REFILE-UK watchdog says EU "robotrader" rules go too far

Wed Feb 29, 2012 10:48am EST

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By Huw Jones

LONDON, Feb 29 (Reuters) - Draft European Union rules to rein in "robotraders" who use ultra-fast computers to trade stocks and shares need "tweaking back a bit", a senior UK markets regulator said on Wednesday.

Politicians have accused high-frequency traders (HFT) of amplifying market volatility and causing Wall Street's "flash crash" in May 2010 when the Dow Jones Industrial Average index went into a brief but dramatic free-fall.

Following that, the EU proposed stricter rules, including forcing high-frequency traders to remain in the market throughout the day, akin to being a fully-fledged market maker, rather than being able to nip in and out when it suits them.

That restriction would be a step too far, said Tim Rowe, manager of trading platforms at Britain's Financial Services Authority.

"I would share concerns there is potential, as the text is currently written, to cast the net a bit too wide," he told a Hifreq Trade conference in London.

Rowe said the number of HFT traders who want to be in the market continuously is tiny compared to the sector and the far bigger users of algorithms.

"Everybody algo trades these days ... There are just some places where we might want to be tweaking back a bit," Rowe said.

Experts said trading speeds have been slashed with the Singapore Exchange now the fastest in the world at 79 micro seconds, far faster than the blink of an eye.

Industry officials told the conference that "politically motivated" draconian rules would crimp market liquidity.

"We don't want to hurt liquidity," responded Jasper Jorritsma of the EU's executive European Commission, which authored the draft rules known as MiFID II and now being approved by member states and the European Parliament.

EU lawmakers don't think the draft rules go far enough in reining in HFT.

"We want to make sure markets don't get out of control and those algos don't run wild," Jorritsma said.

BEHAVIOUR KEY

Industry representatives said regulators were forging ahead with new rules without basics like a common definition of HFT, requiring all trading venues to have the same time stamp or stronger controls at exchanges.

"I don't think you need to define HFT. What we need to do is find what we are worried about, look at what the behaviours are that give rise to that and deal with the behaviours," Rowe said.

Steps are already being taken to dampen down on HFT volumes which have come to represent large chunks on major exchanges like the London Stock Exchange.

Italy is looking at a special fee to rein in traders who bombard the market with many orders but complete very few deals -- a strategy favoured by some HFT traders.

France will introduce a 0.01 percent tax on HFT trading activities from August and Deutsche Boerse will also introduce from March a punitive charge if many orders from a single trader are not completed in deals.

The EU has also proposed a bloc-wide tax on financial transactions, partly aimed at dampening HFT and while it is unlikely to be introduced in Britain, it may end up being introduced in several euro zone countries.

After the first set of EU trading rules in 2007, the euro zone debt crisis and rapid advances in technology, markets may be facing another upheaval, a senior industry official warned.

"There is quite a lot of hype about HFT. We need to be careful that regulation does not become the fourth shock to the system," said Andrew Bowley, head of electronic trading at Nomura bank.

As Europe and the United States crack down on the HFT, the practice is beginning to flourish in Asia as exchanges there upgrade to faster trading technology to lure HFT volume.

"The speed and money is pouring in all the time and it's going to get faster," said Ser-Huang Poon, a professor at the Manchester Business School.

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