France signals need to reshape trading rules

Competition between exchanges and other platforms has brought benefits to equity markets, but coupled with high velocity trading it has also brought some unintended consequences. In a speech to the International Capital Market Association, Jean-Pierre Jouyet, chairman of the French securities regulator AMF, flagged the need for new rules and probably new regulation. The end of the quasi-monopoly of exchanges has had the effect of fragmenting liquidity with a corresponding loss in confidence among investors that they are getting the best deal. Multiple platforms require more spending on information technology and less certainty in pricing. So, more transparency is needed. More trading is taking place not only in non-exchange setting but also on an over-the-counter basis. Jouyet reckons the level is at the top end of the estimates he has heard of 15 to 40 per cent, but worse still is that he doesn't know. "This form of trading must be reserved for clearly identified types of transactions which are not supposed to contribute to price formation, such as complex transactions combining cash and derivatives," he said. More information needs to be available before trades start – too many transactions are hidden as "exceptions" to disclosure of offer size and price. And he wants the same transparecy rules for derivatives as for equity markets.

Markets for society: Perhaps more importantly, Jouyet questioned the principle that liquidity is a good thing. High frequency trading isn't helping as its advocate suggest. Offers disappear before investors can execute, a source of "permanent instability", he said. Moreover, the execution rate has fallen as orders appear and are cancelled in microseconds, creating a "feeling of artificial, fleeting or uncertain liquidity".

Any answers? Jouyet doesn't have the answers, but he does have the questions: "To ensure permanent liquidity in order books, should we impose a minimum period of time before orders can be cancelled, or a pricing system for cancelled orders? Should we place curbs on latency? Should pricing increments be limited? Should we simply confine ourselves to establishing circuit-breakers that put an end to domino effects on markets when algorithms get out of hand?"

Source document: The Jouyet speech is an 11-page pdf file.