ECB calls for light touch on high frequency trading

By Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank called for a gradual approach to regulating ultra-fast trading on Tuesday, fearing stringent rules on the practice might jeopardise financial markets.

High-frequency trading (HFT), which uses super-fast computers and connections to place trades, has been blamed for accentuating market swings and penalising other investors by flooding trading venues with orders that immediately get cancelled or go unfilled.

The ECB, which advises European Union institutions on financial issues, said tightening rules too far may squeeze market liquidity, reducing the ease of buying and selling financial assets at a stable price.

"Our results would support a gradual implementation of high-frequency regulation," the ECB said in a bulletin on Tuesday.

"More constraining measures ... seem, in light of our study, not yet necessary and should be used with care as their negative impact on market liquidity, efficiency and resilience might be detrimental to financial stability and market resilience."

Investment banks have blamed big swings in asset prices on tighter regulation since the financial crisis, which has left fewer lenders willing to make markets at any time.

The ECB said regulation of HFT should focus on "kill switches" that allow trading venues to delete orders and "message throttling", a limit on the number of quotes that can be processed.

This reflects existing EU guidance, which is set to become law in 2018.

The ECB did not yet see the need for introducing a "minimum exposure time" for orders before they can be cancelled and a limit on the proportion of orders a firm can place and not fill.

Stock exchange operator Deutsche Boerse said the measures suggested by the ECB have long been in place on its Eurex platform and are complemented by further security mechanisms.

Germany's central bank took a harsher stance on HFT in a study published on Monday, backing proposals such as introducing a delay on orders and switching from continuous trading to a series of auctions separated by small intervals.

In his 2014 bestseller "Flash Boys", author Michael Lewis said the U.S. stock market was rigged in favour of high-speed electronic trading firms, which use their advantages to extract billions of dollars from investors.

In the bulletin, the ECB also noted that so-called dark pools, where large orders can be executed anonymously to protect traditional investors from high-frequency traders, helped market stability.

"The analysis finds that higher levels of dark pool trading are associated with lower price volatility, suggesting dark pools do not amplify market reactions to shocks," the ECB said.

Barclays (BARC.L) and Credit Suisse (CSGN.VX) recently settled charges from U.S. authorities that they misled investors in their dark pools by saying they would be protected from predatory high-frequency trading tactics.

(Additional reporting by Andreas Kroener, and Huw Jones in London; Editing by Tom Heneghan)