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How to regulate high-frequency trading strategies?

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The development of high-frequency trading strategies has revolutionized the structure of financial markets, but also the behavior of players operating on these markets, whether they practice this type of strategy or not. High-frequency trading (HFT) is intrinsically linked to technological developments related to Internet networks, information storage and processing. Indeed, it is based on the speed advantage that HFT players have over traditional players. THF players have a speed advantage of making many transactions and making small profits by playing on very short opportunities of up to w milliseconds.

We will see that segregation can be established within high frequency trading strategies. Some strategies, known as passive, improve market quality by injecting liquidity, while other strategies, known as aggressive, remove liquidity and thus degrade market quality.

The structural modification brought about by high-frequency trading strategies seems to be established within financial markets. The role of regulation is then more to frame the development of such strategies and not to block/oppose them. The regulation of high-frequency trading strategies can be carried out in different ways depending on the objective to be achieved.

High-frequency trading strategies are thus regulated through the MiFID 2 regulatory framework governing the structure of European financial markets. The MiFID 2 regulatory framework has greatly modified the European financial markets by enshrining new obligations related to product governance, benefits and compensation, market structure and transparency, but also with regard to the regulation of high-frequency trading strategies.

High-frequency trading strategies are also governed by market abuse regulations. High-frequency trading strategies can disrupt the equality of participants in financial markets. Indeed, high frequency trading strategies, which are numerous and different, have in common the technological advantage of speed to reach their end. The processing and use of this information by high-frequency trading firms could constitute market manipulation.

High-frequency trading strategies can also be regulated through a Tobin tax on financial transactions or specific taxation of high-frequency trading activities.

Finally, the development of artificial intelligence and its application to high-frequency trading strategies can also have significant positive and negative effects. We will therefore examine the opportunity of adopting specific regulation.

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