LONDON (Reuters) - Europe’s markets watchdog is stepping up scrutiny of high-frequency trading to assess the impact of so-called “ghost liquidity” and to ensure national regulators and trading venues have strong enough controls in place.
The activity of high frequency traders is in the spotlight after “Flash Boys”, a book by Michael Lewis, last month said they make billions of dollars from other investors by using ultra-fast telecommunications links and special access to exchanges to gain an unfair advantage.
The United States is investigating high-speed traders for possible insider trading and looking at whether ordinary investors are put at a disadvantage by the high-frequency traders, who move in and out of markets quickly to build up big profits over time.
“This (market) needs to be regulated and supervised properly. This needs to be intensely supervised, but at the same time it’s not a ban or stopping of high-frequency trading,” Steven Maijoor, chairman of the European Securities and Markets Authority (Esma), said at the Reuters Financial Regulation Summit on Tuesday.
Maijoor said Esma will visit Europe’s major national regulators in the next few months to assess how guidelines issued in 2011 are being put into practice, specifically to ensure internal controls and expertise at trading venues and firms are rigid enough.
The watchdog will also carry out more research on the impact that high-frequency trading has on liquidity and other areas of the market.
“Is the liquidity provided by high-frequency traders really liquidity or is it ghost liquidity?” Maijoor said, referring to trading orders that can disappear before trades are executed. Critics say they can be used by high-frequency traders to give them an advantage and do not improve market liquidity.
Esma estimated about 60 percent of orders in Europe’s major trading venues comes from high-frequency trading firms, but they only account for about a quarter of trading.
Germany’s Deutsche Boerse (DB1Gn.DE) said on Tuesday it did not expect its business to be hurt by the renewed regulatory zeal on high-frequency trading.
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Reporting by Steve Slater. Editing by Jane Merriman