The electronically thundering herd that is the community of high-frequency traders has found a surprising ally: the European Central Bank.
The Frankfurt-based institution published a working paper on its website Tuesday which came down pretty firmly on the side of the much-maligned cyber-traders, agreeing with their long-held presentation of themselves as a force for efficient and competitive markets.
The authors of the report conclude that HFT generally goes in the direction of correct price signals and against “noise” or short-term volatility, promoting efficiency “both on average and on the highest volatility days.” That last claim is crucial, given the widespread belief among governments that the small-scale individual traders who are so active in HFT are wont to take their precious liquidity off the table at the first sign of volatility.
Before anyone gets too carried away, the view isn’t an official one: all the ECB’s working papers are presented as the opinions not of the bank, but of their authors — in this case Jonathan Brogaard, Terrence Hendershott and Ryan Riordan, three academics of transatlantic origin, all with a track record of defending HFT, and none of them permanently retained by the ECB. Moreover, a cynic would point out that the authors have drawn their data only from U.S. equity markets. One might be forgiven for thinking that the ECB would have given the paper a heavier edit if it had been euro-zone government bonds, rather than U.S. equities, that had melted down in a ‘”flash crash” at the height of the euro crisis.
So it isn’t like the spirit that moved the European Commission and the German government to regulate high-frequency hijinks has evaporated overnight.
But all the same, the ECB knows full well that anything that appears on its website is going to have the implicit imprimatur of Europe’s most powerful financial institution. And its support for efficient markets is of a piece with (if not directly connected to) its opposition to the EU’s proposed Financial Transaction Tax.
Against that background, the language in which the authors couch their conclusions is particularly striking.
“Our results have implications for policy makers that are contemplating the introduction of measures to curb HFT,” they write, stressing HFT’s usefulness to markets. “Introducing measures to curb their activities without corresponding measures to that support price discovery and market efficiency improving activities could result in less efficient markets.”
It’s surely no coincidence that this is coming out as the European Parliament thrashes out new regulations on HFT, due to be written into its updated “Markets in Financial Instruments Directive”, or MiFID 2, as it’s known.
Relations between the ECB and EU Parliament are, to say the least, pretty frosty at the moment, owing to some sharply divergent views over how much in “accountability” the ECB will owe the Parliament when it assumes the role of banking supervisor.
At times like that, it’s so much nicer, if you have to say that a particular legislative initiative is a misguided knee-jerk or just plain financially illiterate, to have some experts say it for you…