Innovations in Trading and Technology (Managing algorithmic trading will become more difficult in the future. Regulators have already suggested in recent drafts of MiFID II and the German HFT Act that algos need to be registered/earmarked and their functionality reported to the competent authority if requested.
The European Parliament (EP) takes the requirement a step further in its draft in Article 10a in MAR. Here, market abuse is defined as any case where an algo or material change to an algo is not reported to the competent authority and that this algo has subsequently had a detrimental impact on the market. Interestingly, the other two instances of market abuse – insider dealing and market manipulation – need to be committed intentionally. The EP’s approach with respect to algos is far less forgiving, with no mention of intent when talking about the failure to report a change in an algo.
Regardless of appropriateness, it would certainly provide a strong incentive for any broker to flood its regulator with large numbers of algo change notices just to get an imprimatur. Whether this makes markets safer is open to question.
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2 Comments to "Bless Me, Father, for I Have Changed My Algo":
fodbarnes
22 February 2013
What is the problem to which "registration" is the answer? What would the regulator do with the information given in the "registration"? If it is easy to spot that this algorithm would cause chaos (or be 'detrimental to the market'), then presumably the trader would have already spotted it. So only if chaos creation is a reliably profitable activity is it likely to be done deliberately. (In the case of Knight Capital, not really profitable for them.) Because of severe information asymetry trying to rely on the regulator to very quickly spot some kind of problem before the algorithm is used is very unlikely to be successful. Even if this is designed to address some other form of more systematic and slower detriment (eg quote stuffing) would it not be easier to identify this in action rather than trying to understand the 1,000s lines of computer code. etc.
Quality policy making? Seems unlikely.
Comments (6)
Anonymous
25 February 2013
" The EP’s approach with respect to algos is far less forgiving, with no mention of intent when talking about the failure to report a change in an algo. "
There a very good reason for that: when "this algo has subsequently had a detrimental impact on the market". there can never be made the distinction between a bug and an intentional act, so all such changes are potentially intentional. Given the consequences, the least one can say is that markets cannot afford more flash crashes.