Crunch Time for Mifid II as HFT Goes Under the Knife

What will today's vote—if it does happen—mean for the European trading landscape?

On first glance, it would seem high-frequency traders are set to lose most, as politicians seek to halt the rise of the controversial form of automated trading, which has been fingered in several well-publicized trading failures in recent years.

Much has been written about high-frequency trading (HFT) since the May 2010 Flash Crash, and the general line from traders, and others in the market-making arena, is that it does great things for overall liquidity, so we shouldn’t make too much of a fuss over occasional glitches.

High-frequency trading is good for the market, proponents say, and should be left untouched by politicians, whose knowledge of the ins and outs of the trading domain—let alone sophisticated algorithms—is lacking.

A New Perspective
One chief strategist at a major data management vendor, who requests anonymity, sees things differently: The regulators have only the industry’s best interests at heart and are wise to scrutinize high-frequency trading due to its potentially catastrophic impact upon the market—exemplified in some of the aforementioned trading debacles that have resulted in huge losses.

Of course, every player in the game has a vested interest, but so much of the detail about what goes on in a high-frequency trade remains unsaid.

Of course, opinions are varied when it comes to HFT, which is anything but simple. All players in the game has a vested interest, but so much of the detail about what goes on in a high-frequency trade remains unsaid. It would not be in traders’ interest to divulge too much information; all they will say is that they would rather the regulators left them to their own devices.

The big question is what this means for investors, which is where opinions tend to diverge.

On one side, there are the market-makers, who hail the positive impact technology—with a particular nod to the realm of HFT—has had upon liquidity, speed and efficiency in recent years. On the other, there are the politicians, and perhaps much of the rest of the world, who gaze only fleetingly at activities taking place within the trading realm.

Volatility in the markets frequently precedes accusations of irresponsibility and gambling. One industry participant who is heavily invested in the markets—and has been for some time—says, “Couldn't all this money that has slipped through traders' fingers have been used to better effect elsewhere?"

Finance Meets Theology
It isn't often that the financial world mixes with the realms of philosophy or theology, but yesterday the two seemed perfectly intertwined.

As for the European Parliament, a rule, or set of rules, may change the shape of the European financial markets for years to come. Reuters and other media outlets report that Germany is ahead of the game and is hoping to apply restrictions to HFT resting times as early as the beginning of next year, or perhaps even this year.

For the rest of us, we will have to wait at least another two years for any of this to come to effect, but one thing's for sure: Today's ruling will cause a lot of noise, both now and in the future.

The Bottom Line
• The European Parliament votes today on Mifid II, which will have a significant impact upon HFT, among other things.
• Market-makers think politicians must keep their noses out of the trading world to avoid negatively impacting upon liquidity.
• Regulators aren't the only ones worried over the seismic impact that HFT can have upon the world's economy.