Two stories this week demonstrated that Greece isn’t the only thing Europe has to disagree about. Together they both help highlight the problem regulators have worldwide with HFT. The first story, by the FT’s Jeremy Grant, describes how Italy’s Borsa Italiana is bowing to Consob pressure and introducing a fee structure that will charge participants more depending upon the number of orders they submit. This effectively introduces a tax on the HFT community because their business model is predicated on a much higher order to fill ratio. The rationale for this is that HFT somehow distorts markets and so this is needed in order to achieve “stability”. And yet, not so far away, the Swedish regulator claims that “the negative effects related to high-frequency and algorithmic trading are limited”. Worse still is the situation in Australia where the new ballooning regulation costs are being divided up in accordance with the numbers of orders submitted. Apparently this is not intended as a direct tax on HFT but a way of reflecting the extra effort involved in supervising these firms. The net effect, however, is just the same.
Part of the problem lies in coming up with a definition of HFT that everyone agrees upon, but the real problem lies with the regulators themselves. When they were busy introducing multi-market structures, why didn’t they think that this would lead to a huge increase in HFT? Splitting liquidity over multiple destinations and the subsequent introduction of maker taker pricing provides the ideal breeding ground for arbitrage. And, of course, exchanges around the world have been busy building the fastest race tracks they can in order to attract the same HFT players too.
Maybe it’s because HFT is such a nebulous concept that it becomes such an easy scapegoat. Firms can always claim that any sanctions aren’t really directed at them but, just like Greece, I guess the debate will go on forever.