German trade body Bundesverband Investment und Asset Management (BVI) has identified a need for better regulation of high frequency trading, as concerns grow among regulators over recent losses it has caused.
BVI says unlike algorithmic trading, which can be useful for cost, high frequency traders simply seek to take advantage of the high volumes of orders placed by professional investors.
The most recent financial group to come under fire from regulators was Knight Capital Group, which apparently wrongly traded 148 New York-listed stocks, causing trading losses of $440m.
The argument used to support high frequency trading is that it brings much needed liquidity to the market, but these claims are dismissed by Bernhard Langer, chief investment officer, global quantitative equity at Invesco. Invesco manages more than $630bn for clients in equities, so his words hold ground.
He says: “The biggest risk in the market these days is not leverage, it is high frequency trading. These high frequency traders invest millions of dollars, and their orders can come through and you have just a few milliseconds.”
BVI’s CEO Thomas Richter echoes Langer’s concerns, stating that the market “needs real liquidity, not inflated trading volumes.”
The problem here is that some funds that trade in this manner often cancel up to 90% of their orders, so what looks like real liquidity on paper in fact does not exist.
BVI suggests that this problem can be solved with increased regulation. It advocates that at least a quarter of the discontinued orders and their size must be documented for a minimum holding period of one to two seconds. This would ensure that clients only cancel orders for a good reason.
Kevin Cronin, Invesco’s global head of trading, suggests various other actions that would level the playing field between investors, such as charging for excessive cancelled trades.
Yet the BVI is skeptical that the charges imposed by the financial transaction tax proposed by the German government would be useful in regulating high frequency trading.
It points to the review of the MiFID regulation, soon to come into force, which already includes proposals to govern high frequency trading across Europe. The trade body is convinced an additional Germany-specific tax would simply be a way for the state to get more money, without making any real improvements to the situation.
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