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When officials from 16 of the world’s securities regulators assemble on Friday in London for a round-table discussion on “high-frequency” trading and over-the-counter derivatives, it will be the biggest gathering of its kind yet convened to brainstorm on those issues.

If Bart Chilton, a commissioner at the US Commodity Futures Trading Commission, has his way, his colleagues will get tough on what he calls “cheetah” traders – so named because of the ultra-fast speeds associated with high-frequency trading, or HFT.



Last week Mr Chilton called for such traders to be registered so they could be monitored more easily. While this is unlikely to happen in the near future, the gathering in London shows that regulators are getting close to deciding what, if anything, to do about a phenomenon that has spread rapidly across equities, derivatives and foreign exchange markets.

HFT refers loosely to the use by automated traders of computer algorithms to generate buy-and-sell orders at the blink of an eye, as well as to other traders who seek to eke out tiny profits by arbitraging between trading platforms and types of securities. The European Commission is proposing, in a new version of the Markets in Financial Instruments Directive (Mifid), that these automated traders be required to post bids and offers – to make markets – throughout the day regardless of market conditions. Investment firms engaging in algorithmic trading would also have to provide regulators with a description of their strategies.

The question now is: what effect would such measures have on a business whose growth has over the past two years seemed unstoppable?

Joe Gawronski, chief operating officer of Rosenblatt Securities in New York, believes US regulators are unlikely to act as quickly or aggressively as those in Europe, partly because they are too busy implementing the Dodd-Frank Act, which reforms the OTC derivatives markets.

The Commission has raised eyebrows with its proposals, which have been made in a politically charged atmosphere after the region proposed a financial transactions tax, aimed in part at curbing HFT.

The idea of forcing automated traders to continue to post bids throughout the day was floated by the US Securities and Exchange Commission after last year’s “flash crash”, when markets gyrated wildly after an algorithm sparked huge selling. It was seen as a way of tackling the fickle nature of some HFTs that sprint for the exits when market conditions become particularly volatile.

“Any time you obligate participants to trade when it is not economically advantageous to do so, you’re going to have to provide them with benefits, advantaging one class over another,” says Cameron Smith, a former SEC staffer and general counsel at Quantlab, a proprietary trading firm. “The ones with the advantages will crowd out those who don’t.”

In addition. many large automated traders – such as Getco of the US and Optiver of the Netherlands – already make a living from posting bids and offers all day long and would be unaffected by any obligation to do so. Moreover, many automated trading firms make money from accepting the bids and offers posted by others and so are not marketmakers. Such traders “would not fit into the framework” of what Brussels is proposing, Mr Gawronski says.

Finally, banks and their asset-manager customers could also be affected if what Brussels has proposed is implemented. Banks routinely use algorithms to execute trades for asset managers – but that is not the same as “high-frequency” trading. One banker says: “How would this work? Would we suddenly have to become marketmakers?”

The SEC, which is jointly hosting the London event with the UK’s Financial Services Authority, has been grappling with these differences as it seeks to deal with HFT. The agency has made a move to ban so-called “stub quotes”, quotes that fulfil obligations but are far from the market price. A person familiar with the agency’s thinking believes it is still examining the issue but the notion of applying rules to all electronic traders is “very difficult”.

Such confusion makes it hard to assess the impact of any tougher regulatory action on HFT. To many market participants it also shows regulators have not fully grasped that HFT is a term that encompasses different kinds of activity, even if most use algorithms in some way.

Any clampdown on HFT could also hit exchanges, which not only have attracted the “cheetahs” to their markets but also earn money by renting out space in purpose-built data centres where automated traders place their “black box” computers. Christian Katz, chief executive of the SIX Swiss Exchange, says introducing market-making obligations would “make it somewhat more difficult to manage on the HFT side”.

Yet some exchanges say regulation might be a good idea. Magnus Böcker, chief executive of the Singapore exchange, says that while high-frequency traders have flocked to Asia recently they were not yet that active in equities since rules governing the use of HFT were not clear.

If regulators clarify the situation, he says, HFTs might be incentivised to come: “A lot of players say, ‘we’ll come if the rules are clearer’. This debate is actually positive for us in Singapore. You can’t have a huge highway and let everyone drive at their own speed.”