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March 23, 2012 3:30 pm
Anyone sending computerised orders into exchanges and other trading systems should be subject to a “minimum holding period” in stocks and derivatives to slow down ultra-fast dealing, a top European parliamentarian has said.
It is the latest sign that regulators are coming up with concrete proposals for tackling the growth of high-frequency trading, where traders use computers to drive trading in and out of stocks, futures and foreign exchange in the blink of an eye.
The call comes in a report by Markus Ferber, German member of the European Parliament charged with shepherding key market structure reforms through the next stage of approval in Europe.
It has been keenly awaited by traders, exchanges and brokers since it will influence how lawmakers vote on a revised version of the Markets in Financial Instruments Directive (Mifid), which includes Europe’s proposals for curbing HFT.
Mr Ferber proposed a minimum holding period for contracts before they can be cancelled. Traders using automated systems often send huge numbers of messages – which contain buy or sell instructions – only to cancel them after market sentiment changes.
Exchanges have recently started taking action against orders that clog up their systems without actually resulting in trades, while Mary Schapiro, chairman of the Securities and Exchange Commission, has expressed concern that excessive cancellations might disrupt markets.
Mr Ferber said action was necessary. “Only then will we get a grip on high-frequency trading and the business of ultra-fast transactions will lose its appeal,” he said.
HFT already faces the prospect of the application in Europe of some kind of financial transactions tax, which is designed partly to slow down HFT.
Mr Ferber said that if a certain percentage of orders ended up being cancelled and thereby unfulfilled, and that this was done in order to drive prices up, then extra fees should be slapped on traders.
However, he did not explain how such a practice would drive prices up, nor discussed what should happen if prices were being depressed by such action.
Exchanges such as Nasdaq OMX, Direct Edge, Deutsche Börse and Borsa Italiana have all this month unveiled fees they say are designed to discourage excessive message traffic and order cancellations.
The biggest HFT firms, which include Getco and Citadel of the US, and Optiver and IMC in the Netherlands, said they were “concerned” by minimum resting periods.
The European Principal Traders Association, a recently formed lobby group representing 21 such firms, said they would be concerned “by any proposals that could undo the good work to date on regulatory reforms – such as the introduction of minimum resting periods”.
It said this “could result in a decrease in liquidity by hampering effective risk management”.
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