Impact of High Frequency Trading and Considerations for Regulatory Change
Over the past 10 years, trading in the U.S. securities markets has dramatically changed from primarily manual trading to almost predominately computer-based trading. New regulations – such as Regulation ATS, decimalization requirements and Regulation NMS – fostered comprehensive computer linkages among trading venues and concomitant upgrades to market participants’ trading systems. Technological advances – such as high speed computing and co-located servers, increased bandwidth, and electronic messaging standards – have accelerated the adoption of new electronic trading strategies, tools, and behavior.
Recent concerns raised in connection with the operation of today’s markets have been focused on computer-based trading activities and strategies that generically have been referred to as “high-frequency trading” (HFT). SIFMA shares its views on computer-based trading, including HFT. Among other points in this paper, SIFMA seeks to describe the benefits electronic markets and computer-based trading provide to investors, and also specific activities and behaviors that may warrant additional regulatory consideration.
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Background
Over the past 10 years, trading in the U.S. securities markets has dramatically changed from primarily manual trading to almost predominately computer-based trading. New regulations – such as Regulation ATS, decimalization requirements and Regulation NMS – fostered comprehensive computer linkages among trading venues and concomitant upgrades to market participants’ trading systems. Technological advances – such as high speed computing and co-located servers, increased bandwidth, and electronic messaging standards – have accelerated the adoption of new electronic trading strategies, tools, and behavior. And, domestic and global trading competition has increased along with these changes.
The media and some market participants have expressed concerns about a perceived unfairness in how different types of investors may be impacted by these changes. Recent concerns raised in connection with the operation of today’s markets have been focused on computer-based trading activities and strategies that generically have been referred to as “high-frequency trading” (HFT). At this time, there does not appear to be an agreed upon definition of HFT among regulators, academics, and the media. Nonetheless, regulators have increasingly focused on the potential effects of computer-based trading, under the rubric of addressing HFT, and are weighing measures to address certain perceived negative effects of these activities.
SIFMA commends U.S. regulators for reviewing securities regulations in this regard and, through this paper, offers its views on computer-based trading, including HFT.2 We agree that it is difficult to arrive at a clear definition of HFT, and so we discuss some of the complexity of this categorization. Next, we seek to describe in this paper the benefits we believe electronic markets and computer-based trading provide to investors, and also specific activities and behaviors that may warrant additional regulatory consideration. We also offer our views on regulatory measures that we believe would appropriately address valid concerns that have been raised regarding computer-based trading and on those regulatory measures that we believe should not be implemented as they may be harmful to markets and investors.