The current draft of the European Commission’s revisions to the Markets in Financial Instruments Directive (“MiFID”) II is generating consternation in the high frequency trading (“HFT”) community because of a new liquidity requirement. The draft, leaked late last week to theTradeNews.com, also contains controversial prop trading regulations and access criteria rules.
If the draft remains in tact, European HTFs will be forced to operate their market-making algorithms continually throughout trading hours. The text specifies that “an algorithmic trading strategy shall be in continuous operation during trading hours of the trading venue to which it sends orders or through the systems of which it executes transactions. The trading parameters or limits of an algorithmic trading strategy shall ensure that the strategy posts firm quotes at competitive prices with the result of providing liquidity on a regular and ongoing basis to these trading venues at all times, regardless of prevailing market conditions.”
While HFTs use their algorithms at many different times across the trading day, they usually deploy them during specific market conditions. Regulators have toyed with similar requirements since the May 2010 flash crash, which was partially blamed on the withdrawal of liquidity by too many HFTs at a single moment. However, sources within the industry say that this requirement would force many firms to leave the market permanently.
Market participants are also agitated about new restrictions on prop trading. This draft confirms the European Commission’s intention to prohibit organized trading facilities (“OTF”) from trading against their own proprietary capital (prop trading). However, systemic internalizers (SIs) will be exempt from this ban, provided they don’t operate “in functionally the same way” as an OTF and abide by a strict pre-trade transparency regime. The MiFID draft also contains language aimed at opening vertical silo exchanges to competition, and introduces new index licensing requirements that prohibits trading venues from claiming “exclusive rights in relation to any derivatives subject to this obligation preventing other trading venues from offering trading in these [index and benchmark] instruments.”
The European Commission is slated to present MiFID II and its regulatory twin Markets in Financial Instruments Regulation (“MiFIR”) on October 19th.