Toward a global response to HFT


In the U.S., regulators are taking a very deliberate approach to market structure issues, especially when it comes to high-frequency trading.

At this point, it would be hard to say that there's a lot of urgency around the issue, except as it is related to quality assurance and code that could be foisted on the entire market system, thanks to the recent Knight Capital fiasco. This slowness reflects perhaps the fact that high-frequency traders have taken a few step back as of late, as volatility and volume dried up.

In any case, in contrast to the slow pace of change at home, we're seeing more aggressive responses around the globe. In Germany for example, the government has put forward legislation that would, among other things, force high-speed trading firms to register and place limits on quote cancellations. The European Parliament later agreed on similar restrictions that would apply to all 27 members if they are approved locally. In Asia, the issue is starting to loom larger. Australia has been pondering some sort of crack down, even as smaller markets---such as Korea, Singapore and Taiwan, where many exchanges have oriented around high frequency trading---ramp up, attracting attention from big funds. An even more aggressive approach has been embraced in Canada, where the government now levies fees on firms that engage in excessive quotation.

The New York Times notes that, "Now Canadian trading desks are preparing for rules that will come into effect on Oct. 15 and curtail the growth of the sophisticated trading venues known as dark pools that have proliferated in the United States. While the regulation has been hotly debated, many Canadian bankers and investors have said they don't want to go any further down the road that has taken the United States from having one major exchange a decade ago to having 13 official exchanges and dozens of dark pools today."

In the U.S., the fragmentation cat has been out of the bag for years now. It will not easily go back in, and many are vexed as to what the market structure of the future should look like. For global players, the best bet for high-frequency trading in the future may well be at home, where the regulations may end up being the lightest. That's either a great thing or not, depending on your world view. -Jim