EU Lawmakers Seek High-Frequency Trade Curbs in Markets Law

EU Lawmakers Seek High-Frequency Trade Curbs in Markets Law
The parliament was voting on a draft overhaul of the EU’s financial market rulebook, known as Mifid, proposed last year by Michel Barnier, the EU’s financial services chief. Photographer: Jock Fistick/Bloomberg

Lawmakers backed tougher European Union curbs on high-frequency trading and limits on commodity speculation as part of a push to toughen the bloc’s financial market rulebook.

European Parliament legislators, voting in Brussels today, also called for the European Securities and Markets Authority to be equipped with powers to ban financial products that might pose a threat to confidence or stability

The rules will “protect taxpayers and consumers,” Markus Ferber, the lawmaker leading work on the dossier, said after the vote by members of the assembly’s economic and monetary affairs committee.

High-frequency trading in stocks came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. Companies active in such trading have warned that interfering with their strategies would raise investor costs and harm financial stability.

The practice involves using powerful technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues.

Lawmakers backed a range of curbs on high-frequency trading in today’s vote, including a rule that orders must be kept in the market for at least half a second before they are canceled, and a requirement for traders to face higher fees if they withdraw excessive numbers of orders.

‘Highly Questionable’

The planned restriction on how fast traders can cancel orders “is highly questionable as it will lead to less liquidity and more fragmentation in markets,” Stefan Mai, head of market policy and European public affairs at Deutsche Boerse AG, said in an e-mail. This will result “in higher costs” for investors “and the real economy.”

The parliament was voting on a draft overhaul of the EU’s financial market rulebook, known as Mifid, proposed last year by Michel Barnier, the EU’s financial services chief.

The final version of the rules must be agreed on by the assembly and by national governments before they can take effect. Today’s committee vote sets parliament’s negotiation position.

On commodity derivatives, lawmakers backed a dual system in which speculators would face position limits capping their activities, while companies that are hedging business risks would be subject to lighter rules.

Limited Support

Still, Parliament gave only limited support to an attempt by Barnier to boost competition in clearing of derivatives.

While exchanges should, as a rule, be required to supply their trade data to rival clearinghouses, lawmakers voted that these requests would have to be assessed for any risk they may pose to financial stability.

Today’s decision boosted Deutsche Boerse’s chances of winning a reprieve from Barnier’s original proposals to force exchanges to open up their derivatives clearing services to competition.

Lawmakers voted to oppose so-called interoperability arrangements between clearing firms, and vetoed plans from Barnier to boost access to information used to compile market benchmark rates.

Sharon Bowles, chairwoman of the economic and monetary affairs committee, said it was “frankly bizarre” that legislators had opted to scrap the access plans for benchmarks and indexes.

Deutsche Boerse

EU antitrust officials vetoed merger plans by Deutsche Boerse and NYSE Euronext in February after concluding that the combination could threaten competition for trading in some derivatives. Barnier urged Joaquin Almunia, the EU’s antitrust chief, to take the competition-boosting effect of the draft law into account when deciding whether the merger should be permitted.

U.K. Chancellor George Osborne won assurances last year from Barnier that the draft Mifid rules would contain strong competition-boosting provisions.

Kay Swinburne, a U.K. lawmaker on the committee said it was disappointing that legislators had eliminated the access rules for benchmarks and indexes.

“This runs counter to calls following the Libor scandal for transparency in benchmarks,” she said in an interview after the vote.

Clearinghouse Competition

Parliament’s approach to clearinghouse competition is consistent with parallel EU rules for the over-the-counter derivatives market, Deutsche Boerse’s Mai said.

Lucie Holloway, a spokeswoman for London Stock Exchange Group Plc, declined to comment.

The committee also voted to scale back plans from Barnier to create a new type of platform, known as an Organized Trading Facility. OTFs are intended to handle some transactions that currently take place in so-called dark pools.

The new platforms shouldn’t be allowed to handle equity trades, the lawmakers said, because of concerns this could lead more highly-regulated venues to lose business.

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