When cracking a nut, would you normally use a sledgehammer or a more precise tool? It may sound like a daft question, but it’s nonetheless one that occurred to me at the European Trading Technology Conference, TradeTech, in London earlier this week.
Much of the conference’s agenda was focused on two topics (often at the same time): Regulation, and HFT. Many of the speakers and participants were concerned with understanding how the new guidelines from the European Securities and Markets Authority (ESMA), aimed at regulating the systems and controls required in an automated trading environment for trading platforms, investment firms and authorities, will work. As a result, much of the TradeTech conversation I heard came from attendees asking whether or not the regulations were, to employ my earlier analogy, a sledgehammer when perhaps a nutcracker was required.
To my mind, it’s worth having a look at what’s going on with the decline in trading volumes to find the answer. Last week the Chicago Mercantile Exchange (CME) announced they were cutting staff partly as a result of reduced market activity, while NYSE Euronext today announced that its net income fell 43.9 percent in the first quarter to $87 million, from $155 million a year ago, reflecting the situation seen across other venues, Brokers and Investment Banks around the world. It is clear that high-frequency traders are being driven out of the market by what they see as an incessant drive towards over-regulation of their activities.
Although nobody is suggesting that ESMA is paving the way towards a blanket ban on high-frequency trading, it seems clear that an environment of contempt and, in some cases, hostility is being cultivated towards those who operate in this space. No-one likes being labeled a pariah; without a change in tack, this environment could lead to an even sharper decrease in trading volumes, as well as more lay-offs in the industry in the long-term.
Perhaps then, instead of the sledgehammer, what’s needed is a more precise real-time surveillancenutcracker, which will target specific issues with HFT – i.e. those that unfairly disadvantage other market participants. Clearly, any such solution would need to work across multiple markets and asset classes, to capture the full picture of traders’ activity, but it does seem that the greater transparency this would provide could go a long way towards resolving the issue without driving liquidity from the market.
In my view, the real-time technology is available today, and ready to deploy, but there needs to be a widespread agreement that the best way to regulate automated trading is to monitor everything that’s taking place and reduce the risk of abuse. The alternative is we carry on with the sledgehammer; whilst we might crack the nut, when we’re done we might find we’ve destroyed the kernel in the process.