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EU High-Frequency Trade Curbs May Hurt Markets, Industry Warns

High-frequency traders said that plans by European Union lawmakers to interfere with their strategies and restrict the speed of transactions would raise investor costs and harm financial stability.

“It is ironic that growth market exchanges in countries such as Brazil, Hong Kong and Singapore are making substantial investments in technology in order to improve liquidity, whilst Europe is contemplating doing the reverse,” the FIA European Principal Traders Association, a group that represents high-frequency traders, said in an e-mailed statement today.

The European Parliament is seeking to bolster last year’s proposals by Michel Barnier, the EU’s financial services chief, to revamp the region’s market legislation, known as Mifid. The draft rules were proposed by Barnier to plug regulatory gaps exposed by the financial crisis that followed Lehman Brothers Holdings Inc.’s 2008 collapse.

A bid by the assembly to force traders to keep orders in the market for at least half a second before canceling them, and to set EU limits on how many orders a firm may cancel compared to those it completes, would lead to “higher transaction costs for end users” and increase the chance of “extreme price swings,” the FIA said.

Markus Ferber, the lawmaker leading work on the rules in the parliament, has backed calls for traders to face additional fees if they exceed a pre-determined limit for excessive numbers of canceled orders. Arlene McCarthy, a legislator responsible for a related draft law against market abuse, has called for the pre-fee limit to be set at 250 cancellations to one completed order.

Half-Second Rule

Ferber has also called for the half-second rule for traders to keep orders in the market.

Setting minimum order waiting times would “take European markets back at least 7 years” and would undo many “of the improvements in market quality achieved over that time,” the trade group said. A “one-size-fits-all” ratio of orders to completed trades would “harm liquidity and discourage competition in certain asset classes.” The setting of such ratios is “best left to trading venues,” it said.

Ferber has said that the measures would help to prevent a repeat of the flash crash that rocked markets in May 2010, and curb market volatility.

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