High frequency trading now accounts for the majority of all U.S. equity trades, and by most accounts has dramatically increased liquidity in a variety of markets. Nonetheless, largely based on a conflation of high frequency trading and flash orders – practices that are related, but different in key ways – high frequency trading has received quite a bit of negative press of late. On flash orders, see “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?
,” Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009). One frequently adduced argument is unfairness: high frequency traders are said to have access to potent computers and powerful human resources, while lesser traders do not. This may be true, but it’s not illegal (at least not yet). Moreover, it is difficult to identify any reason why this would be less than ethical, or materially different from the informational asymmetries that have characterized trading markets at least since a group of brokers formed the New York Stock Exchange under a buttonwood tree on Wall Street in 1792. High frequency trading remains a viable investment approach, and securities investing has incontrovertibly become a global business. Accordingly, this article explores whether Europe offers a more hospitable regulatory environment for high frequency trading and high frequency traders than does the U.S. It also addresses the practical and technological variations among the two jurisdictions. The purpose of this article is to help hedge funds with a high frequency trading strategy answer the question: If I’m going to do this, where should I set up shop? Or if I’ve already set up shop, what are the regulatory considerations of which I should be aware, and how may they change? Most importantly, how will these regulatory considerations affect my trading profits and opportunities and my investments in technology and other resources? In particular, this article examines what high frequency trading is, including how it interacts with flash orders, dark pools and multilateral trading facilities; the upsides and downsides of high frequency trading from the perspectives of hedge funds and regulators; regulation of high frequency trading in the U.S. and Europe; and the relative benefits and burdens (practical and regulatory) of the trading environments in both places.