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EU algorithmic trading curbs risk ‘exodus’

Tuesday 1 November 2011 – by Will Henley

EU policy proposals to curb automated trading strategies have aroused concern from financial players who fear they will have serious ramifications, reports Will Henley.

Proposed EU curbs on algorithmic trading could provoke an “exodus” of traders from European financial markets, according to industry experts.

Both a stakeholder group set up to advise the EU Securities and Markets Authority and leading firms argue new rules risk driving firms overseas.

In July, Esma put forward a draft set of guidelines that traders and hosts of electronic trading systems will have to adhere to from the end of 2011. It said that traders will have to test their algorithms before using them in markets, and suggested limits on order entry capacity in an effort to prevent “excessive flooding”.

The consultation received a furious response from leading exchanges, including Deutsche Börse Group, which warned “inadequate regulation or… impairing underlying business models through excessive burdens” could badly impact the market.

However the revised Markets in Financial Instruments Directive, released to mixed reaction earlier in October, went even further.

The new directive imposes liquidity requirements and introduces circuit breakers and other mechanisms to slow orders. Yet crucially it also states that traders using algorithmic strategies must be “in continuous operation during trading hours” – up to 22 hours a day in some contracts.

According to Laurence Walton, director of regulatory policy at the New York Stock Exchange’s global derivatives trading arm NYSE Liffe, restricting the ability of firms to dip in and out of the market could force many firms to simply turn their backs on Europe, while other market users will be hit by reduced liquidity and limited capacity to hedge.

“Whereby firms today can enter the market at their own free will and withdraw at their own free will, [under current proposals] depending on their risk profile, if a firm’s trading is regarded as algorithmic in nature it would have to be present in the market – open to close – regardless of how volatile the market is and what conditions are,” Walton says.

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