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Screenshot of a breaking news alert e-mail from Q2 2017
Multinational network of exchanges and electronic trading marketplaces IntercontinentalExchange Group Inc (NYSE:ICE) has announced that is taking an increasingly conservative stances with regard to counteracting what it considers to be high frequency trading abuses, following a move by rival company CME four months ago.
According to a report this week by the Financial Times, the new, more stringent ruling which bans what ICE considers ‘disruptive’ high frequency trading (HFT) has been decided at a time when electronic exchanges walk a delicate balance between being market regulators and satisfying their largest customers. High frequency trading has been reported to make up nearly half of all exchange revenues, with some estimates claiming that at times HFT, as it is known, makes up nearly ¾ of all trading revenue.
Since the flash crash of 2010, global regulators have increasingly turned their eye toward mitigating the possibilities of such a computer failure recurring. Despite Germany’s BaFIN taking steps to outlaw high frequency trading, followed by a pan-European disdain for the practice, high frequency trading has only grown in importance and influence.
Regulatory opinions continue to vary on this subject, with Australia having recognized the use of dark liquidity, algorithms and HFT as a part of the financial landscape, designing a set of rulings for institutions to stand by, whilst North American proprietary trading companies continue to forge ahead with leading technologies, unencumbered with the Volcker Rule, which sought to eliminate proprietary trading, omitted OTC derivatives related activity from its remit.
The disruptive strategies being discussed among firms such as IntercontinentalExchange and CME as well as regulatory authorities are those generally considered manipulative in nature. This includes what is known as “spoofing,” which involves entering buy and sell orders with the intention of not executing the order, but instead coaxing the electronic market making software and its electronic eye into pushing the price of an asset either higher or lower.
Spoofing was the core of the Chicago Department of Justice’s recent criminal charges. Such HFT strategies, unlike more common managed futures algorithmic trading strategies, are typically executed in a matter of milliseconds.