European Parliament lawmakers have reached a draft deal with national governments on high-frequency trading curbs as part of a push to toughen the bloc’s financial market rulebook, said the chief legislator working on the plans.
“The negotiation team achieved a significant breakthrough on this issue,” Markus Ferber, the lawmaker leading on the measures, said in an e-mail. “The area of high-frequency trading is lacking suitable regulation. This is why it was high time to find a decent solution to this pressing problem.”
The provisional deal, reached by legislators and officials from Lithuania, which holds the EU’s rotating presidency, includes a so-called tick size regime limiting the minimum size of price movements on financial markets, Ferber said. “This will slow down high-frequency trading significantly,” he said.
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.
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. Companies active in high-frequency trading have warned that interfering with their strategies would raise investor costs and harm financial stability.
Key elements of the draft deal were reached at a meeting of officials and lawmakers last week, Ferber said two days ago.
Under the provisional agreement, “traders will have to have their algorithms tested on venues and authorized by regulators to minimize systemic risk,” Ferber said in the e-mail. “Moreover, we introduced circuit breakers that will stop the trading process if price volatility gets too high.”
“Preliminary” agreement has been reached “on a possible compromise package,” Lithuania, which holds the rotating presidency of the EU, said in a note to national officials dated Oct. 21.
While EU parliament lawmakers secured some of the curbs they had sought on high-frequency trading, they have also had to give up some of their goals, including EU-wide penalty fees for traders who cancel excessively large numbers of orders, according to the document.
Under the draft deal, such fees would be “a national option for the member states,” according to the document. The draft deal also excludes a parliament initiative to set a minimum length of time that orders must be kept in the market.
The draft high-frequency trading measures are part of a broader overhaul of the EU’s financial-market rules proposed by Michel Barnier, the bloc’s financial services chief. Other parts of Barnier’s proposals seek to push more derivatives trading onto regulated markets, and restrict commodity speculation.
The measures, which must be voted on by the EU Parliament and approved by national governments in the 28-nation EU before they can take effect, would update the EU’s Markets in Financial Instruments Directive, or Mifid.
A representative for the Lithuanian EU presidency in Brussels declined to comment.