* Market will have two years to set up consolidated tape

* EU examines U.S.-style curb on in-house bank trading

* Proposals on high-frequency trading may follow

* Germany against mandatory tape of share orders to brokers

(Adds more details, timeline on consolidated tape)

By Huw Jones

LONDON, July 29 (Reuters) - European Union regulators
proposed radical changes in the way the region's securities
markets operate on Thursday so that investors have a complete
snapshot of prices currently fragmented by fierce competition.

Heavy lobbying by bourses for their new rivals to face the
same tough rules as themselves appears to have paid off.
In-house trading by big banks also face tougher rules.

The EU's executive European Commission is reviewing the
markets in financial instruments directive (MiFID), a set of EU
rules introduced in 2007.

The Committee of European Securities Regulators (CESR) is
advising the Commission on drafting amendments to MiFID and has
recommended major changes that will change business models of
stock exchanges, brokers, banks and new trading venues.

One key recommendation is the mandatory creation of a
consolidated "tape" or "pipe" that contains all the prices from
share trades across the whole market to give investors a
comprehensive view.

"The efficient development of a European consolidated tape
for shares on the basis of clear rules and a viable economic
model involving the industry is amongst a number of key
proposals which should deliver major transparency benefits,"
said Sally Dewar, a managing director at Britain's Financial
Services Authority and co-author of the CESR proposals.

CESR wants a revised MiFID to say that unless the market
comes up with a consolidated tape within about two years, the
watchdog can set one up.

The recommendations include lessons from the financial
crisis on the need for more transparency and the demands on
regulators to keep up with big advances in trading technology.

However, regulators are keeping their powder dry for now on
what to do about high-frequency trading or ultra-fast
computer-aided trading that has come to represent a major chunk
of volumes on exchanges.

There could still be recommendations to regulate HFT.

CESR is due to become a more powerful pan-EU markets
authority from next year and wants specific powers to issue
binding guidelines to regulate any change in trading technology.

CESR also held off from requiring banks to post prices
before they complete a trade in the vast over-the-counter or
off-exchange market.

The Commission, which typically takes on board most of
CESR's recommendations, will make formal legislative proposals
early in 2011 which will need approval from EU governments and
the European Parliament.

Main recommendations include:

-- new trading facilities spawned by MiFID to be treated
like exchanges, a step bourses have lobbied hard for;

-- "best execution" rules improved though Portugal wanted
more radical change to link all trading venues.

-- extending MiFID's transparency rules from shares to
similar instruments like deposit receipts, exchange-traded funds
and certificates;

-- investors should not be forced to buy huge wads of
bundled data but have the choice to buy subsets, a step
exchanges may resist as data is a key moneyspinner for them;

-- volumes at in-house share trading networks at big banks
will be limited, beyond which they must become a formally
regulated market with all the transparency rules that entails.
CESR is eyeing whether a 5 percent threshold used in the United
States is suitable for the EU as well;

-- MiFID's post-trade transparency rules should in future be
applied to cover most of the bonds trading sector, sovereign as
well as corporate;

-- Industry-wide mandatory taping of voice communications
handling share orders, a step Germany opposed;

-- MiFID's post-trade transparency regime should also apply
to structured finance products and cover all asset-backed
securities and collateralised debt obligations for which a
prospectus has been issued;

-- All credit default swap contracts, corporate or
sovereign, should come under MiFID's transparency regime if they
are eligible for clearing;

- A harmonised post-trade transparency regime for
over-the-counter (off-exchange) derivatives should be developed
quickly;

-- A compulsory pre-trade transparency regime should be
required for all non-equity instruments traded on exchanges and
platforms.
(Reporting by Huw Jones, editing by Stephen Nisbet)