American and European Regulators See Risks in High-Frequency Trading, but Lack Answers

As reported by Global Investor’s Boyd Erman, global securities regulators don’t know what to think about high-frequency traders as a debate rages about whether they are harmful to markets, but watchdogs are clearly concerned that HFTs may be tilting markets.

HFTs are in focus because there’s concern among some investors that their super-fast trading may be unfair, and leading to strange movements in securities — most notably the flash crash.

High-Frequency Trading

High-Frequency Trading

In a new consultation paper, the International Organization of Securities Commissions lays out what it knows about high-frequency traders, and the upshot is not much — but the regulatory body is voicing some significant concerns. Chief among them is that the technological advantage of high-frequency traders gives them an unfair edge, causing other investors to drop out of markets, and whether their speed and sophistication make it too hard for regulators to ensure they aren’t gaming markets.

“Although the technological advantage might decline in the future as technology often becomes commoditised, a challenge posed by HFT is the need to understand whether HFT firms’ superior trading capabilities result in an unfair advantage over other market participants, such that the overall fairness and integrity of the market are put at risk,” said IOSCO, whose members include Canada’s HsecuFT.

The regulatory body added that “many trading strategies used by HFT participants are so sophisticated that they raise an issue as to whether market authorities have the necessary resources to conduct effective market surveillance.”

Given the uncertainty, it’s unlikely that any tough new rules on HFTs are coming anytime soon.

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