The European parliament has finally managed to reach a compromise over the draft law that is aimed at regulating HFT in European marketplaces. The document touches multiple HFT issues, including the minimal price shift.
Is it good or evil for other market participants and financial markets in general? How may this influence financial markets and various stages of trading? Let's ponder on this question together with Masterforex-V Academy.
Taming HFT
Such suggestions can be found in draft laws put forward by the Lithuanian representatives. As you know, Lithuania is presiding over the EU this year. The minimal price shift is a key factor determining the entire process of trading. It holds especially true in high-frequency trading (HFT for short).
HFT robots that are usually hosted on some local servers near the biggest marektplaces worldwide are caplable of opening and closing thousands of trades that last for a couple of milliseconds. This is done th scan the market and to be find out the current tendenices in the market as well as to make money even on minor prcie changes.
These algorithms work perfectly even when the price is change to the minimum. The more digits they allow after the floating point when shooing the price, the more space HFT robots get to do what they are designed to do. Yet, the HFT share in today's financial markets is growing, which starts worrying human traders as well as authorities around the globe. The Eu authorities seem to be first to reach and try to do something about it.
Another way to secure financial markets from major collapses caused by HFT (like the one sen in May 2010) is to make traders reveal their trading strategies and algorithms to the authorities. This is really a major issue. During the breakdown seen in May 2010 Dow Jones collapse almost 1000 points within 5 minutes.
The EU parliament is currently considering the possibility of forcing all the owners of HFT robots to reveal their trading algorithms to the authorities before being allowed to trade financial markets.
Then the authorities are going to create certain circumstances in the markets to see the reaction of these HFT robots and the consequences of their actions.
These efforts come as a part of a bigger-scale program aimed at reforming the European financial sector. They also concern licensing and speculations in commodity markets.
Some experts say that these changes won't affect retail traders and investor. History shows that similar reforms in the stock sector were unpopular among traders and led to an exodus in favor of Forex. Whether this time will be different, we will wait and see…
