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.
Depending on the outcome of the MiFID II OTF debate it will be interesting to see if discretion around access to OTF venues will bring forth evidence of how HFT serves the real economy.
Here is the US things are the same, the regulators are grappling with a good definition of HFT which they are slowly begining to understand. It’s definitely far removed from traditional approach to investing for the long term. There time horizon is short, really immediate. They take advantage of aberrational price differences in the market that are short-lived. They are obsessed with time and a millisecond is a lifetime to these guys.
However, I heard from one of the regulators that joked that they have come up with a way to identify high frequency traders. Ask him what time it is? If his response is “do you mean now or when you asked the question” you have your answer….
Steve, this is brilliant:
“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.”
Penalizing HFT is like demanding that your child speak up when you ask him a question, then punishing him for talking with his mouth full.
It’s asinine. It’s cognitively dissonant.
So is mandating low spreads through price controls ranging from decimalization, to the trade-through rule, to the NBBO, to Rules 605 and 606, and then activing surprised when the marketplace devolves into a chaotic speculative scrum for alpha in artificial liquidity.
The same thinking brought about Greece. If your financial rules include target inflation rates — meaning the systematic depreciation of your unified currency — nations are going to spend more than they make and somebody is going to go broke. Period.
If you float your currencies against other currencies, the fixed-for-floating swap market will mutate across every asset class into a massive global nightmare attempting to compensate for unknown asset values.
It’s all the same thinking.
Until this folly goes the way of the dodo (which it inevitably will at some point in time), our markets will be unfit for anything but arbitrage, and therefore homes for HFT.