HFT: WHAT IS IN STORE FOR THE INDUSTRY IN 2012? There are many challenges that will face Europe's high-frequency trading (HFT) market in the next year, meaning that companies will need to keep abreast of developments in the industry. HFT has progressed alongside technology, enabling businesses to utilise new methods of trading their securities. Therefore, as engineers develop new tools for the practice, companies must be conscious of their advantages and drawbacks. One key factor that will impact on the HFT world in the next year is regulation, with new rules being introduced that will cause firms to alter their operations in order to abide by the law. Arguably the most pivotal rules will be the MFID II proposals, which have been formulated by the European Commission, setting new legal barriers for companies within the market. The law is aiming to target low-latency trading for increased security, while hoping to boost the integration, competitiveness and efficiency of European Union financial markets. These are only a few of the law's aims, so specialists in the financial industry will want to familiarise themselves with its features. One in particular that could be of distinct importance is the change to operators rights when it comes to managing transaction speeds, with the new regulation allowing them to manage them and restrict the numbers of trades versus cancelled orders. Article 51 of MFID II reads: "Trading venues should also ensure their trading systems are resilient and properly tested to deal with increased order flows or market stresses and that circuit breakers are in place to temporarily halt trading if there are sudden unexpected price movements." The article also notes that both firms and trading venues should guarantee that robust measures are in place to ensure automated trading does not lead to a disorderly market. Additionally, the MFID II proposals feature a provision that any firm involved in automated trading should be in continuous operation during the trading hours of the venue that it sends orders to. The law also requires that firms in continuous operation should include posting firm quotes at competitive prices, guaranteeing a regular source of liquidity. One of the firms that has commented on MFID II is PwC, which has advised companies to learn the rules, while noting that HFT firms may harbour concerns over its content. Munib Ali, director at PwC, said: "High-frequency trading firms will be particularly concerned by having to provide liquidity on an ongoing basis like market makers, revisiting their trading strategies and sharing these with the regulator."
Mr Ali went on to pinpoint that other types of trading will be affected by the regulation, explaining: "Enhanced collateral requirements could further contribute to the decline of over the counter trading. "The provisions designed to enable greater competition and choices around central clearing come with hurdles that will be contentious, such as the requirement for regulatory approval." Out of all the businesses in the industry, investment banks will feel the effects of MFID II the most, with their fixed income businesses particularly set to feel consequences from the law, Mr Ali remarked. He commented that severe strain will be witnessed on the business models of HFT and commodities firms, which will be hit by higher implementation and operating costs in order for the regulation's heavy control and reporting requirements to be met. According to efinancialnews.com, the future of HFT has also been addressed by The International Organisation of Securities Commissions (Iosco), which operates as a forum for regulators across the world. Iosco's technical committee argued that high volume trading algorithms could lead to market prices moving away from fundamental values in the short term, impacting the price discovery process that occurs on public and transparent markets. Overall, the future of HFT is certainly unclear and a number of factors will prove challenging for market specialists, ranging from the resultant costs of the MFID II regulation to potential changes in market values.
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