* UK's FSA says need to focus on behaviour not algos
* Amid western crackdown, HFT seen growing in Asia
By Huw Jones
LONDON, Feb 29 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
"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
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.
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
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.