European Central Bank Governing Council member Ewald Nowotny said high-frequency trading is an example of financial innovation that cannot be properly regulated and should be prohibited.
“There are cases in which regulation achieves more with simple bans than with sophisticated regulations,” Nowotny told a conference on financial regulation in Vienna today. “One concrete example is high-frequency trading. This can’t be regulated, this should be banned.”
High-frequency trading uses powerful technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. It came under regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.
While companies active in such trading say interfering with their strategies would raise investor costs and harm financial stability, Nowotny said it has “no measurable economic benefits.” Regulations designed to keep it within limits would only create incentives to circumvent them, he said.
The European Commission and European Union lawmakers have drafted rules to regulate high-frequency trading, which accounts for more than half of equity trading in the U.S., as part of a broader effort to toughen a draft financial-markets law.
Nowotny said financial regulation is approaching the limit of what it can achieve because overly complex rules make it unwieldy and create incentives to undermine it.
“We’re getting to the limits of regulatory capacities that we have, in terms of what we can execute, in terms of the costs, in terms of the staff,” he said. “As long as I give the option, it’s obvious that every bank executive will strive to find the hole in the regulation, and then the hole has to be closed with new regulation again. I believe sharp but simple regulations sometimes have a better effect.”