CEPS debate on new trading technologies and financial stability
18 October 2010
The evolution of trading technologies has changed the market microstructure of today’s financial markets. Panelists mainly discussed the effects of high frequency trading in equity markets and how this market is organised in the US and in Europe.
Carsten Ostermann from DG MARKT, Securities Markets Unit presented the following key points:
· This week Barnier‘s comments on High Frequency Trading (HFT) come at the right time since the Commission is in the process of reviewing MiFID and MAD.
· Concerning MiFID, the EC is working on a consultation paper that is scheduled to be published before the end of the year. HFT will be addressed in this consultation paper.
· MAD is at a different stage than MiFID because the consultation has already been closed and the EC will put forward its proposal for 2011.
· HFT will also be tackled in the MAD review.
· The Commission still has a number of open questions on how to deal with HFT, for instance: how to slow down the HFT market? Do regulators have the right tools to enforce a prohibition?
· Another major problem the EC faces when looking at HFTs is that there is not enough data to analyse that market.
Professor Larry Harris from University of Southern California and former Chief Economist at the U.S. Securities and Exchange Commission (SEC) said that High Frequency Traders (HFTs) provide liquidity to the market and they are “arbitrageurs” who do not pose any type of risk for market infrastructures. Moreover, he stressed that the percentage of high frequency traders that really manipulate the market is very low. Policymakers have considered introducing compulsory quoted orders of HFT. Professor Harris said that to quote HFTs orders for a longer period means to increase the time traders are expose to risk. If this is introduced, then HFTs would stop placing this types of orders and liquidity would dramatically decrease.
He highlighted that what creates volatility in the equity market is not the market infrastructure in itself but the external news as for instance the government's debt or inflation.
Professor Frank de Jong, Director of the Finance Department at Tilburg University, focused his presentation on the EU equity market. He said that Algorithmic Trading (AT) has been blamed for market disruption, but there is no evidence of such disruption. He presented several charts and academics papers which demonstrate that there is no causal relationship between AT and volatility in the market. Mr. de Jong also said that AT can smooth out liquidity and stabilizes the market. However, he pointed out that the data is still incomplete.
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