As the high frequency trading debate continues, it is interesting that the European financial regulator CESR (the Committee of European Securities Regulators) has now announced that it will be investigating the burgeoning practise in detail.
Like its counterpart the SEC in the US, CESR (headquartered in Paris, France) believes that high frequency trading (HFT) should come under greater scrutiny and is now beginning an investigation into trading developments that are largely driven by technology. This is an evolution of the Markets in Financial Instruments Directive (MiFID), which came into effect in November 2006.
CESR’s concern is that technology-driven developments such as HFT are having a potentially detrimental impact on the fairness, transparency and efficiency of the wider market.
Their concerns are certainly not without foundation. Recent analyst reports show that high frequency traders now make up a significant proportion of overall trading volume in US and European shares. According to the High Frequency Trading Review, HFT now accounts for up to 80% of the volume on US stock markets and 50% of the the volume in Europe.
HFT involves trading in and out of stocks at an extremely fast pace, sometimes hundreds or even thousands of times per second. Of course, this requires hugely expensive technology to be top of the game, so CESR (and the SEC) are worried that the firms with the deep pockets will disadvantage the smaller or more traditional long-term investors.
It is a thorny topic and the debate will no doubt continue to rage on for some time. There are those out there who seek to ban high frequency trading entirely, but of course the big players, the Goldman Sachs and Credit Suisse’s of this world will be lobbying powerfully to allow the practice to continue.
It will be interesting to see how the whole thing plays out.