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JWG regulatory trading digest

Published in Automated Trader Magazine Issue 34 Q3 2014

Record fines have been dominating the headlines in the US, as the federal government appears to have finally hit the brakes on Dodd-Frank rulemaking. In July, BNP Paribas reached an $8.97 billion settlement with the US Justice Department (that also took it out of the market for 12 months) for breaching sanctions on Sudan, Iran and Cuba. However this was subsequently dwarfed in August as Bank of America agreed to pay a cross-jurisdictional record fine of $16-17 billion for mortgage related misconduct in the run up to the financial crisis.

To date, the US federal government has published a grand total of 4,229 documents under the Dodd-Frank Act, since it was initially passed in 2009, but it seems as if this frantic rulemaking is finally slowing down. This is not to say that US regulators are resting on their laurels. SEC/CFTC probes into high frequency trading (HFT), which were launched in light of the publication of Michael Lewis' 'Flash Boys', remain ongoing, and New York Attorney General, Eric Schneiderman, has been particularly vocal about going after big firms who favour HFT over other forms of trading.

Meanwhile, things have certainly been heating up in the EU. The regulation that everyone is talking about is MiFID II, which is set to rewrite the rulebook for algorithmic trading - as well as just about every other type of market activity. The major development this quarter has been ESMA's publication of its consultation and discussion papers seeking industry input as they begin focusing on writing the technical standards.

One of the most important things that ESMA set out in this exercise was how they plan to define HFT and what implications this will have. They have set out two approaches; the first an infrastructural definition, based on matching distance, volume capabilities and trading frequency; the second a more flexible approach, taking an ongoing assessment of the nature of the daily lifetime of orders on trading venues. Judging from the responses in the public domain, it is fair to say that market participants are not particularly receptive to either of these.

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