The European Union’s (EU) financial services commissioner, Michel Barnier, has promised to clamp down on so-called ‘flash boy’ high-frequency traders as the world’s biggest futures market faced legal action related to the practice.
He expressed his voiced concerns over high-frequency trading a day ahead of a European Parliament (EP) vote which will impose curbs on high-frequency trading (HFT) as part of a wider overhaul of markets.
“With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world,” said Barnier. “Although HFT trading might bring some benefits, we need to make sure that it doesn’t cause instability.”
The restrictions have been in the pipeline for several months but gained attention after recent claims from financial writer Michael Lewis in his book
that the stock market was rigged in favour of high-speed traders.
The practice gained attention in May 2010 when a plunge dubbed the ‘flash crash’ saw the US Dow Jones Industrial Average (DJIA) briefly lose almost 1000 points. The new rules will force the traders who buy and sell shares in a millionth of a second to exploit minute price differences to have their algorithms tested and be subject to regulation.
The EU vote comes as US futures market operator CME Group, owner of the Chicago Board of Trade (CBOT), faces a lawsuit from three traders who claim the body sold information to high-speed traders earlier than other market participants. They allege CME committed “a fraud on the market” by offering speed traders the chance to trade on early access to buy and sell orders. CME denies any wrongdoing.
The new EU rules will also stop the minimum increments in prices at which shares trade from becoming too small to prevent a race to the bottom where trading platforms offer the smallest tick sizes to attract high-speed traders. Marketmakers who quote buy and sell prices for shares will also be obliged to remain in the market for a minimum period to ensure liquidity and prevent volatility.
However, proposals for a ‘minimum resting period’ originally demanded by the EU which would have required a share order to stay on an order book for 500 milliseconds and effectively killed off HFT were withdrawn last year. Details have yet to be finalised and the new rules are unlikely to be introduced before 2017 at the earliest.
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