Regulating algorithmic trading in the new capital markets: a critical analysis of the European Union regime

Thesis

Trading in modern capital markets is currently dominated by algorithms and concerns over the impact of algorithmic trading on market quality have led a number of jurisdictions to regulate this new type of trading. The European Union (‘EU’) has been no exception to this trend.

This thesis offers a critical analysis of the EU algorithmic trading regime, arguing that it rests on three fundamental misconceptions: that simpler execution algorithms carry less risk than other algorithms; that algorithmic trading has meaningfully added to the risk of market manipulation; and that the benefits and risks of different high-frequency trading (‘HFT’) strategies can be considered and discussed as if HFT were a monolithic category of trading.

As a result, the EU algorithmic trading regime mistakenly leaves unregulated a type of algorithmic trading that carries significant risk for the quality of its capital markets, creates unnecessary suspicion that certain algorithmic trading behaviour carries an abnormally high risk of market manipulation, and unwarrantedly imposes onerous requirements on all high-frequency traders, regardless of the particulars of their strategies.

In response to these errors, this thesis proposes three main solutions: amending the EU definition of algorithmic trading to include all execution algorithms; eliminating the add-ons introduced by the EU regime to the EU definition of market manipulation; and removing ‘HFT’ as a regulatory category—which should be accompanied by extending the rules needed to govern the activity of algorithmic traders (and only those rules) to all proprietary investment firms with disintermediated access to EU markets.

Ultimately, the EU algorithmic trading regime should nonetheless be praised for its structure, comprehensiveness, proportionality and ability to effectively address many of the risks created by algorithmic trading and by the strategies inspired by this trading. As such, this thesis proposes small incremental changes to the EU regime, rather than its complete overhaul.

Authors: Martins Pereira, C

• DOI: 10.5287/ora-7qze8rpnj
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: financial regulation; algorithms; algorithm regulation; HFT; MiFID; high frequency trading; algorithmic trading; European Union algorithmic trading regime; MAR; fintech
• Subjects: Regulation; Finance; Law