Discussion Paper No. 5 - December 2012

Valeria Caivano (v.caivano@consob.it)
Marco Fratini (m.fratini@consob.it)
Giorgio Gasparri (g.gasparri@consob.it)
Nadia Linciano (n.linciano@consob.it)
CONSOB, Research Division

Salvatore Ciccarelli (s.ciccarelli@consob.it)
Giovanna Di Stefano (g.distefano@consob.it)
Monica Giliberti (m.giliberti@consob.it)
Isadora Tarola (i.tarola@consob.it)
CONSOB, Market Division


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Technological progress and financial innovation have spurred the development of high frequency trading (HFT) in recent years. HFT is a trading technique based on algorithms which enable their users to gather, elaborate and react to market information in a matter of milliseconds. In the main European countries, the market share of high frequency traders (HFTr) has constantly risen in recent years, and currently it ranges between 10% and 40%, depending on the country. The academic debate on the effects of HFT has not reached a definitive conclusion yet. According to some authors, HFT might amplify the systemic impact of a shock and might affect negatively market integrity and market ‘quality’ (in terms of price information efficiency, liquidity and volatility). In order to mitigate these negative effects, supervisory authorities have begun a policy instruments review, regarding, on the one hand, stricter disclosure obligations for HFTr, and, on the other hand, microstructural adjustments (i.e. on circuit brakers, tick size limits, fee policy). In Europe, the ESMA has issued new Guidelines requiring information disclosure and organizational requirements both to market participants and exchange operators. In the US, the SEC has adopted a regulation that imposes a stricter disclosure regime on market participants (HFTr included) dealing with large size trades. Given today’s highly integrated financial markets, regulatory measures need to be internationally coordinated (in order to avoid regulatory arbitrage) and carefully assessed by a proper cost-benefit analysis.

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