Self-test – am I a HFT strategy?

Christian VoigtThe European Parliament has issued its rapporteur report for MiFID II, as discussed in The Rapporteur’s Story and Should have gone to Specsavers! The current proposal includes a definition of high-frequency trading strategy. Furthermore, it proposes to regulate HFTs more strictly. That scared me a little bit. After all, I do some trading in my spare time so I followed the definition outlined in the text to check whether I’m a HFT strategy myself. The test is quite simple – if you tick 4 out of the 6 criteria, you’re a HFT strategy. Let’s look at my trading and see whether I do, in fact, qualify:

1. it uses co-location facilities:
No, I don’t do that. I’ve heard exchanges charge a small fortune for that. No interest. I’m just a small retail investor that likes to play the market from time to time.
2. it relates to a daily portfolio turnover of at least 50%:
I only have one strategy to begin with and it says: buy low and sell high. Therefore, my trading strategy makes 100% of my portfolio turnover. Thus, 1 tick against the 6 criteria.
3. the ratio of orders to trades exceeds 4:1:
I trade with my computer mouse and a small Excel sheet. I often use Fill or Kill orders but, unfortunately, most of the time my orders are killed. Additionally, I get nervous very easily. But markets can change very rapidly and you have to be on your toes all the time. I therefore end up with an order to trade ratio above 4:1. That’s 2 ticks.
4. the proportion of orders cancelled exceeds 20%:
Heh!?!?!?! Can someone please explain to me how I can achieve an order to trade ratio above 4:1 without cancelling 20% of my orders? I would love to see that. In the meantime, I’m up to 3 ticks.
5. the majority of positions taken are unwound within the same day:
Yes, of course I’m flat at the end of the day. I just trade to relax. I don’t want to have nightmares because of some overnight position. 4 ticks now!
6. Over 50% of the orders or transactions are made on trading venues offering discounts or rebates to orders which provide liquidity are eligible for such rebates:
It doesn’t matter anymore, but I only trade on BATS Chi-X (a venue that offers rebates to passive orders). It’s cheaper and I can trade all of Europe. So, 5 ticks out of 6! I wonder how BATS Chi-X feel about the fact the trading on their platform potentially makes me a HFT strategy.

Should I be expecting ESMA to knock on my door insisting on a search of all my cupboards?

Actually I skipped one criterion that, in the final analysis, prevented me from being a HFT. It says in a different part of the text: “High-frequency trading means trading in financial instruments at speeds where the physical latency of the mechanism for transmitting, cancelling or modifying orders becomes the determining factor in the time taken to communicate the instruction to a trading venue or to execute a transaction.” I would have failed that criterion because I use a 6 year old desktop and a slow internet connection. In the end, my unwillingness to invest in decent technology saved me from even stricter regulation!

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