Do not Throw the Baby out with the Bath Water. An Analysis of the Potential Effects of the Legal Measures Adopted in the EU and the US in Response to the Proliferation of High Frequency Trading

Abstract

Following the recent expansion of High Frequency Trading and other types of Algorithmic Trading, the financial markets law of the EU and the US has seen the introduction of numerous new rules, all of which have been adopted within a rather tight timeframe. The main purpose of these measures is, and has been, to counter the chaos allegedly characterising markets. As the conditions are in fact neither as extreme as is often claimed nor always a result of Algorithmic Trading of any kind, many of the new provisions seem to conflict with superior rules demanding that markets promote economic growth. To see how the new rules can be expected to impact markets and their participants, this thesis first identifies the actual, by law demanded, purposes of the markets; namely to achieve a more efficient allocation of resources, meant to forward the recently stated pursuit of economic growth. It then determines how to measure market performance using metrics such as liquidity, volatility and confidence. After that, the actual effects of HFT are sought, with an overall positive outcome. To enable the concluding analysis of the rules, the new provisions themselves are then presented and examined. Once the analysis – which finds both suitable and unsuitable rules – is completed, a closing statement on the legislative process is delivered.