Carlos Jorge Lenczewski Martins
JEL classification: D47, D53, G18;
Keywords: HFT; MiFID II; batch auctions; granularity; clock synchronisation;
Abstract: In recent years, there
have been many discussions and analyses of how high-frequency trading may affect the financial
market – but still without any clear conclusions. Leaving these opinions behind, many adjustments
have already been made in the US and Europe - both to regulations and market rules, impacting
not only High-Frequency Trading but general electronic trading as well. These rules and regulations
are the result of technological developments in electronic trading and more specifically, High-Frequency
Trading and the practice of Payments for Order Flow. The question remains as to how deep
regulations should go, especially in the case of HFT which can be severely affected by harsh regulatory
requirements or procedures. Because two of the most important issues in HFT are time and
information, some of the rules and regulations affect aspects such as not only what type of information
and how it should be gathered, but also clock synchronisation and time-stamp granularity.
Another issue that may be considered controversial in the field of HFT (although it is not a practice
limited to HFT) is Payment For Order Flows. Under this mechanism, wholesale market makers pay
brokers for their client’s order flow – a practice that performed in great amounts and at high speeds
may give a considerable level of “inside” information. Regulations, especially from ESMA (MiFID II).
try in great part to thus mitigate the practice of Payments For Order Flows.