to give independent advice to policy makers.

Finance Watch regrets that the ‘independent’ paper relays almost point to point the lobbying arguments of the HFT industry, which can be summarized as follows: a) there is room for improvement on risk management and controls: efforts are driven by HFT firms and trading venues, with potential room for regulators to coordinate cross-market measures (circuit breakers) and b) otherwise, markets have never been more liquid, transparent and fair, thus any proposed regulation is a priori not proportionate. The paper points out repeatedly that there is insufficient scientific evidence to assess the impact of the various measures on the table within the MiFID review, aside from circuit breakers.

Finance Watch, however, sees this same conclusion as support for its view that the full toolkit should be granted to regulators (ESMA), not the industry, to ensure the appropriate measures are available for harmonized implementation once proven effective.

These measures include:

  • Fee structures: covering price of orders (based on the principle that every order modification or cancellation should have a small price tag) and incentives to provide useful liquidity (overhaul of the current maker/taker model).
  • Market-making: financial incentives and exemptions should be strictly linked to defined and harmonized obligations to provide genuine, reliable liquidity.
  • Tick size: a coordinated, wider minimum tick size regime should be implemented by regulators and not left to the industry.
  • Resting time in the order book: should be further explored and possibly imposed by regulators as a means to make order book dynamics more stable and transparent.
  • Order-to-trade ratios: should be calibrated based on the type of securities and should target manipulative and abusive practices.

Leaving regulators without proper tools to regulate what has become the main feature of financial markets is not an option. Moreover, most of these tools are relatively easy to implement and would discourage abusive practices, lowering the burden of real-time or post-facto surveillance – which, in the current environment, would require huge investments of public money.

Surprisingly, the Foresight paper reflects very little, if at all, on the views expressed by end-users (ultimately, citizens) in a Foresight-sponsored survey. The survey’s executive summary indicates clearly that end-users experience a degradation of market quality linked to the rise in high-frequency trading. Among other things, they mention higher volatility of liquidity, higher total trading cost, abusive patterns in excessive order-entry and ‘inequality in latency’ (co-location viewed as a breach of equal market access).

This survey proves that legislators are right to demand curbs on volumes brought by high frequency trading as an essential means to restore genuinely liquid, orderly and fair markets. Only such markets can serve the real economy.


Journalists who want to learn more about Finance Watch’s technical response to the conclusions in the interim Foresight paper are invited to contact Benoît Lallemand, a specialist in exchange infrastructure and financial markets, on + 32 (0)2.401.87.07.

For details of Finance Watch’s position on HFT, please visit:

[1] See Foresight Project survey of end-users: http://www.bis.gov.uk/assets/foresight/docs/computer-trading/12-679-end-user-perspectives-on-computerised-trading

[2] The interim paper can be found at: http://www.bis.gov.uk/assets/foresight/docs/computer-trading/12-1088-economic-impact-mifid-2-measures-computer-trading.pdf

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