31 October 2014

Trading & Risk Technology

Derek Klobucher - Sybase Inc.

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Europe Takes Control of High-Speed Trading

02 October 2012  |  2335 views  |  0

The European Parliament’s financial committee decided last week to rein in the velocity of high-frequency trading. The Economic and Monetary Affairs Committee’s unanimous vote paves the way for a half-second speed limit on those using computers to execute lightning-fast stock deals.

“All market players and trading venue operators would be required to lay down clear rules and procedures for fair and orderly trading, objective criteria for executing orders efficiently and transparent criteria for determining which financial instruments may be traded via their systems,” the committee stated.

The speed limit would be part of Europe’s new financial driver’s manual, the Market in Financial Instruments Directive. True, MiFID still requires ratification by national governments, but that’s not so far-fetched.

All The Time In The World

“Canada, Australia and Germany have adopted or proposed limits on high-speed trading and other technological developments that have come to define United States markets,” Nathaniel Popper wrote in The New York Times. “Countries around the globe are now using America as a model for what they don’t want to look like.”

Harsh? Maybe.

Too harsh? Probably not.

More than two years after the Flash Crash, and almost two months after the Knight Capital debacle, the U.S. Securities and Exchange Commission began evaluating the control systems of major brokerage firms -- if only by questionnaire. The forms could help the agency better understand how brokerages use technology.

The new initiative could also help the SEC decide about kill switches, which turn off trading outside specified parameters in order to help curtail a disaster. Kill switches are among MiFID proposals, and NYSE Euronext, NASDAQ and other exchanges informed the SEC Friday that they are ready for kill switches.

The exchanges’ letter comes before an SEC meeting Tuesday whose topics will include deterring another Knight Capital-style disaster. This is neither a coincidence, nor a surprise.

On Top Of The World

Exchanges aren’t offering to install guardrails along the highway because it will keep them safe. They’re offering to do so in order to do so on their own terms -- and to keep the government out of it.

Not that the exchanges have to move with lightning speed on this. The SEC has dragged its feet on stricter controls for HFT since the Flash Crash two years ago, according to critics, including the Federal Reserve Bank of Chicago.

“The competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response,” the Chicago Fed’s David Marshall stated shortly after the 2010 incident.

So as the Chicago Fed continues its calls for change, lumbering U.S. regulators will cede market leadership to relatively nimble European authorities who are making progress toward a more stable and confident trading environment. Perhaps it will even be one that the U.S. and other regions deem worthy of emulation.

Related Articles:

EU Lawmakers Seek High-Frequency Trade Curbs in Markets Law” by  Jim Brunsden

Beyond Wall St., Curbs on High-Speed Trades Proceed” by Nathaniel Popper

SEC reviewing technology at brokerages following glitches” by Sarah N. Lynch

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