‘Guns don’t kill people – people kill people…’

This oft quoted statement used in gun control debates attempts to apportion responsibility to a person operating a firearm rather than demonizing the firearm itself.  In applying licensing laws to firearms it would seem challenging, at the very least, to license every gun manufactured or already in existence and thus legislation is often centred on the individual.  This echoes a similar dilemma currently faced by the European Commission in their attempts to regulate algo trading.

In an ever competing market, developers of execution algorithms and sell sides developing their own in-house algorithms are increasingly playing in a game of one-upmanship and creating a market saturated in algorithmic flow. Ever more complex algorithms are manipulating the market and sniffing out best prices.  Indeed, algorithms can go one better and sniff out algorithms created by other market participants and trigger buy orders to generate a better market price into which to sell.  Open warfare for algo trading?  Not quite but fairly or unfairly, the perceived risks posed by algorithms that overreact to market events and the pressure exerted on trading venues by large numbers of algorithmic trades are being touted as key contributors to current market volatility.  And herein lies the issue with how the EC proposes to regulate the industry.

As a preventative measure against unscrupulous individuals attempting to trade against the market the EC may attempt to demonize algorithms (like firearms) through regulation of the algorithms themselves. This would however require sell sides to reveal potentially sensitive trading strategies and any advantage gained on the market would be lost. Should the EC attempt to regulate the individual, the suppliers/developers of algorithms to the market, then similar problems surface as to the effectiveness of algorithms.

Either way the core theme of transparency and investor protection being pushed by the MiFID II programme is maintained.  For the EC however, careful consideration needs to be given over who should be responsible for algorithmic flow on the market.  As a still burgeoning part of the industry algorithmic trade now accounts for a large percentage of order flow across various venues and in creating transparency the EC would not want to be seen to be ‘uninventing’ the algorithm.

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