September 27, 2012

Mirror, mirror on the wall, who's the fairest securities market of them all? Regulators in Canada, Germany and Australia are answering that question by implementing or proposing new restrictions on high-frequency trading.

While U.S. regulators have been slow to act on several events that have eroded the confidence of investors, including the flash crash of 2010 and the Knight Capital incident caused by errant software that rang up $440 million in losses, other nations are taking steps to curb the free-wheeling behavior of high-frequency trading firms.

According to today's New York Times, the German government introduced legislation yesterday that would force high-frequency trading firms to register with the government and limit their ability to rapidly place and cancel orders, one of the key features that allows automated traders to capture arbitrage opportunities based on tiny price discrepancies in stocks.

Going further, a European Union committee is pushing for broad rules that if accepted could impact the entire Continent, according to the Times. Europe is acting swiftly to counteract the growth of high frequency trading, which accounts for 45 percent of all stock trading, as compared with 65 percent in the U.S., based on data from Celent.

Canada has already increased fees to firms that flood the market with orders, notes the Times. It cites a report by ITG suggesting that fees have made trading more efficient by curbing the tsunami of data taxing the market's computer systems.

Meanwhile, Canadian trading desks are also bracing for new rules that take effect on Oct. 15, which are aimed at limiting the growth of dark pools in Canada, to avoid the cloning effect that has led to 30 or 40 in the United States. Under the new Canadian guidelines, dark pools will only be allowed to take orders if they provide a significantly better price, the Times notes.

Even though these new curbs were hotly debated in Canada, Canadian bankers decided they didn't want their markets to follow the U.S. model, which has fragmented liquidity across 13 exchange venues and dozens of dark pools.

But is some of this regulation an anti-competitive move to protect the established players against the encroachment of more nimble electronic start-ups? Last year, Chi-X, the first electronic competitor to the Australian Securities Exchange, captured 7 percent of the volume by catering to high frequency traders.

While American regulators have taken a slower approach toward imposing any restrictions on high speed trading out of concern for unintended consequences, other nations are watching the U.S. experience and think that by acting now, they can protect their markets against the types of technological disruption we've seen here. Let's wait and see if it works.

ABOUT THE AUTHOR
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...