The European Commission (EC) has strayed from the basic regulation of financial markets (who is allowed to buy what) and is starting to step into the how and why of buying. To be fair, it has been given the tough target of resolving the financial crisis and creating a single rulebook for the continent’s capital markets in a single raft of new regulations. Broken up into several overlapping pieces, including the revision of MiFID and MAD, the regulations alternately prioritize risk reduction and cost reduction, creating a natural tension between these two positions.
Given the complexity of this enormous task, it is perhaps not surprising that very different aspects of trading are becoming intertwined in the minds of the politicians that edit the EC’s text.
High-frequency trading (HFT) has been a key focus. Trading high volumes of assets based on small price movements to make intraday profits, HFT firms have been widely vilified. However, the reasons most typically given are in fact based on popular misconceptions.
[For a detailed look at the perceived unfair advantages afforded high-frequency traders, see Haim Bodek's series on Why HFTs Have an Advantage. Part 4 of the series examines the DAY ISO order type.]