High Frequency Trading: A Critical Analysis of MIFID II - A Return to The Fundamentals?

• Author: Eoin Doyle
• Position: Final Year BCL (Law and Business), University College Cork
• Pages: 56-68

(2021) 20 COLR 56

56

HIGH FREQUENCY TRADING: A CRITICAL ANALYSIS OF MiFID II – A

RETURN TO THE FUNDAMENTALS?

Eoin Doyle*

A INTRODUCTION

Thales of Miletus, the world’s first option trader, made his wealth from a monopoly on olive

presses.1 During the winter, Thales acquired his presses at low cost which reflected the lack of

demand. However, he correctly predicted as the large crop of olives ripened, demand would

increase, and profit would ensue. The basic fundamentals of trading have remained unchanged

ever since: buy low and sell high.

However, technological developments have caused a shift in the evolution of trading. Prices

are no longer decided by economic fundamentals; instead, they are distorted by the rapid nature

of the modern markets.2 The financial markets are myopic; they focus on profit in the very near

term, with profits arising from intraday price exploitation.3 It is suggested that the ‘short

sightedness’ of speculation has increased market volatility.4 In fact, the pri ce distortions caused

by rapid trading tend to favour such speculators, feeding into another cycle of even higher

levels of trading.5

The Global Financial Crisis (GFC) should have resulted in a radical rethink of the financial

services industry.6 Whilst the introduction of the Markets in Financial Instruments Directive II

(MiFID II) is a formal recognition of the risks posed by automated trading, it is submitted that

* Final Year BCL (Law and Business), University College Cork. I would like to pay tribute to my family and

the UCC School of Law for their continued support throughout my studies. I would also like to extend my

sincere gratitude to the Editorial Board for their insigh tful comments.

1 Boudewijn de Bruin and others, ‘Philosophy of Money and Finance’, The Stanford Encyclopedia of

Philosophy (Winter edn, 2020) <https://plato.stanford.edu/archives/win2020/entries/money-finance/> accessed

18 March 2021.

2 Stephan Schulmeister, ‘Boom-Bust Cycles and Trading Practices in Asset Markets, the Real Economy and the

Effects of a Financial Transaction Tax’ (2010) Austrian Institute of Economic Research Working Paper No 364,

2 <https://www.wifo.ac.at/en/publications/working_papers?detail-view=yes&publikation_id=38641> accessed

18 March 2021.

3 De Bruin and others (n 1) 4.1.3.

4 ibid.

5 Stephan Schulmeister, Margit Schratzenstaller and Oliver Picek, ‘A General Financial Transaction Tax.

Motives, Revenues, Feasibility and Effects’ (Austrian Institute of Economic Research, March 2008), 36

<https://www.wifo.ac.at/en/publications/search_for_publications?detail-view=yes&publikation_id=31819>

accessed 18 March 2021.

6 Ross P Buckley, ‘Reconceptualizing the Regulation of Global Finance’ (2016) 36(2) Oxford Journal of Legal

Studies 242, 254.