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Foreign Exchange

Principal traders urge regulators to take balanced view on their market influence

Regulators need to consider carefully the impact of high-frequency and other types of automated trading in financial markets, before imposing new regulations, say the two trade groups that represent US and European principal trading firms (PTFs).

PTFs – which trade their own capital on electronic exchanges – now make up a large percentage of trading in global equity markets and represent the fastest growing sector of the $4 trillion-a-day foreign exchange market. They have been under fire since the equity markets flash crash in May last year. More recently, high-frequency traders (HFTs) have also been criticized for scalping foreign exchange market makers, who say that HFTs have caused liquidity to fragment.

“Academic and industry research overwhelmingly supports the important role of electronic liquidity providers in today’s marketplace, including those who employ tools such as algorithmic and high-frequency trading,” says Remco Lenterman, chairman of the European Principal Traders Association (EPTA), and managing director of trading firm, IMC. “We caution regulators against basing regulations on evidence that is merely anecdotal.”

Lenterman was responding to a report published in July by the International Organisation of Securities Commissions (IOSCO) on the impact of technological changes on market efficiency, integration and stability. The report examines issues around algorithmic trading, market fragmentation and dark liquidity, direct electronic access, co-location, tick sizes, fee structures and high-frequency trading.

The two trade groups acknowledge the need for market structure refinements in certain areas, but argue that the benefits of electronic trading –increased liquidity and transparency, tighter spreads and reduced costs – should not be sacrificed.

The debate about the role of automated and high-frequency trading has re emerged as detractors have once again blamed recent excessive volatility on HFTs. These complaints run contrary to much academic research on the subject. The financial markets consultancy group, Woodbine Associates, earlier this week cited research showing that high-frequency strategies likely curtail price movement on both the upside and downside of large market swings. The existence of HFT and other automated trading firms may actually reduce volatility during times of market stress.

EPTA formed in June within the Futures Industry Association’s (FIA) to represent the interests of the European principal trading community following the creation of the Principal Traders Group (PTG) in the US last year.

EPTA’s members include Allston Trading UK Limited; Chopper Trading, LLC; Citadel Securities Europe Ltd; DRW Investments (UK) Ltd; Flow Traders B.V.; Getco Europe Limited; G.H. Financials Limited; Hudson River Trading Europe Ltd; IAT International Algorithmic Trading GmbH; IMC Trading B.V.; Jump Trading International Ltd; Knight Capital Europe Limited; Optiver VOF; RGM Trading Europe Limited; RSJ as.; Spire Europe Limited and XR Trading LLC

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