Asset managers could be set to clash with Brussels over automated trading

Almost half of global fund managers surveyed over summer said they plan to increase their levels of automated trading, putting them in conflict with authorities in Brussels, which have generally opposed the practice and were due to vote today on high speed trading.

The proportion of fund, hedge fund and wealth managers planning to boost machine-based trading was double the proportion of those who plan to keep their levels of automated including algorithmic trading roughly stable for the next 12 months.

Those planning to increase it also outnumbered (31%) those who said automated trading had “had its day” and they were planning to use alternative methods of trading, according to the research by mathematical computing software provider MathWorks.

When the sell side was also included in responses – effectively therefore also including banks – 59% of respondents said they were planning to increase levels of automated trading, 36% said there would be no change to their levels, and 5% said they would seek alternative trading methods.

The findings put the financial community largely at odds with Brussels. Today the European Union parliament’s economic affairs committee was to vote to introduce wide-scale reforms of securities markets, including HFT, as part of Mifid II.

European regulators, mainstream fund trade bodies and even some fund managers have singled out automated trading, responsible for 40% of European trading by some estimates, for favouring speculators, to the detriment of the wider investing public. A slip-up by trading algorithms at market maker Knight Capital that hit some US share prices by at least 10% on one day earlier this year fuelled the argument against automatic trading.

German fund trade body the Bundesverband Investment und Asset Management recently called for the practice to face curbs, while the global head of trading at $650bn equity investor Invesco said fast trading brought little utility to markets, and could not be classified as true ‘investing’ in the classical sense.

Steve Wilcockson, industry manager – financial services at MathWorks, said: “The industry, regulators and politicians can benefit from looking under the hood at applications of automated trading. MathWorks’ recent industry survey finds that in general, financial institutions are looking to increase levels of automated trading, with the sell-side leading the charge as better automated trading enhances their competitive edge, but it also creates market liquidity and reduces volatility, as demanded by government and regulators.

“The buy- and sell-side agree that more robust and faster implementation of trading – and risk – models is key to better market performance. This can reduce the likelihood of bad trades and provide more effective risk monitoring.”

Whereas some opponents of automated trading said fining traders for failed or withdrawn traders could curb automated trading, it was expected the EU parliamentary committee would instead support enforcing minimum time periods for placing orders in markets.

HFT’s proponents argue markets should be democratic, and that imposing minimum time periods will simply make everyone aim for exactly that minimum, not stopping the practice overall.

EU member states can also voice their thoughts on the draft law that would come from today’s vote – so changes are still possible – and the vote has been delayed before in July, as thousands of amendments were worked through.

High frequency trading is not the only focal point of the laws being voted on. Speculation around commodity prices and better transparency in bond and commodity markets are other targets.

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