BREATHE EASY The fact that agency business has been explicitly excluded will enable the sell-side to breathe a sigh of relief because all trades that are made from a firm ’ s own account can be discounted and thus reduce brokers ’ trading frequency below the crucial two messages per second that would define them as an HFT .
However , a huge range of firms including market makers and other prop trading businesses will now be captured by the rules , meaning many will now be regulated for the first time , and there are key new responsibilities they will face as a result .
One of the most significant is the need to accurately timestamp all trades .
Kenwright , who has been closely involved in advising firms on the new clock synchronisation rules , said : “ Time stamping beyond the tenth of a second scale is very challenging , but from 2018 firms will have to timestamp their trades down to a microsecond with an accuracy of 100 microseconds either side . This is challenging – though not as much as the original proposal of a nanosecond requirement – as an HFT can make thousands of trades a second .”
The initial proposal for nanosecond accuracy was widely condemned as ludicrous and there was palpable relief among many firms when it was relaxed . To give some perspective , the Large Hadron Collider particle
physics experiment in Switzerland can only accurately measure time to around 4 nanoseconds
The rules are intended to enable regulators to properly unpick a timeline of events around severe market volatility and flash crashes as one of the biggest problems with past crashes is that is has been difficult to tell exactly what triggered the market volatility due to vast numbers of trades all carrying the same timestamp .
Alongside this , firms will also face much tougher rules on the use of algos , including a need to certify them as being safe to use and having to store records of algo trades for five years .
“ Algorithms will need more controls in their development and must be able to prove they are robust ,” says Kenwright .
“ The industry has been moving in this direction anyway , with more testing and automated breaks in algo code , but this will mean those that have not
MiFID I HAD NO MENTION OF HFT OR ALGO TRADING ; BUT THE FLASH CRASH IN 2010 AND OTHER EVENTS SINCE HAVE OPENED PEOPLE ’ S EYES .
GILES KENWRIGHT , HEAD OF REGULATORY ADVISORY , DELTA CAPITAL exercised tighter control will now be forced to , resulting in more stable market conditions for everyone .”
But these new controls , and their associated costs , have led to fears that some firms will simply have to leave markets as a result . With banks much less able to offer liquidity in the way they once were , many HFTs have filled the gap acting as market makers and providing much needed liquidity .
However , if the cost of doing business increases then it is likely some firms will struggle to make money and this could be detrimental for all market participants in the long run .
“ For HFTs , MiFID II comes with increased costs and uncertainties ,” says Fidessa ’ s Voigt . “ Regulation
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