Recently there was wide press coverage about the “flash crashes” and about its effects on the investors and business people in the market. As a result of this press coverage report, the idea of flash crashes is going to become dream in near future. The European Legislation in the form of MidFid II will be taking actions from January 2017 and the actions are aimed at reducing the worst crash effects of the most subjective strategy called algorithmic trading and also its subsets which is more into controversies called as High Frequency Trading (HFT)
In 2010, there was a major flash crash in the market which has made many investors and market leaders to run fail. The major reason behind the flash crash was found to be algorithmic trading. The trading strategy appears so profitable, but also posses high risks in it. The grade of risks of algorithmic trading is so high that the strategy follower will fall into loss than can never be compensated. In 2010, the algorithmic trading has faced so many orders that are duplicates and hence has increased the volumes in the venues and hence ended up in a major loss.
More than the algorithmic trading, it was high frequency trading caused more damages to the market in 2010. The HFT is sending and receiving orders for at large number at a very short notice of time. This may lead to abuse of market by spoofing and layering. For example, multiple numbers of orders placed with an amount and an order placed with slightly touching amount to the previous order at the same time will remove the orders which have been placed initially and hence leads to heavy loss for the business.
With the MidFid II regulation from 2017 January, the algorithmic trading activities will be watched keenly and any duplicative orders will never be entertained. The new regulation will allow only authorized algorithmic trading under supervision. Hence the chances of flash crash are reduced highly. No chances for any duplicative orders and high volume transactions in venues. Similarly the High Frequency Trading will also be supervised by the regulatory for reducing the risks of flash crash. Effective systems and controls will have to be installed by the traders to makes sure that the strategy works well and is not getting into any major loss risks.
For a better notice, the HFT following companies are advised by the regulatory to have the record of each and every orders placed and delivered in timely manner. This will help them to understand the flow of the market and will provide the regulatory with more information regarding the market strategy. Furthermore obligations are also to be installed at the venues of the trading to constantly watch the HFT workings. Thus the MidFid II regulation in the year 2017 is making certain that the risks of flash crash caused by algorithmic trading and high frequency trading will be reduced in future.
In 2010, there was a major flash crash in the market which has made many investors and market leaders to run fail. The major reason behind the flash crash was found to be algorithmic trading. The trading strategy appears so profitable, but also posses high risks in it. The grade of risks of algorithmic trading is so high that the strategy follower will fall into loss than can never be compensated. In 2010, the algorithmic trading has faced so many orders that are duplicates and hence has increased the volumes in the venues and hence ended up in a major loss.
More than the algorithmic trading, it was high frequency trading caused more damages to the market in 2010. The HFT is sending and receiving orders for at large number at a very short notice of time. This may lead to abuse of market by spoofing and layering. For example, multiple numbers of orders placed with an amount and an order placed with slightly touching amount to the previous order at the same time will remove the orders which have been placed initially and hence leads to heavy loss for the business.
With the MidFid II regulation from 2017 January, the algorithmic trading activities will be watched keenly and any duplicative orders will never be entertained. The new regulation will allow only authorized algorithmic trading under supervision. Hence the chances of flash crash are reduced highly. No chances for any duplicative orders and high volume transactions in venues. Similarly the High Frequency Trading will also be supervised by the regulatory for reducing the risks of flash crash. Effective systems and controls will have to be installed by the traders to makes sure that the strategy works well and is not getting into any major loss risks.
For a better notice, the HFT following companies are advised by the regulatory to have the record of each and every orders placed and delivered in timely manner. This will help them to understand the flow of the market and will provide the regulatory with more information regarding the market strategy. Furthermore obligations are also to be installed at the venues of the trading to constantly watch the HFT workings. Thus the MidFid II regulation in the year 2017 is making certain that the risks of flash crash caused by algorithmic trading and high frequency trading will be reduced in future.