HFT, Dark Pools and Spoofing in Hillary Clinton’s Crosshairs

The U.S presidential contender says she wants to tax certain aspects of high frequency trading. Is that the right approach?

Election campaigns always push politicians to make populist statements, whether or not they plan to follow up on them after they get elected. Naturally, as the global economy is still recovering from the latest financial crisis and some fear a new one is not far away, economic subjects are at the top of voter’s agenda.

Dragged to the left by Socialist challenger Bernie Sanders, and even Donald Trump who said in August: “hedge fund managers are getting away with murder,” Democratic frontrunner Hillary Clinton has now taken on high frequency trading (HFT). With all the recent discussions and revelations over the past few years about HFT tactics employing unfair advantages it’s not a surprise some politicians will see this as their ticket into office.

Clinton, which many consider to be Wall Street’s candidate alongside Republican Jeb Bush, has proposed taxing high frequency transactions with excessive order cancellations. Known in the business as “spoofing,” this tactic is accused of promoting abusive trading which could threaten the stability of the financial markets.

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She also calls on the U.S Securities and Exchange Commission (SEC) to reform market regulations regarding privately traded equities which enable Dark Pools, to “allow for equal access to markets, greater transparency and the minimization of conflicts of interest.”

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Market Reactions

Dan Marcus, CEO of ParFX, the platform launched by 14 global banks specifically to combat disruptive trading behaviour, says Clinton’s approach is not new (a tax on financial transactions has been floated in Europe) and does not focus on the right issues.

He commented: “HFT clearly still has a reputation problem, but at the same time it’s important to note that high-frequency trading is not bad in itself, and it is unfair to paint all those who practice it with the same ‘dark arts’ brush. It is a logical and natural evolution of electronic trading which brings many benefits.

Dan Marcus, CEO of ParFX
Dan Marcus, CEO of ParFX

However, there are some real concerns relating to disruptive trading behaviour and these are justified and worthy of discussion. In the pursuit of speed, disruptive trading behaviour and an arms race for the fastest market data and technology has created inefficiencies that damaged the wider trading environment.”

As for how should regulators react to the challenge of HFT, Marcus says: “Rather than an ineffective and expensive cure in the form of legislation or taxation on trades, which will take years to implement and almost certainly result in regulatory arbitrage, a proactive preventative solution is required. The focus needs to be on eradicating disruptive trading behaviour and the intent behind it.

The central issue is around the behaviour and conduct of individuals engaging in such practices, and the trading venues encouraging or facilitating this type of behaviour. Ultimately, this is what needs to change.”

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