While the new rules do not outlaw high-speed trading, "Algo trading is an underlying fact" of the new regulations, according to Philippe Buhannic, chairman and CEO of EMS provider TradingScreen, which also operates the Galaxy MTF in Europe. Every regulator, he insists, is trying to create a safer overall trading environment and framework for all transactions. "That's the idea of putting a number of protections into these markets," Buhannic says, suggesting that some controls on algo trading are needed.
According to industry observers who have read the E.C.'s recommendations for MiFID II (one pointed out the typos and the Commission's obvious confusion around the differences between algorithmic and high-frequency trading), the new laws could have been more onerous. While HFT is featured in the proposed new regulations -- as many had imagined it would -- "Some people will feel that the regulations are not as strict as they expected them to be," says Simmy Grewal, an analyst with Aite Group.
"There is an element that HFT has to be registered with regulators [with regard to] what types of algorithms they are using," Grewal adds. But she also acknowledges the confusion over the rules. With the current proposals, "It is unclear if it will actually encompass everyone who does algo trading even if they are not a high-frequency trading firm," Grewal says.
"Regulation of HFT is clearly coming -- and it is coming strangely enough not just from the regulators but from the providers," adds TradingScreen's Buhannic. "Most of the exchanges are forcing people to have the same length of cable to reach the trading engines to erase any unfair advantage. The regulators will come up with some regulations about the minimum time you would need to reach the exchange -- the microseconds -- for the basic investors and avoid contravening and things like that."
The Next Steps
At press time, the E.C. was preparing to send its proposals to the European Parliament and the European Council (or member states) for negotiation and voting on the new measures. Although no target date has been set for implementation -- Fidessa's Strong expects the measure to be "tweaked" and to "evolve" -- experts predict that MiFID II could become law in 2013.
While the experts Advanced Trading interviewed for this article doubt that the new measures will require a back-office overhaul, they agree that hedge funds will have to get their reporting capabilities in order. According to Fidessa's Strong, who says he met with a small group of buy-side managers recently, half of the managers are not overly concerned with the new proposals, while the other half admitted that they already were taking steps to comply with the new requirements.
"Some were not at all concerned, and some said that they won't do anything until they are told to do so," Strong relates. But at the other end of the spectrum, he adds, "Firms are putting dedicated staff into the spreadsheets and looking at all elements of their business and intersections of clients. They are looking at whether to update products, and they're speaking with people about what needs to be done."
All in all, TradingScreen's Buhannic sees a greater convergence between the rules of Dodd-Frank in the U.S. and MiFID II across the Atlantic. But two unique regulatory environments are likely to exist for some time. "Even if the regulators cooperate and communicate, you are going to have the new regulatory regime between the U.S. and Europe, and this will create an environment where some business will move from one pocket to another," Buhannic says. "And this could have a significant impact on the way the buy side trades and works."