Wednesday, September 17, 2014

U.K. Parliamentary Committee Questions Conventional Premises on High Frequency Trading

The U.K. Parliamentary Committee on Economics fired off a letter to the Financial Conduct Authority on high frequency trading questioning the premise that such trading increases liquidity. In a letter to FRC Chief Executive Martin Wheatley, the Committee cited a recent study indicating that trading speed does not necessarily improve liquidity. The Committee also cited recent testimony from Brad Katsuyama, president and chief executive of the US equity trading venue IEX, to the effect that high-frequency trading has created predatory practices

Mr Katsuyama.believes that the race s not really between high-frequency trading participants and slow manual traders; it is between high-frequency trading and the market centers themselves in that you have an extreme situation where the fastest participants are faster than the New York Stock Exchange. He thought markets today were unfair because trading venues, by selling technology to high-frequency trading firms, are no longer neutral. An entire infrastructure has been built around unfair trading.

The Committee noted that revisions to the Markets in Financial Instruments Directive (MiFIDII) will be implemented in the U.K. in two years time. CEO Wheatley has described these changes as bringing in “a long, and complex list of new rules.”

Mr Katsuyama thought that it would be difficult for direct regulatory action to prevent predatory trading or market volatility since every prevention technique really addresses the problem that just happened, not necessarily one that may happen in the future. Instead, he advocated more transparency and disclosure for trading venues, believing this would help stop predatory practice.

The Committee asks the FRC if the authority believes that predatory trading is an issue in U.K. equity markets and, if it does so believe, how does the Financial Conduct Authority think the issue should be best tackled. The Committee would also like to hear the FRC comment on Mr Katsuyama’s thoughts.