Published September 26, 2012
Curbs on firms that trade shares faster than the blink of an eye moved a step nearer in the EU on Wednesday when a committee of the European Parliament voted unanimously to introduce sweeping reforms of securities markets.
High-frequency trading (HFT) has been singled out by regulators and policymakers on both sides of the Atlantic for favoring speculators and adding to share price volatility.
Such trading by Optiver, IMC Trading and other firms involves posting orders for microseconds at a time to exploit tiny differences in share prices.
The firms involved say they are courted by exchanges to provide liquidity, with HFT accounting for 40 percent or more of volumes on Europe's main stock markets.
The parliament's economic affairs committee voted 45 to zero to update a European Union law known as Mifid, which was instrumental in ending national stock exchange monopolies.
Share orders would have to be posted for at least half a second, far longer than HFT firms currently stay in the market.
"As a result of that the liquidity will drop, the spreads will rise, with corresponding additional costs for investors and the real economy," Deutsche Boerse's market policy head Stefan Mai told Reuters.
The HFT industry's trade body FIA EPTA said emotion, anecdotal evidence and populist rhetoric lay behind some of the rules rather than firm evidence. "Some of the proposed measures will erode the benefits that technological progress has delivered to investors," it said.
Separately on Wednesday Germany's cabinet approved a draft law on tougher rules for HFT, although it stopped short of setting a minimum "resting" period for orders in the market. EU financial rules, once approved, take precedence over domestic regulations.
Wednesday's vote is the first milestone for the draft law and the parliament has equal say with EU member states on its approval, meaning changes are expected before a final text is agreed and it becomes law around 2015.
The broad aim of the law is to catch up with big advances in fast trading technology and apply lessons from the financial crisis, such as the need for more transparency.
The lawmakers watered down the draft law's "open access" articles intended to increase competition in processing derivatives trades, and ditched a provision making it easier for rivals to buy licenses for popular traded benchmarks such as Deutsche Boerse's Stoxx.
Derivatives based on the Stoxx indexes can be traded only on the German exchange. NYSE Euronext (NYX) is planning to open its own clearing house in 2013 for derivatives - which Deutsche Boerse already has - and Mark MacGann, NYSE Euronext head of government affairs, welcomed the rollback on open access.
"Central to these reforms are the goals of increased financial stability, transparency, and regulation of all markets and participants. Open access runs contrary to financial stability," he said.
Britain will try to halt the dilution when EU finance ministers debate the draft law in early October but it will need to find several allies to make headway.
Sharon Bowles, the British Liberal Democrat chairwoman of the economic affairs committee, said more competition in clearing trades would have led to more choice and lower fees for investors.
Wednesday's broad majority in parliament puts it in a strong negotiating position when it sits down with member states.
Another element approved curbs on what some policymakers see as speculation pushing up oil and food prices, by imposing limits on positions that traders can hold in energy and food commodity derivatives markets - a step the United States has already taken.
Positions used as an insurance against adverse price moves in the actual commodities will be treated more leniently.
Lawmakers also voted to increase transparency in bond and commodity markets to levels seen in share trading so that investors and regulators have a better idea of what's going on.
One way of doing this will be to force much of the $650 trillion in derivatives trading among banks onto electronic platforms.
A new breed of organized trading facility (OTF) will be created for off-exchange traded instruments.
The lawmakers approved restricting trading on an OTF mainly to bonds and commodities so that shares traded between banks would end up on an existing exchange or similar venue.
But exchange officials were dismayed that transparency rules for trading inside a bank won't be as rigorous and fear this "loophole" will be exploited to avoid using an OTF or an exchange.
Lawmakers beefed up the draft law by stopping investment advisers from pocketing commissions themselves and instead they will now have to pass them on to the customer.
Germany is expected to challenge this as it has many small firms which earn their living from commission, a form of remuneration Britain will ban from 2013 to stamp out mis-selling.
Lawmakers also agreed to give the European Securities and Markets Authority powers to ban products temporarily before and after they reach markets to protect consumers better.