Banks want calm over high tech traders

By Luke Jeffs and Sara Webb

LONDON/AMSTERDAM | Wed Mar 2, 2011 1:37pm EST

LONDON/AMSTERDAM (Reuters) – Europe’s top banks are warning global regulators against curbs on high-frequency trading firms (HFTs), insisting that so-called “market bandits” are vital for efficient markets.

U.S. and European regulators plan next year to introduce new rules to restrict the trading activities of these traders — tech-savvy hedge funds that generate huge volumes of orders — to prevent a repeat of last year’s U.S. “flash crash”.

But a panel of managing directors from major European investment banks told the Reuters Future Face of Finance Summit on Wednesday that punishing these traders was risky because they were a key source of liquidity that benefits all trading firms.

“If they are somehow going to outlaw or make it disadvantageous to be a market-maker, they are going to take liquidity out of the market,” Jack Vensel, global head of wholesale services at Citigroup, told the Reuters Summit, in London.

These traders use super-fast computers to engage in various trades such as “shaving” — buying and selling in nanoseconds to chase tiny margins — and often collect a rebate from the exchange for creating liquidity as they go.

More traditional investors worry such speedy traders are effectively engaging in a legal, computerized version of front running — where firms glean information about rivals trading plans.

The regulators are considering rules to slow them down and impose extra risk management requirements on them.

But the trading industry, that reaps healthy revenues from high-tech traders, is fearful of over-bearing regulation.

“Risk controls are sensible but putting artificial controls on how people trade is not the solution to the problem,” said Richard Semark, head of European client trading at UBS.

Andrew Bowley, responsible for electronic trading product management at Nomura said: “This is a competitive environment, the idea that innovation and technology can be regulated out of the market is a hard one to deal with.”

Continue reading here.

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