Europe’s financial chief has vowed to lead the toughest ever clampdown on “flash boy” high-frequency traders as the world’s biggest futures market faced legal action related to the practice.
European Union financial services chief Michel Barnier voiced concerns over high-frequency trading a day ahead of a European Parliament vote which will impose curbs on HFT as part of its wider overhaul of markets.
The restrictions have been in the pipeline for several months but follow recent claims from financial writer Michael Lewis, pictured below, that the stock market was rigged in favour of high-speed traders in his latest book, “Flash Boys”.
The practice first grabbed the headlines after the plunge known as the “flash crash” in May 2010, when the US Dow Jones Industrial Average briefly lost almost 1000 points. The new rules will force the traders who buy and sell shares in a millionth of a second to exploit minute price differences to have their algorithms tested and be subject to regulation.
“With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world. Although HFT trading might bring some benefits, we need to make sure that it doesn’t cause instability,” Barnier said.
The vote comes as futures market CME, owner of the Chicago Board of Trade, faced a lawsuit from three traders who claimed the body was selling information to high-speed traders earlier than other market participants. They allege CME committed “a fraud on the market” by offering the speed traders the chance to trade on early access to buy and sell orders. CME denies any wrongdoing.
The new EU rules will also stop the minimum increments in prices at which shares trade from becoming too small to prevent a race to the bottom where trading platforms offer the smallest tick sizes to attract high-speed traders. Marketmakers who quote buy and sell prices for shares will also be obliged to remain in the market for a minimum period to ensure liquidity and prevent volatility.
However, proposals for a “minimum resting period” originally demanded by the EU — which would have required a share order to stay on an order book for 500 milliseconds and effectively killed off HFT — were dropped last year. Details have yet to be finalised and the new rules are unlikely to come into force for three years.