Significant technology advancements have been implemented by trading venues, in a bid to provide the investor with improved access to and interaction with the market. One of them is high frequency trading (HFT), which allows more accurate, granular and faster pricing of securities. Following the US Flash Crash - the roots of which are, for various reasons, specific to the US - the focuses has shifted to HFT and the potentially detrimental effects it may have on already volatile markets. It is important note that HFT makes a positive contribution to market quality; nonetheless, it is also vital to deal with the concerns surrounding HFT activity and its effect on market safety and integrity. Recent research conducted on the subject of HFT and market efficiency found that, to date, there is no direct evidence that HFT trading has increased volatility. In this regard, FESE welcomes this opportunity to outline the provisions taken by its members to foresee potential problems and the tools that they have put in place to safeguard against them.
FESE agrees with the view that HFT is not a strategy in itself, but a sub-set of automated trading and encompasses many different trading strategies. In this regard, FESE agrees with the provision for enhanced organisational requirements to safeguard the efficient and functioning integrity of the markets indicated by the European Commission.
FESE has understood that the purpose of ESMA's work is to provide an immediate set of guidelines that can be implemented with the current MiFID Directive. However, there are other areas on which ESMA could also consult and issue guidelines that could be introduced under the existing framework. Much of the current policy debate on HFT is focused on the lit markets and, when it refers to dark venues tends, to focus on regulated dark trading venues. Less considered is the issue of interaction of HFT in the OTC space. By contrast, some recent researchers have suggested that HFT exists in the OTC space, probably in particular in the platforms known as Broker Crossing Networks (BCNs) in Europe which are currently regulated as OTC.
FESE believes that it is essential that any proposed guidelines contain no ambiguity on what entity with which the eventual responsibility rests. There needs to be a clear and well defined division of labour in order for market participants to understand their role in ensuring a fair and orderly market. An example of such a need for a clear distinction of responsibility is the issue of Direct Market Access (DMA) and Sponsored Access (SA). It must be made clear that due to the nature of the business, it is the intermediary offering either DMA or SA that must bear the ultimate responsibility for orders sent to the trading platforms.
ESMA must ensure that it achieves the right balance between the correct level of details contained in the guidelines and the need for flexibility in how trading venues are allowed to execute these guidelines. This flexibility must be based on the business model and the financial instrument being traded. FESE believes that an excessive level of detail would hinder trading platforms ensuring a fair and orderly market and fulfilling their functions correctly.
These guidelines must take into account that different trading venues facilitate different investor profiles. Therefore, they may desire to be more restrictive to firms using algorithmic trading strategies accessing their platforms. In principle this should be allowed.
FESE agrees with the view that HFT is not a strategy in itself, but a sub-set of automated trading and encompasses many different trading strategies. In this regard, FESE agrees with the provision for enhanced organisational requirements to safeguard the efficient and functioning integrity of the markets indicated by the European Commission.
FESE has understood that the purpose of ESMA's work is to provide an immediate set of guidelines that can be implemented with the current MiFID Directive. However, there are other areas on which ESMA could also consult and issue guidelines that could be introduced under the existing framework. Much of the current policy debate on HFT is focused on the lit markets and, when it refers to dark venues tends, to focus on regulated dark trading venues. Less considered is the issue of interaction of HFT in the OTC space. By contrast, some recent researchers have suggested that HFT exists in the OTC space, probably in particular in the platforms known as Broker Crossing Networks (BCNs) in Europe which are currently regulated as OTC.
FESE believes that it is essential that any proposed guidelines contain no ambiguity on what entity with which the eventual responsibility rests. There needs to be a clear and well defined division of labour in order for market participants to understand their role in ensuring a fair and orderly market. An example of such a need for a clear distinction of responsibility is the issue of Direct Market Access (DMA) and Sponsored Access (SA). It must be made clear that due to the nature of the business, it is the intermediary offering either DMA or SA that must bear the ultimate responsibility for orders sent to the trading platforms.
ESMA must ensure that it achieves the right balance between the correct level of details contained in the guidelines and the need for flexibility in how trading venues are allowed to execute these guidelines. This flexibility must be based on the business model and the financial instrument being traded. FESE believes that an excessive level of detail would hinder trading platforms ensuring a fair and orderly market and fulfilling their functions correctly.
These guidelines must take into account that different trading venues facilitate different investor profiles. Therefore, they may desire to be more restrictive to firms using algorithmic trading strategies accessing their platforms. In principle this should be allowed.
FESE Response to ESMA_ESMA.2011.224__FINAL.pdf