High-Frequency Traders Face European Order Limits

High-frequency traders face European Union limits on the number of orders they can place, as well as requirements to tell regulators how their computer algorithms work.

They would not be allowed to exceed a “ratio of orders to transactions executed” and to “notify their competent authority” of the trading strategies they use, under draft EU proposals obtained by Bloomberg News.

Most high-frequency trading “is done with algorithms and regulators have to understand what’s behind them to be certain there aren’t any embedded market abuse practices,” Carlos Tavares, chairman of the Committee of European Securities Regulators, or CESR, said in a Brussels interview on Nov. 29.

The Commodity Futures Trading Commission, the top U.S. commodity regulator, said in October it would review algorithmic trading and other practices such as “spoofing” and “quote stuffing” as part of the Dodd-Frank financial legislation, the largest rewrite of Wall Street rules since the 1930s.

The EU measures are part of an overhaul of the Markets in Financial Instruments Directive, or Mifid, scheduled to be published Dec. 8 by Michel Barnier, the European Union’s financial services commissioner.

The revamped law will also include rules on bond markets, investor protection and dark pools, which are trading platforms that allow investors to buy and sell securities away from regulated exchanges so they don’t have to disclose positions.

Policy Breaches

The proposals would give a new European Securities and Markets Authority powers to write EU-wide rules for transparency waivers for dark-pool transactions and to notify national regulators of policy breaches.

“My view is that the U.S. approach on dark pools is probably the best,” Eddy Wymeersch, the former chairman of CESR, said in a telephone interview in Brussels. “As long as they are limited, and don’t make up a large percentage of trading, then nobody cares.”

The European Parliament voted earlier this year to establish authorities in London, Paris and Frankfurt to regulate banking, securities and insurance industries respectively that would have the power to mediate between national supervisors and write EU-wide rule-books.

The Mifid review will also include proposals to shed light on the bond markets, requiring the publication of “post-trade transparency data” which would “follow the same channels as for equities,” the draft said.

Investment firms should have to tape telephone calls of clients submitting orders, and keep the recordings for at least three years, according to the EU document.

The step would improve “the detection of abusive and manipulative behaviors affecting the integrity of the markets,” the draft said.

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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