Rethink mandatory 500 ms minimal order validity time
The European Parliament has voted to require high-frequency traders (HFTs) to ensure that their orders are valid for at least 500 milliseconds. The vote last week marks the start of a long process before this and other approved measures might be included in rule-making under MiFID II.
“The intentions might be good – to prevent potential abuse of high-frequency trading – but a word that also comes to mind is populistic,” says Nils-Robert Persson, Executive Chairman of Cinnober Financial Technology. “Many of the people who recently pressed their voting buttons might not truly understand the technical challenges and opportunities of today’s financial marketplaces. A larger role for technology is in general positive for our society, for example, by lowering entry barriers to new and innovative financial marketplaces, thus creating competition. History also teaches us that it’s generally unwise not to harness new technical developments. The value comes from how you implement the technology.”
Cinnober is a global supplier of mission-critical solutions and services in trading, clearing and surveillance to major trading and clearing venues, many of them handling multiple asset classes. In many cases, the company’s innovative solutions in the areas of pre-trade risk, real-time clearing and risk management in real time have anticipated the needs of markets. This is reflected particularly by recent prestigious orders from ambitious and proactive actors such as BM&FBOVESPA, DGCX and LME Clear.
An example of a technology and corresponding business model for marketplaces that want to avoid potential HFT deviations is Adaptive Micro Auctions, which Cinnober described in a white paper almost three years ago (available at www.cinnober.com/whitepapers). This technology is both available and compliant. It is designed to increase communication efficiency as well as to reduce the number of transactions sent, by configuring the lifetime of an order. The specifications of these micro auctions can be set to microseconds.
The information made public after last week’s vote at the European Parliament stated "All firms and trading venues would also have to ensure that trading systems are resilient and prepared to deal with sudden increases in order flows or market stresses. These could include 'circuit breakers' to suspend trading.”
In addition, the parliament said all market players and trading venue operators would be required to lay down clear rules and procedures for fair and orderly trading, objective criteria for executing orders efficiently and transparent criteria for determining which financial instruments may be traded via their systems.
“All this is more or less old stuff,” Persson explains. “Hardly anyone would speak against it and the technology has been available for ages… at least from some of us. Cinnober’s technology is fully compliant today and tomorrow, even if additional strange regulations come along that require a minimum validity time or perhaps a rule for minimum order size. But what comes next? Will the European Parliament set a speed limit for the next Formula One Grand Prix and have a vote on who gets to stand on the winner’s podium?”