After years of emulating the flashy U.S. stock markets, countries around the globe are using America as a model for what they don’t want to look like.
Industry leaders and regulators in several countries, including Canada, Australia and Germany, have adopted or proposed a range of limits on high-speed trading and other technological developments that have come to define U.S. markets.
The flurry of international activity is particularly striking because regulators have been slow to act in the United States, where trading firms and investors have been hardest hit by a series of market disruptions, including the flash crash of 2010 and the runaway trading in August by Knight Capital that cost it $440 million in just hours. Although the Securities and Exchange Commission hosted a round table on the topic on Tuesday, the agency has not proposed any major new rules this year.
In contrast, the German government on Wednesday advanced legislation that would, among other things, force high-speed trading firms to register with the government and limit their ability to rapidly place and cancel orders, one of the central strategies used by the firms to take advantage of small changes in the price of stocks. A few hours later, a European Union committee agreed on similar but broader rules that would apply to the entire Continent if they win approval from the union’s governing bodies.
In Australia, the top securities regulator recently stated its intention of bringing computer-driven trading firms under stricter supervision and forcing them to conduct stress testing, to protect the country’s markets “against the type of disruption we have seen recently in other markets.”
The broadest and fastest reforms have come out of Canada, where this spring regulators began increasing the fees charged to firms that flood the market with orders. The research firm ITG found the change had already made trading more efficient by reducing the crush of data burdening the market’s computer systems.
Now Canadian trading desks are preparing for rules that will come into effect on Oct. 15 and curtail the growth of the sophisticated trading venues known as dark pools that have proliferated in the United States. While the regulation has been hotly debated, many Canadian bankers and investors have said they don’t want to go any further down the road that has taken the United States from having one major exchange a decade ago to having 13 official exchanges and dozens of dark pools today.
“We don’t want to look like the U.S., but we have to do it better than we are now,” said Greg Mills, the head of stock trading at the nation’s largest bank, Royal Bank of Canada.
Canadian executives traveled to Washington last week to discuss what the United States may soon be able to learn from Canada about how to rein in the new high-speed markets.
“Because the U.S. had moved ahead so fast, we had the opportunity to watch and decide in some cases that there were extremes we didn’t want to go to,” Kevan Cowan, the president of the Toronto Stock Exchange, said at last week’s conference.
U.S. regulators have faced a growing demand at home for some sort of market reform from traders and exchange executives. At a Senate hearing on computerized trading last Thursday, one market analyst called for a moratorium on the new trading venues that have popped up in recent years, while traders on the panel recommended mandatory kill switches that could be flipped in case of technology malfunctions.
There are many explanations for the slower pace of reform in the U.S., including the crush of work the SEC has had to deal with in completing regulations under the Dodd-Frank financial overhaul law. In addition, many of the largest U.S. market participants, including big banks, have built high-speed trading desks and dark pools, and as a result have a vested interest in protecting them against new regulations.
The soft-touch approach of U.S. regulators has won praise from some in the many industry who say that the rush elsewhere to impose new rules could jeopardize the lower trading costs that have come with automation.