James Moore: Barnier’s EU crackdown on HFTs won’t take effect for years – if ever
Now Michael Lewis has written about high-frequency trading in Flash Boys it has become big news.
A debate about the practice has been rumbling on for some time but it has largely been conducted in the arid terrain of trade publications and the financial blogosphere.
Mr Lewis’s involvement means it has been brought into full public view. So another Michael has decided he wants a piece of the action. Well, a Michel.
That Michel is Michel Barnier, the EU’s internal market chief who’s been a busy boy of late. Just last week he unveiled plans to force the rest of Europe to take up Vince Cable’s governance reforms that give shareholders a binding vote on executive pay policy at the companies they own (with the addition of a couple of extras that were too rich even for Vince’s blood).
He’s promising to lead the toughest-ever clampdown on “flash boy” high-frequency traders (HFTs).
Actually most of them aren’t very flash. They’re more often geeky types who are whizzes with numbers but don’t get out as often as they should. The “flash” refers to the trades their algorithms execute. Gazillions of them can be pushed through in infinitesimally short periods of time. It’s an activity that has become very profitable.
Mr Barnier worries that these trades may be a cause of instability, such as in 2010 when the US Dow Jones Industrial Average briefly lurched down by almost 1,000 points. So he’s going to force them to submit to regulation.
The rules he’s proposing will make the lives of HFTs, and the exchanges which make millions in fees from them, more difficult. But he has stopped short of proposing requirements for what is known as a “minimum resting period”. That would force share orders to remain on the books for a minimum time, stopping HFTs in their tracks.
Mr Barnier has said that while he wants to keep a closer eye on HFTs, they “may be of benefit”.
If so, it’s hard to see how.
The traders’ lobby likes to deploy a trope that has long been a favourite of the hedge-fund industry. It holds that HFTs are ultimately useful because they “provide liquidity”. In English that means they help to ensure there are always enough buyers and sellers of shares around in the market, something you need to keep the show on the road. This (their proponents argue) also helps keeps the “spread” between buying and selling prices low.
Au contraire, say critics. It’s not liquidity these people are providing so much as volume. Thanks to sophisticated technology they shove a huge amount of trades through in short periods of time, managing to make a virtually guaranteed profit.
Do that, and someone has to lose out, because these traders are providing a service to no one other than themselves and the exchanges they trade over. That someone is us. Anyone who has a pension, Isa, unit trust, investment trust and so on.
Unfortunately even the rules that have been proposed are unlikely to take effect for three to four years. So there will be ample time for lobbying to water them down when the spotlight has faded and Lewis’s book is on the two for a fiver table at Waterstones.
Unless, that is, someone can find a way of making a movie about this somewhat rarefied subject. Over to you Mr Lewis. You may do more for our pensions than Mr Barnier ever will.
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