EU watchdog reviews high-frequency trading

AMSTERDAM Wed Mar 2, 2011 6:49am EST

Outgoing Managing Director of the Dutch Financial Market Regulator, AFM, Steven Maijoor, speaks to Reuters in an exclusive interview in Amsterdam March 1, 2011. Maijoor, who officially joins as chairman of the European Securities and Markets Authority (ESMA) on April 1, said that the EU securities watchdog has begun a review of the use of high-frequency trading, given the huge economic impact and risks involved, and will state its position by year-end, the incoming chairman said on Wednesday. Picture taken March 1, 2011. REUTERS/Jerry Lampen

Outgoing Managing Director of the Dutch Financial Market Regulator, AFM, Steven Maijoor, speaks to Reuters in an exclusive interview in Amsterdam March 1, 2011. Maijoor, who officially joins as chairman of the European Securities and Markets Authority (ESMA) on April 1, said that the EU securities watchdog has begun a review of the use of high-frequency trading, given the huge economic impact and risks involved, and will state its position by year-end, the incoming chairman said on Wednesday. Picture taken March 1, 2011.

Credit: Reuters/Jerry Lampen

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AMSTERDAM (Reuters) - The EU securities watchdog has begun a review of the use of high-frequency trading, given the huge economic impact and risks involved, and will state its position by year-end, the incoming chairman said on Wednesday.

"You need to look at this intelligently. High frequency trading is a very substantial economic activity. We need to look at the pros and cons," said Steven Maijoor at the Reuters Future Face of Finance Summit.

Maijoor, who officially joins as chairman of the European Securities and Markets Authority (ESMA) on April 1, said that the new European regulator was working on an assessment, with plans to have a consultation paper ready by the summer, and a position by the end of the year.

But he said it was too early to decide whether it would be necessary to introduce any sort of curbs or circuit-breakers.

"Some of the pluses (of high-frequency trading) are related to liquidity, are related to the fact they help making pricing consistent across various trading venues," Maijoor said.

However, he added that the negatives included concerns about risk management policies used by high frequency traders, deliberate attempts to manipulate prices, and the use of algorithms that were not properly thought through.

High-frequency traders flood the markets with orders to buy and sell stock and often cancel the vast majority of them before they are executed as trades. This kind of trading has emerged as a hot topic for regulators who are considering measures to prevent massive market disruptions such as the May 6 "flash crash" which knocked the Dow Jones industrial average down some 700 points and back in a matter of minutes.

The Securities and Exchange Commission, the top U.S. securities regulator, wants to press ahead with market structure changes that may include fees on high-frequency traders to curb large numbers of order cancellations, SEC Chairman Mary Schapiro told the Summit on Tuesday.

Schapiro said she hopes to adopt the outstanding proposals this year and particularly wants to improve market surveillance by allowing the SEC to track stock orders as they happen. This proposal to consolidate exchanges' stock order trails would give the SEC a chance to see across all markets instead of relying on disparate information from the multitude of trading venues.

RATING AGENCIES ON WATCH

Maijoor, previously managing director of the Dutch financial markets regulator, said that one of the new EU securities watchdog's top priorities would be the direct supervision of the credit rating agencies, which came in for widespread criticism in the credit crisis because of their poor risk assessment.

"The main concern is they were not good predictors of the quality of these financial products," said Maijoor. He added that as a former lecturer, he had previously referred his students to the 1930s and Latin America for examples of bank runs, and that it had come as an acute shock to experience such examples in the Netherlands during the 2008-2009 credit crisis.

ESMA will have its own people inside the ratings agencies, doing inspection visits, Maijoor said -- most likely at relatively short notice, although he did not rule out springing surprise visits on the rating agencies, a practice he has used on audit firms in the past.

"Regarding the credit rating agencies ... there are very clear requirements, we will have a team established this year which will have the powers to inspect the credit rating agencies and if there is a gap between the practices and the requirements there will be also the opportunity to fine," he said.

(Reporting by Sara Webb; Editing by Hans Peters)

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