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European Commission official defends order-to-trade concept as debate rumbles

First Published 27th February 2013

Would an order-to-trade ratio be more appropriately called an ordeal-to-trade ratio? The European Commission does not appear to think so, but many in the market do.

(This version corrects an earlier version which incorrectly referred to "higher" order-to-trade ratios in the first paragraph instead of "lower" ratios.)

London - A policy officer for the European Commission argued at a financial conference that efforts to force markets to have lower order-to-trade ratios were in the interest of the wider market though his views met with scepticism.

"Unlike MiFID 1, MiFID II is not just there to reduce administrative costs for the industry. It's actually a reform of EU market structure in an attempt to get more trading onto organised venues and to make all trading, all kinds of financial instruments pre- and post-trade, transparent," Jasper Jorritsma of the European Commission said in a panel discussion.

As part of that, an order-to-trade ratio was one idea that was being taken up by both the Council of Europe and the European Parliament, Jorritsma said. The concern is that exchange systems are being overloaded and that there is too much "fake liquidity."

"And one of the ways of addressing both of those concerns would be to maximise the ratio between the number of transactions that someone does and the number of orders that they can post," he said.

"In this case, one of the reasons for wanting to regulate is that exchanges have shown that they're not able to manage this risk adequately, possibly because they just make too much money out of all the actual trading so that they don't necessarily have the proper amount of incentives," he added. By introducing regulation, authorities would be helping them in collectively addressing the issue.

Kee-Meng Tan, managing director for electronic trading at Knight Capital, scoffed at that argument.

"That's just like the government telling you that you can only download five megabytes on your phone a day, that's it, because you might bring down the phone company," he said.

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