German regulators have increased the pressure on high-frequency traders, prompting concerns from the market that the country risks damaging its financial sector.
Chancellor Angela Merkel has ordered her government to rein in HFT prior to the establishment of a broader European regulatory regime. As is the case with its American critics, HFT in Europe has been blamed for destabilizing markets. Oppositely, HFT has been defended on the grounds that it brings greater liquidity to the market.
At the epicenter of German plans regarding HFT regulation is a new rule that would require high-frequency traders to register independently. As expected, there are dissenters to the proposed regulation:
“We have to be very careful not to go from no regulation to over-regulation . . . This kind of rule will drive traders from the transparent environment of an exchange into less transparent over-the-counter transactions,” said Mark Spanbroek, general secretary of FIA EPTA.
Recent evidence suggests that the CFTC could pursue HFT regulation in 2013. Recently, the agency’s chief economist, Andrei Kirilenko, released a landmark report on the inherent advantage of algorithmic trading, which prompted a wave of criticism.
Yet, as it stands, arguments both for and against HFT stand on a mountain of dubious or unverified analysis. Defenders of HFT routinely cite studies whose authors can be traced back to HFT funding; for example, James Angel, professor at Georgetown, later admitted that HFT data is a “big jumble” even though he published a report in favor of HFT for Knight Capital. This, of course, was prior to the flash crash earlier this year. Or there’s the case of Christopher Culp, hired by Virtu Financial LLC, who wrote a study against transaction taxes, the Wall Street Journal reports.
On the other hand, aside from Kirilenko’s important study, U.S. regulators have put together scant data on the vices of HFT.
So, it remains to be seen whether U.S. regulators will pursue HFT registration in the coming year. One thing is for certain, though. Without more substantial data, it will be difficult to for lobbies or regulators to make coherent claims in either direction.