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EU preliminary deal points to curbs on high frequency trading

Matthew Finnegan | Oct. 28, 2013
Regulators demand complex algorithms be tested before being unleashed on markets

A draft deal has been agreed by the European Union to clampdown on the high frequency trading in order to prevent further market upsets.

High frequency trading involves using complex computer algorithms to buy and sell large volume shares at high speed, typically for small individual gains. High frequency trades now make up around a third of the volume made on exchanges such as the London Stock Exchange.

The impact of the practice on markets has proved controversial, however, with the 'flash crash' of 2010, sending the Dow Jones Industrial Average plummeting by 700 points as high frequency traders sold off masses of securities in just a few minutes. This has led to calls from US and the EU in the past to introduce tighter regulations on HFT.

According to Bloomberg the European Parliament and its member states have now agreed a preliminary deal, outling measures to regulate high speed trades, with a deal struck last week.

"The negotiation team achieved a significant breakthrough on this issue," said Markus Ferber, the MEP leading on the push for regulation. "The area of high-frequency trading is lacking suitable regulation. This is why it was high time to find a decent solution to this pressing problem."

Under the terms of the preliminary agreement, traders will have their algorithms tested on venues in order to minimise "systemic risk". Regulators will also require that "circuit breakers" are introduced to bring a halt to trading if price volatility spirals out of control. Rules will also be introduced on 'tick sizes', the small increments in price for stocks, with smaller ticks thought to be used by venues to attract HFT firms.

However the agreement stopped short of some of the demands that were tabled by EU lawmakers, such as monetary penalties for traders which had been cancelling large amount of orders as part of their HFT practices.

Commenting on the provisional agreement, Dev Tyagi, UK general manager at server firm Supermicro, which sells to trading firms, said that regulation can help create more stable high speed trading practices within markets, and even attract more to the field.

"Regardless of the sector, regulation always causes raised eyebrows in some circles and invokes absolute panic in others. The fact that regulation is being discussed in relation to HFT shows how important a market this is becoming and it seems this trend is continuing as it broadens across different asset classes," he said.

He added that new rules "might encourage more entities to operate in the HFT space as they may feel more comfortable with the regulation".

 

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