Veteran trader calls for more exchange regulation
Philip York is chief executive of trading firm Alt 224 and founder of the Hong Kong-based eTrading Association. He has been trading equities and derivatives since 1984, including in Asia, and spoke to AsianInvestor recently.
AsianInvestor: Regulators are formulating new rules on e-trading risk limits and controls to protect market integrity. Are more measures needed in the markets you trade?
York: We need regulators to stop increasing the burden of regulation on buy- and sell-side participants and focus on regulating the exchanges and pushing them to support the idea of a fair and orderly market with circuit breakers and matching engine-based risk controls that provide independent third-party oversight. That is, we need client IDs on orders to exchanges [Hong Kong does not have this].
We need exchanges not to accept orders unless a party independent of the trading party has put in a risk control over the top of the trading party’s order. For self-clearers this is the exchange itself; for DMA [direct market access] clients this is the clearer; for executing broker clients it is the executing broker.
Also, exchanges should start offering proper simulation [test] platforms. Not just the simple connectivity test platforms they have at the moment, but platforms that support venue order types and implement the venue’s actual matching rules and can enable participants to test against mispricing, volume and volatility spikes and other forms of dislocation.
Do you support the argument there should be independent pricing of research?
It’s a free market. I think this aspect is best left to market forces.
Do we need to expand the definition of ‘best execution’ policy in Asia?
The reason ‘best execution’ policies are required is because there are profit incentives to do otherwise. Remove the options to screw the clients and best execution will be sorted out by the free market. For example, regulation should be universally implemented to ensure the independence of executors.
Specific examples would be: order book flows should not be sellable to high-frequency-trading-supported electronic communications networks; and exchanges should not be allowed to implement specialist order types that allow HFTs to game participants who do not have access to such order types.
What are your regulatory and compliance priorities this year?
Knowledge management. All knowledge for compliance and related issues needs to be proceduralised, computerised and data-based, where possible. It is well recognised that neither proprietary nor third-party solutions provide comprehensive audit trails to support current compliance requirements.