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Author's profile photo Derek Klobucher

Europe Takes Control of High-Speed Trading

The European Parliament’s financial committee decided last week to rein in the velocity of high-frequency trading. The Economic and Monetary Affairs Committee’s unanimous vote paves the way for a half-second speed limit on those using computers to execute lightning-fast stock deals.

Europe Reins In HFT 10-02-2012“All market players and trading venue operators would be required to lay down clear rules and procedures for fair and orderly trading, objective criteria for executing orders efficiently and transparent criteria for determining which financial instruments may be traded via their systems,” the committee stated.

The speed limit would be part of Europe’s new financial driver’s manual, the Market in Financial Instruments Directive. True, MiFID still requires ratification by national governments, but that’s not so far-fetched.

All The Time In The World

“Canada, Australia and Germany have adopted or proposed limits on high-speed trading and other technological developments that have come to define United States markets,” Nathaniel Popper wrote in The New York Times. “Countries around the globe are now using America as a model for what they don’t want to look like.”

Harsh? Maybe.

Too harsh? Probably not.

More than two years after the Flash Crash, and almost two months after the Knight Capital debacle, the U.S. Securities and Exchange Commission began evaluating the control systems of major brokerage firms — if only by questionnaire. The forms could help the agency better understand how brokerages use technology.

The new initiative could also help the SEC decide about kill switches, which turn off trading outside specified parameters in order to help curtail a disaster. Kill switches are among MiFID proposals, and NYSE Euronext, NASDAQ and other exchanges informed the SEC Friday that they are ready for kill switches.

The exchanges’ letter comes before an SEC meeting Tuesday whose topics will include deterring another Knight Capital-style disaster. This is neither a coincidence, nor a surprise.

On Top Of The World

Exchanges aren’t offering to install guardrails along the highway because it will keep them safe. They’re offering to do so in order to do so on their own terms — and to keep the government out of it.

Not that the exchanges have to move with lightning speed on this. The SEC has dragged its feet on stricter controls for HFT since the Flash Crash two years ago, according to critics, including the Federal Reserve Bank of Chicago.

“The competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response,” the Chicago Fed’s David Marshall stated shortly after the 2010 incident.

So as the Chicago Fed continues its calls for change, lumbering U.S. regulators will cede market leadership to relatively nimble European authorities who are making progress toward a more stable and confident trading environment. Perhaps it will even be one that the U.S. and other regions deem worthy of emulation.

Related Articles:

EU Lawmakers Seek High-Frequency Trade Curbs in Markets Law” by  Jim Brunsden

Beyond Wall St., Curbs on High-Speed Trades Proceed” by Nathaniel Popper

SEC reviewing technology at brokerages following glitches” by Sarah N. Lynch

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      Author's profile photo Former Member
      Former Member

      another front opens then, in addition to IFRS. it will be a tough sell to those owning the keys to their kill switches as they are holding not only the fastest machines, but the smartest minds to help them defend their power sources.

      Author's profile photo Derek Klobucher
      Derek Klobucher
      Blog Post Author

      Good point, Gregory. Do you think this will give compliance departments power within their firms -- or marginalize them?

      Author's profile photo Former Member
      Former Member

      only time will tell, but i haven't seen anybody parading in orange overalls after the flash crash and trying to explain what happened to anybody in the street would result in a blank stare. this should not prevent us from pushing the issues forward, though.

      Author's profile photo Derek Klobucher
      Derek Klobucher
      Blog Post Author

      Agreed, Gregory. Time will tell, and I'm very interested in how this will play out.

      Plenty of pundits have offered their explanations of the Flash Crash, but much of the outrage seems to be around the lack of regulatory follow-up.

      Who else should have explained the Flash Crash? Would it have helped if they'd worn orange overalls? 🙂