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Finance Watch demands European HFT crackdown

24 April 2012  |  5766 views  |  1 mifid

Finance Watch, a European association lobbying under the banner 'making finance serve society', has called on the EU to crack down on high-frequency trading.

In a position paper on MiFID II, the organisation - which is made up of consumer groups, retail investor associations, trade unions, think tanks, NGOs and others - argues that HFT damages traditional investors' trust in markets, drains useful liquidity and increases the potential for market abuse.

Finance Watch says that HFT is either built on trend-following strategies that generate volume but take away liquidity or on so-called 'liquidity-making' strategies that collect the rebates but in reality provide no liquidity because of the limited depth and milliseconds duration of their quotes.

Meanwhile, the surge in HFT trading has also contributed to a rise in dark and OTC trading, which in turn has a detrimental effect on fairness and price formation with a "negative impact on the economic meaningfulness of market prices".

Says the report: "One has to wonder what the added value for financial markets is when a share of stock or a financial future changes hands hundreds of times within one second. The question becomes even more puzzling when looking for the value it brings to the real economy, especially given the costs and risks involved and suspicions of market abuse."

Finance Watch calls for rules meaning that only members have direct access to venues and the introduction of circuit breakers both within and between markets. It also wants a unique identifier requirement for HFT and automated transactions to identify trades generated by algorithms and for firms to provide to regulators their algo code on a regular basis.

The paper's claims have been slammed by Remco Lenterman, chairman of the FIA European Principal Traders Association, who insists: "We believe that the views on liquidity held by Finance Watch are not correct and are not supported by any empirical evidence. High-frequency trading is clearly playing an unequivocal role in lowering transaction costs, which is of huge benefit to end users."

The next step in the MiFID II process sees the European Parliament's ECON committee debate the issues later this week ahead of the 10 May deadline for them to table amendments. Parliament has already warned in a report that the EC's draft measures do not currently go far enough.

You can read the full Finance Watch paper here:» Download the document now 3.3 mb (PDF File)

Comments: (1)

A Finextra member
A Finextra member | 24 April, 2012, 14:05

There are clearly pros and cons with HFT.It has in many respects assisted the market with price/spread reduction and i do beleive improved liquidity. However it is only open to a few to play and it does not appear to the Tax payer as a fair method of trading. It can also be open to abuse and manipulate markets to the benefit of the few and the expense of the many.

There does need to be some better management of the markets that allows the use of HFT but in a way the is clearly beneficial to everyone and understood as such by all

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