Global regulators are considering penalizing traders if they issue but then cancel a high degree of orders, or even making them keep open their orders for a minimum time before they can cancel. Long-term investors worry that some traders may be using their superior technology to detect when others are buying and selling and rush in ahead of them to take advantage of price moves. This is driving some investors who buy and sell in large blocks to move to new so-called dark pools - venues away from public exchanges. As more trading takes place in these venues, prices on exchanges have less meaning, critics say.
In the United States, the Securities and Exchange Commission has been looking into the new market structure for almost two years. In July, it approved a "large trader" rule, requiring firms that do a lot of business, including high-speed traders, to offer more information about their activities in case regulators need to trace their trades.
After the flash crash, exchanges introduced circuit breakers to halt trading after violent moves. Bart Chilton, a commissioner at the Commodity Futures Trading Commission, called for regulators to go further. He wants compulsory registration of high-frequency firms and pre-trade testing of their algorithms.
Eoin Treacy's view This
speech delivered by Andrew G Haidane
from the Bank of England in July was also forwarded by a subscriber and goes
into some specific detail on high frequency trading and the need for regulation.
I commend it to subscribers.
Veteran subscribers will be familiar with our view that high frequency traders need to be tamed with regulation and improprieties need to be stamped out. Trading practices such as layering are outright predatory. Co-location is by definition unfair since the ability to occupy space inside the exchange building is limited. High frequency trading strategies are often little more than scalping and claims that they are contributing to liquidity only apply when it suits them. It is true that high frequency trading has reduced the bid/ask spread but slippage has in all likelihood increased. This means that while you might pay less for your trade, you are less likely to be filled at a desirable level.
An additional factor seldom remarked upon is that central banks are contributing to the increased volatility evident across markets and asset classes. Low interest rates, ease of access to credit at the discount window and rapid increases in money supply encourage speculation.