HTF Regulatory Challenge: Define High Frequency Trading

How does one define a previously un-definable topic such as High Frequency Trading (HFT)?

Sources close to the Commodity Futures Trading Commission (CFTC) indicate new thinking may be underway regarding the topic of High Frequency Trading (HFT). Speculation is this thinking could look at the relative market impact HFT may have in a given market move as a legal definition. Such a definition could consider the relative impact of a particular HFT player as a percentage of a market damaging move and could be used for potential CFTC action on the issue. This new thinking could be outlined sometime in March, sources told Opalesque.

Current US regulation regarding HFT is considered by some market participants to be behind the curve relative to the European Union. In the EU, for instance, algorithm type is used as an identifier to determine market participant behavior during crisis conditions.

“There is significant uneasiness on the speed in markets,” noted Vassilis Vergotis, Executive Vice President, Head of Eurex, Americas.

Dr. Randolph Roth, Executive Director at Eurex, noted the difficulty to define HFT and how speed was now being used as a risk management tool: “HFT is about technology that enables a strategy.”

The Eurex exchange monitors market participant based on strategy, differentiating between HFT proprietary directional traders and commercial interests such as investment banks and what is known as “real paper” institutional orders.  In a press presentation, Eurex displayed a study that illustrated during a single market crash on August 25, 2011 they had identified HFT traders in the market and it did not contribute to the fall in price of the stock market.  This date was similar to a “Flash Crash” in that a large number of sell orders swamped buyers in a short period of time.  On this day, a time when the market was already skittish over the US debt downgrade, the Eurex market with an order to sell over 6,000 DAX stock index futures contracts over a 15 minute period of time.  When a sell order from apparent “real paper” entered the marketplace, this apparent institution scared buyers.  “Who catches the falling knife?” is a question that volatility circuit breakers are attempting to better manage.

Do HFT cause market volatility?  No, claims Dr. Roth.  “The objective is to improve latency, reduce unwanted trades and provide real time risk management.”

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