Oil, the ECB and HFT
Yesterday was certainly a wild day in the oil market. While the quick answer for the late day drop in oil prices was a rumor that Gadhafi had been shot, the real reason probably was a few statements made by President Obama and his Treasury Secretary. The President said that he thinks we can “ride out the Libya situation” and the Treasury Secretary threatened to open up the strategic petroleum reserve if oil prices got too high. Just like the Bernank can print money, Turbo Tax Tim can now print oil. As we have seen before, our equity markets love government intervention and they proceeded to start their month end markup early once they got this news.
As our government officials are busy controlling asset prices, officials at the European Central Bank are busy addressing the serious problems with market structure. For those that think America has stopped exporting goods, you can rest easy that we have exported high frequency trading to Europe. The ECB doesn’t see this as an import that they really wanted though. In a comment letter issued dated 2/17/11 on the European Commission’s review of MiFID, the ECB listed four major concerns with High Frequency Trading click here for ECB comment letter :
1) “The existence of players with very short horizons may lead to the prices in the markets being driven by short-term objectives and may therefore reflect fundamentals less efficiently.”
Think about what they just said here. They are saying that HFT is skewing the true fundamental prices of securities. This is not Themis Trading ranting, this is the ECB saying that prices are being distorted. Pretty powerful stuff.
2) “The high number of orders generated by HFT may put market infrastructures under severe stress.”
This echoes alot of the concerns that the Joint CFTC-SEC Advisory Committee said last week. That committee suggested a cancellation fee as a way to remedy the problem.
3)”While HFT are often mentioned as providers of liquidity in the markets, unexpected stress situations may lead them to a sudden withdrawal with lasting liquidity disruption.”
Obviously, they are referring to May 6th when our so called liquidity providers ran for the exits faster than you can say nanosecond.
4) “Given the massive number and the high frequency of orders, errors by HFT may lead to disorderly trading or even a breakdown of trading systems.”
Can you say “systemic risk”?
A couple of suggestions the ECB had were market maker obligations in times of stress and also “a minimum resting time for orders entered into the order book“. Now that minimum life things sounds familiar to us. Oh that’s right, we recommended that back in December 2008 when we wrote our first white paper. Glad to see that regulators are catching on.