Brussels, 27/09/2012 (Agence Europe) - MEPs on the European Parliament's Economic and Monetary Affairs Committee want high-frequency trading (HFT) to be forced to retain orders for at least 500 milliseconds (see EUROPE 10696). Adopting their views on Wednesday 26 September on the MiFID II draft legislation, they gave a negotiating mandate to rapporteur Markus Ferber (EPP, Germany) for exploratory talks with the EU Council of Ministers, where the member states may possibly reach broad agreement by November. After the vote, Markus Ferber said the main aim of the changes to the legislation on financial instruments' markets is to reduce the danger of collapse of the financial system, ensure financial stability and provider proper consumer protection.
High-frequency trading by computer works automatically, buying and selling without human intervention, triggered by price fluctuations, and accounts for 40% of financial transactions in Europe. It can cause the collapse of the financial system because it can generate massive volatility and is suspected of causing the May 2010 crash on Wall Street. MEPs say that something must be done and agree with Ferber that orders traded by HFT must be held for at least half a second.
Pointing out that HFT transactions operating currently at an average speed of 3 milliseconds account for 80%-90% of all trades but only 20% of trades actually processed (paid for), Robert Goebbels (S&D, Luxembourg) said: “We need to stop this nonsense. The S&D Group wants to prevent markets from reaching a point where human control is lost and where computers trade with computers. Where is the so-called 'market truth' when price formation takes place in milliseconds or nanoseconds without the possibility of human intervention?” Philippe Lamberts (Greens/EFA, Belgium) issued a press release stating that by forcing purchase and sales orders to be held for at least 500 milliseconds, the Parliament would be putting a serious brake on high-frequency trading, which is clearly a destabilising influence on the financial markets. He recommends, in fact, that HFT be banned outright. British Conservative Kay Swinburne, says the measure would increase costs for consumers without providing much advantage compared with other, more sophisticated, measures that are less disruptive of the markets.
The MEPs also introduced fines on HFT traders who withdraw a large number of trades without due reason. Trading systems dealing in HFT must keep an eye out for malfunctions, such as erratic price fluctuations, and use circuit breakers to stop trading in the event of serious malfunction.
Consumer protection. The Economic and Monetary Affairs Committee wants increased consumer protection by forcing traders to offer financial products properly suited to their retail customers' needs. Member states will have the option of banning payment of agents dealing in financial products by commission. Lamberts said ensuring that commission is awarded to investors retroactively is a smart and balanced measure to ensure investor protection. Swinburne welcomed the fact that there will be full openness about exactly how much commission and fees are paid to sellers of financial products.
OTF. The MEPs endorsed the idea of setting up organised trading facilities (OTF), a new type of trading system that the MEPs think should only deal in bonds and complex financial products (derivatives and the like). Swinburne argues for “the new platform to be opened up to trading equities as well so that the buy-side community - such as pension funds or mutual funds - have a greater choice over where they execute their trades.”
The European Commission's introduction of greater competition when it comes to the clearing of securities was reined in by the MEPs, with amendments restricting inter-operability among clearing houses, reports Bloomberg. Access to information about financial benchmarks was also restricted, but the Parliament wants the market to find its own solutions to the problem of generating sales and purchase information from all trading systems, failing which legislation will be introduced.
Commodities. The Economic and Monetary Affairs Committee decided to try and combat commodity speculation with amendments setting caps on commodities that derivatives investors may hold over a given period. Goebbels hoped the limits would reduce the impact of commodity speculation on food prices, and Lamberts said it was “a first step.” (MB/transl.fl)