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August 30, 2012 11:59 pm
European proposals aimed at curbing automated trading could have a negative economic impact on the region, according to a study commissioned by the British government.
The findings are part of a high-profile project begun last year to examine the effects of computerised trading, including high-frequency trading, on financial markets.
The Foresight project said there was evidence to support the economic benefits of some of the proposals in the review of the EU’s Markets in Financial Instruments Directive (Mifid), such as circuit-breakers.
However, it said there was less evidence to support forcing electronic market makers to make continuous quotes in markets – one of the most controversial proposals from European regulators.
The interim findings come as global authorities become increasingly concerned about the role of computer algorithms in trading.
In recent years, traders have employed automated systems to quote, trade and hold positions for fractions of a second.
Consultants estimate such trading accounts for about half of US equity markets and 35 per cent of European markets.
The interim findings from the Foresight research on the Mifid proposals were released seven weeks ahead of the rest of its study and intended for European lawmakers returning to work after a summer break.
The Foresight project is sponsored by the UK but it draws on 35 academics from nine countries. It does not represent the position of any government.
Markus Ferber, the lawmaker leading work on the rules in the European Parliament, wants to strengthen the European Commission’s Mifid draft by introducing proposals that market makers be required to keep orders in the market for at least 500 milliseconds before cancelling them – so-called “minimum resting times”.
However, Foresight said market-maker obligations ran into complications as many high-frequency strategies post bids and offers across correlated markets.
“A requirement to post a continuous bid-offer spread is not consistent with this strategy and, if binding, could force high-frequency traders out of the business of liquidity provision.
“With upwards of 50 per cent of liquidity coming from high-frequency traders, this could be disastrous,” it said.
The paper also doubted the efficacy of a proposal that there should be a cap on the number of orders a firm can cancel relative to the number completed.
“An order-to-execution ratio is a blunt measure that catches both abusive and beneficial strategies,” the study said.
The Foresight paper was authored by Jean-Pierre Zigrand of the London School of Economics, Oliver Linton of Cambridge university and Maureen O’Hara at Cornell University – who is also chairman of the board of ITG, a large US broker which sells computer trading algorithms.
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