High-Frequency Trading Faces EU Probe, Regulator Says
High-frequency trading will be investigated by regulators to “better understand any risks,” Europe’s top market watchdog said in a report on proposed industry rules.
A planned European Union market regulator should also have the power to set standards for the tools used by high-frequency traders, such as the practice of placing computer servers close to trading venues to speed up market access, the Committee of European Securities Regulators told the European Commission.
Powers for the proposed European regulator should keep pace “with new technological advances, increasingly fragmented equity markets” and “shortcomings” in post-trade information, Sally Dewar, a managing director at the U.K. Financial Services Authority, said in an e-mailed statement today.
The commission, which proposes legislation for the 27- nation EU, is reviewing a directive that governs trading across the region. Paris-based CESR will take on additional powers at the start of next year when it becomes the European Securities and Markets Authority.
U.S. lawmakers have questioned whether the practice is benefiting Wall Street at the expense of individual investors. The Securities and Exchange Commission sought input from securities professionals on strategies used by high-frequency traders in January. EU officials met financial companies the same month to gather information.
Price Discrepancies
High-frequency trading entails hedge funds and other firms using powerful technology and complex computer programs to execute orders in milliseconds to profit from fleeting discrepancies in the prices of shares across different trading venues.
The practice now accounts for 42 percent of the U.S. market, Celent, a consulting firm in Boston, said in a study in December. Proponents of the technique say it has lowered fees, boosted liquidity and increased volume.
CESR also said Europe should develop a so-called consolidated tape, a pricing mechanism for securities that combines prices from multiple trading venues. The U.S. uses a consolidated tape to price securities.
“Concrete steps” should be taken to set up a consolidated tape “in the very short-term as we remain convinced of its necessity,” CESR Chairman Eddy Wymeersch said in the statement.
The tape should be “run as a not-for-profit entity on the basis of terms of reference and governance to be set out by ESMA,” CESR’s recommendations said.
Consolidated tape would improve the quality of trading data and “offer market users a single point of access” for information CESR said.
To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net
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