European legislators are poised to approve some of the toughest restrictions in the world on high-frequency trading, the first crackdown in the aftermath of Michael Lewis’s latest book, “Flash Boys.”
The curbs are part of revamped EU markets legislation spanning from commodity derivative speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.
"With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world," EU financial services chief Michel Barnier said in an e-mail. "While HFT trading might bring some benefits, we need to make sure that it doesn't cause instability, and isn't a source of market abuse. That's what these rules set out to achieve."
High-frequency trading in stocks grabbed the headlines after the plunge known as the flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. Controversy returned with the publication of Lewis’s book on March 31. Lewis argues that the $22 trillion U.S. stock market is rigged in favor of speed traders, who he says prey on slower investors by getting faster access to information.
Members of the European Parliament will vote today on EU rules that also include a requirement for traders to have their algorithms tested on venues and authorised by regulators. The assembly in Strasbourg, France, is set to endorse a tentative deal reached with governments on the measures earlier this year.
The draft rules, which predate Lewis's book, are "the most comprehensive regulatory response yet to HFT," Christopher Bernard, financial regulation lawyer at Linklaters LLP in London, said.
High-frequency trading involves using powerful technology and computer programs to execute orders in thousandths or even millionths of a second, profiting from fleeting discrepancies in security prices across different trading venues.
The curbs “strike a decent balance,” the FIA European Principal Traders Association, a group that represents high-frequency traders, said in January when a political accord on the law was reached.
The group had warned that more sweeping measures initially demanded by the parliament would lead to higher transaction costs and boost market volatility.
The law would also link overseas-based firms’ market access to whether they are subject to regulations as tough as the EU’s from their home regulator.
While the assembly will vote on the measures this week, their ultimate impact will depend “to a large extent” on technical measures to flesh out the law that are still under discussion, Bernard said.
This week's vote is a key step toward formal adoption of the law by the parliament, which oversees draft legislation proposed by the European Commission, the EU's executive arm. After the vote, EU governments who negotiated with the parliament on changes to proposals will also have to formally sign off on the plans.
The measures will take effect 2 1/2 years after they are adopted and published in the EU’s official journal.
The speed-trading curbs are part of an overhaul of EU markets legislation, known as Mifid.
Bloomberg
