HFT Examined In Europe

Posted by Jeff Carter
on April 6th, 2011

European regulators are taking a harder look at HFT. Jeremy Grant at the Financial Times does a great job investigating all this exchange and regulatory news. If you aren’t reading him regularly you should. American regulators have taken a look, but bloggers from the US have sounded the alarm for years. To be clear, I am not against HFT and electronic trading per se, but I think we need a level playing field and we need to police nefarious practices that they engage in like quote stuffing.

As far as the exchanges are concerned, I don’t know what other exchanges do, but I do know that CME employs hackers that try and hack into the system. ($CME, $NYX, $NDAQ, $ICE)

With the planned attack by the SEIU on companies like JP Morgan($JPM), and the speculation that terrorists might want to attack America by crippling its capital market, this is a quasi national security issue. That being said, the less government intervention the better. Government needs to be informed as to attacks, real and potential, and it needs to regulate so things happen in markets for economic reasons, not other ones.

The worst regulation that comes to mind is the one that allows for payment for order flow, and a proliferation of dark pools. This fragments the marketplace and makes it more vulnerable to attack. A bad quote in a dark pool could cause the house of cards to fall creating a new flash crash.

What we need is to make all markets hyper competitive. With the advent of electronic trading, we have seen less volume on each bid/ask, more volatile markets, and a concentration of players. More people can access the market easily, which is great-but the power in the marketplace is extremely concentrated. Players need to be assuming actual risk in the marketplace when they trade, not simply front running or getting paid for order flow. There are a lot of issues here, which is why the government needs to have a lighter hand, not heavy. They can’t possibly understand or anticipate each and every part of the market. Centralized planning for every contingency won’t work.

Free unfettered, and un-manipulated markets are the most critical piece of American capitalism. The regulations set down by the SEC today are not the best for protecting our marketplace.

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