The increased regulation of high frequency traders that’s being considered by the U.S. Securities and Exchange Commission could hurt industry profits and market liquidity, while boosting stability, says Fitch Ratings
In a research note, the rating agency says that new regulations for high frequency trading “could compress already thin margins associated with the electronic trading of cash and derivatives securities on exchanges”.
And, it suggests that a resulting pull back in trading activity by high frequency traders could come at the expense of overall market liquidity, “but with the potential benefit of reducing the magnitude of future technical market dislocations such as the ‘flash crash’ of May 6, 2010.”
It notes that the SEC could require high frequency traders to pay a fee for cancelled trades; a move that it says appears to be in line with broader ongoing regulatory efforts to curb systemic risks and price distortions that involve high frequency trading.
“If additional regulation is implemented, it may heighten high frequency strategists’ sensitivity to volatility and liquidity demand in the market. From a business model standpoint, the charge contemplated by the SEC, if not applied uniformly, may make alternative venues, such as dark pools or traditional broker-dealers, more attractive,” it adds.