Bourses play nice cop to head off speed-trade rules

Tue Apr 10, 2012 8:54am EDT
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By Luke Jeffs and Douwe Miedema

LONDON (Reuters) - The world's stock exchanges are trying to rein in some of the most controversial activities of high-speed trading firms, among their most valued clients, to help head off tough sanctions from regulators.

The London Stock Exchange Group (LSE.L: Quote), Deutsche Boerse (DB1Gn.DE: Quote) and Nasdaq OMX (NDAQ.O: Quote) have all recently announced fines to cut out speculative trading in high volumes that some of the speed traders engage in.

The trading firms use powerful computers to churn out thousands of proposed trades, or orders, in fractions of a second, a practice critics say has caused detrimental market crashes and can give rise to market abuse.

The traders seek out tiny price differences in the market, reaping a small margin on each trade, and need to trade in large volumes to make enough money. But these high volumes, which account for about half of all the trade on stock exchanges, can exaggerate market moves, critics say.

The speed traders hope to avoid draconian new rules in the works in Europe and America, which hit at the heart of their technology-driven business, and exchanges are working on voluntary measures to slow down trading.

"The exchanges are looking to push self-regulation rather than have regulation imposed upon them," said Andrew Bowley, who heads the computerized trading unit at Japanese investment bank Nomura International (9716.T: Quote) in London.

High-frequency trading firms have grown rapidly in the United States and Europe in the past decade and are a vital source of income for exchange groups.

The firms - which include Getco and Citadel Securities in the United States, and Optiver and IMC Trading in Europe - can function as market makers, enabling their clients to trade in securities by guaranteeing buy or sell prices.   Continued...

A man walks through the lobby of the London Stock Exchange August 5, 2011. REUTERS/Suzanne Plunkett