Dutch market watchdog AFM says it sees no grounds for restricting the use of high frequency trading (HFT), but warns that market participants and regulators must improve their operational and risk management techniques to deal with the complexity of computer-driven trading strategies
Following a study into the use of high-speed market trading, AFM says it sees HFT not as a separate strategy, but as a technique for applying short-term trading strategies that have been in use for years.
AFM says fragmentation of the European securities markets as a result of changes to the market structure has contributed to the growth of HFT.
"Using HFT, trading strategies can be implemented that provide liquidity on various trading platforms and that contribute to more efficient price formation for securities," says the regulator.
The AFM takes the view that automated trading methods like HFT have increased dependency on complex technical systems. It therefore argues that additional requirements should be set with regard to operational and risk management systems used by market participants throughout the trading chain.
It also calls for "a more intensive exchange of information" between international regulators and further harmonisation of European supervision.
"To be able to act effectively against possible illegal and/or undesirable behaviour by market participants, it is essential that regulators make additional investments in technological know-how, expertise and resources," says the report. "The information systems currently available in Europe are not adequate for supervisors to obtain a coherent and complete picture of the behaviour of individual players in the European capital markets."