High frequency traders (HFTs) seem to be the evil redheaded stepchild of today’s markets. France implemented transaction taxes, Germany is pushing for registration, and the EU is proposing minimum holding times, increased pre-trade risk requirements, stiffer market maker liquidity requirements, mandatory kill switches, elimination of broker crossing networks, and the banning of tiered exchange pricing. All of these regulations are meant to increase market robustness, and to pressure high frequency firms to either provide greater liquidity, or to leave the markets entirely.
The macro goal of these rules seems to be to slow down the markets, decrease speculation and intermediation, reduce gaming, and curtail short-term equity trading profitability. If these rules are implemented, I am not sure that we will experience the perfect market that regulators are hoping for.
Do we think technology will slow down? Do we think the use of computers in trading will decrease? Do we think that by lengthening the time an order is in the market it will stop faster firms from having an advantage? Do we think that mandating a longer time-in-force for orders will make bid/offer size increase? Do we think we can force HFTs to become market makers if this isn’t in their best interests? Do we think that a market maker who doesn’t want to provide liquidity will do so because of a regulatory fiat? Do we think investors will want to pay higher commission rates or demand expensive capital from banks? Or that banks will suddenly (especially in cash-strapped Europe) open the capital window? Do we think new risk intermediaries will come into the market without reward, especially in an age of regulatory expansion? And do we think that just because we slow down the market, or place artificial market barriers, that gaming will end? Of course not.