The European Union (EU) is preparing to vote on some of its “strictest” restrictions for high frequency traders to date. The measures will aim to reduce instability whilst improving investor protection and transparency.
High frequency trading (HFT) is a type of algorithmic trading to rapidly trade securities. The computer programmes that make the decisions have the ability to make thousands of transactions each minute, allowing traders to hold stocks for just a fraction of a second.
This method of trading now largely dominates the global markets. HFT has been criticised for encouraging short-termism and volatility within the financial markets.
If passed, the limits will include mandatory testing for HFT algorithms and restrictions to ensure that price increments for securities don’t become too small. Proposals to ensure that traders kept orders for a minimum time, which would have made it difficult for trading programmes to operate, were dropped last year.
Michel Barnier, EU financial services chief, said, “With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world.
“While HFT might bring some benefits, we need to make sure that it doesn’t cause instability, and isn’t a source of market abuse. That’s what these rules set out to achieve.”
The rules are expected to come into force by the end of 2016 and are likely to mean that high frequency traders will have to change their techniques and operations to comply.
The vote follows recent claims from financial writer Michael Lewis that securities markets are rigged in favour of high-speed traders, allowing a few companies to dominate the market and make a quick profit. The speed of HFT means that small shareholders cannot compete, he added.
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