Regulators plan co-ordinated HFT monitoring

Global regulators plan a more co-ordinated approach to monitoring high-speed trading, following a meeting in London on Friday.

A round-table of around 40 officials from 16 regulatory bodies focused on automated trading, including high-frequency trading, as well as competition in markets and so-called “dark pools”, or off-exchange venues that post prices only after trades have been executed.

It was hosted by the UK Financial Services Authority and the US Securities Exchange Commission, and participants included Gary Gensler, chairman of the Commodity Futures Trading Commission, and Steven Maijoor, chairman of the European Securities and Markets Authority (Esma), as well as securities regulators from Asia and Australia.

The FSA said the meeting laid the groundwork for future discussions on the issues. “The meeting also highlighted the need for global co-ordination on regulatory approaches to HFT,” it said.

Moves to foster a co-ordinated response to high-frequency trading come as the rapidly growing phenomenon spreads beyond its traditional markets of equities and derivatives to foreign exchange and energy trading.

HFT refers loosely to the use of computer algorithms to trade and match orders, or make profits by using statistics to exploit small price differentials, all conducted in fractions of seconds. The latter example is a type of trading that can take place without the trader needing to take a fundamental view on the value of the asset.

Tabb Group, the US capital markets consultancy, has estimated it accounts for around half of average daily trading in US equity markets and a third of European markets, though some studies have cast doubt on the role they play in market price action. The group has also estimated HFT accounts for around a third of the overall volume in the over-the-counter energy swaps market.

Various regulatory bodies are examining the effects of HFT, particularly after the US “flash crash” of May 2010, which highlighted some of the pitfalls from a dependence on computerised trading in daily markets.

However there have been differing approaches on how best to monitor the market. No regulatory bodies currently define “high-frequency trading” or require exchanges or brokers to produce precise figures on the phenomenon.

Some want investment firms that engage in algorithmic trading to provide regulators with a description of their strategies, but the idea has met resistance from industry practitioners unwilling to give up their “secret sauce”.

“Our trade secrets are very important, we’re all competing on the basis of having slightly more predictive models than someone else,” said Cameron Smith, general counsel at Quantlab, a proprietary trading firm, and a former SEC staffer.

“I don’t believe what anyone is using would not be intuitive once seen, and we don’t want that getting to regulators who leave to work in the industry,” he said.

The European Commission is proposing, in a new version of the Markets in Financial Instruments Directive (Mifid), that these automated traders be required to post bids and offers – to make markets – throughout the day regardless of market conditions. A similar proposal has proved controversial in the US.

“Cooperation among regulators at an international level is increasingly vital in ensuring the safety and soundness of our markets and protecting investors, and the meeting was a tremendous success in advancing such co-operation on market structure issues,” said Mary Schapiro, chairman of the SEC.

Additional reporting by Telis Demos in New York