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April 15, 2011 2:04 pm
Fidessa’s blimp was hovering above, Pipeline Financial were offering massages and champagne from 10am and ING’s main freebie, a large stuffed toy lion, appeared to be everywhere.
It was standard conference fare at TradeTech, the trading industry’s annual conference in London this week. But there was one topic distracting attendees more than the gimmicks: regulation.
Most concerns could be traced back to one event that came without warning: the “flash crash” of May 6 last year, when the Dow Jones Industrial Average, the world’s flagship stock market, suddenly dropped 1,000 points in just over 20 minutes before rebounding.
The trigger was traced not from the huge dumping of shares from one of the world’s largest trading firms or investors but a small sale of derivatives from a firm in Kansas. The event underlined the extent to which daily trading on US markets had become so automated, complex and interlinked.
Buzzwords bandied around at Trade Tech last year by asset managers, brokers and technology providers like automated trading, speed and fragmentation have taken on very different connotations in the eyes of regulators.
The industry has, with a few exceptions, enjoyed a bumper few years of growth as the dispersion of trading across multiple venues has coincided with a financial crisis provoking the most volatile markets in living memory.
While high-frequency trading institutions were absolved from blame in the regulatory report, policymakers in Europe crafting the Mifid review, have joined the fresh push to regulate parts of the industry and force it to give up hitherto closely-guarded information on technologies and trading strategies.
The problem the industry faced at TradeTech was no-one yet knows the likely shape of regulation. As it comes on top of the wide-ranging and fundamental reform of financial markets in Dodd-Frank and Mifid, it makes the outlook even more unclear.
Natan Tiefenbrun, commercial director of Turquoise, summed up the mood well when he said: “There is uncertainty on whether there will be regulatory harmonisation, or just a gentle push in this direction, so there is very little incentive to invest in the safety of the market at the moment.”
Comments from regulators at TradeTech did little to clear the outlook. Laurent Degabriel, policy officer, DG Markt, securities markets, for the European Union confirmed that the European Commission was working to produce the draft proposals for July, but given the size of the task the EC is undertaking, some scepticism remained.
What emerged was that differences between regulators still remain. Tim Rowe, manager for trading platforms and settlement policy in the FSA’s markets division, gave short shrift to the proposals for high frequency traders to give up their codes, calling the plans “a bad idea and unworkable”.
“No way in a million years will we be able to look through millions of lines of code,” he said. “I can’t really see what regulators are going to do save recruiting a small army of PhDs. There’s also a fear of creating a moral hazard that if you have signed off an algo and something goes wrong, I’m in trouble.”
The FSA’s stance is that HFT firms should be authorised if trading firms are trading directly onto the market but the suggestion that all HFT firms should become market makers.
The FSA was equally clear on the Commission’s proposal to define a multilateral trading facility by the amount of order flow it trades.
“We see no reason to use an arbitrary size threshold ... if it doesn’t meet definition of an MTF, then it shouldn’t be regulated as one, whatever the size,” says David Lawton, head of market infrastructure and policy at the FSA.
But the uncertainty was encapsulated by the debate over organised trading facilities, or OTFs. A regulatory push from G20 countries to move more over-the-counter derivatives trading on-exchange by the end of 2012 has led to regulators redefining the categories under which brokers and trading firms may trade and introducing new categories. In the US they have become known as swap execution facilities while the European equivalent being floated is known at an OTF.
Mr Lawton said: “We see no need to create a broader OTF category.”
Kate Swinburne, a UK conservative European parliamentarian and author of a report into dark pools and “high-frequency” trading as part of a Brussels review of trading infrastructures, said the OTF was not prescriptive so it could be changed. The head of a European dark pool operator said privately that there was a possibility of the OTF proposal being dropped altogether.
But if there was little clarity coming from the regulators, the industry didn’t help itself either. One panel debate was hosted by John Humphrys, the BBC broadcaster and probably the most prominent “outsider” in a room full of industry executives.
Mr Humphrys, more at home asking questions to politicians and reporting from war zones, listened to speeches which included industry leading lights talking of investor fears of “getting their faces ripped off”.
Kicking off the debate, he said the impression was of an industry that behaved more like casino. If so, he asked: “Who is the house?”
While the panel all knocked back the suggestion, industry executives quickly slipped into jargon and a level of assumed knowledge to make their points. Neither was the question fully answered.
Mr Humphrys, I got the sense, was not completely convinced. It served as a reminder that the whole point of European regulation was to protect the man on the street and if the industry doesn’t sufficiently address fundamental concerns in simple language to Brussels, it could still end up with something it doesn’t want.
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