Speculation on financial markets is contributing to higher and more volatile food prices, said MEPs in the European Parliament's Committee on Economic and Monetary Affairs, who voted yesterday (26 September) for a 500 millisecond break on ultra-fast computerised trades.
Lawmakers sitting on the committee adopted a report on the review of the Markets in Financial Instruments Directive (MiFID).
The draft text – which still needs approval from the full Parliament and EU member states to become law – imposes limits on positions that traders can hold in energy and food commodity derivatives markets. This is a step the United States has already taken.
The MEPs called for stronger regulation of commodity derivative markets to avoid that millions of people are forced into poverty and hunger.
Soy and maize prices were at all-time highs in July according to the World Bank. Prices of cereals and vegetable oils also remained at high in August according to the Food and Agriculture Organisation (FAO).
Commodities markets are subject to a wide range of influences, but recent years have seen a massive shift in the level and nature of financial speculation. There has been evidence that this shift has exacerbated price volatility and is contributing to elevated prices.
The European Commission promised to wage war against speculation on commodity markets when it tabled a revision of its Markets in Financial Instruments Directive (MiFID) in October last year.
The regulatory crackdown aimed at addressing issues raised by new market practices such as computerised ultra-fast trading.
In their vote yesterday, MEPs called for a 500 millisecond period to be placed between trade orders, in order to decelerate high-frequency trading and curb commodity speculation.
Pots and pans for lower prices
The EU legislator's calls for stronger regulation resonate with environmental and development NGOs, which have been advocating for limits to the number of contracts in a particular commodity that can be held by traders.
Ahead of the vote in the Parliament, Oxfam and Friends of the Earth, backed by other activist groups, staged a demonstration using hundreds of recycled pots and pans to spell out 'Stop food speculation' in giant letters at the entrance of the European Parliament. The 925 pots and pans used represented the 925 million people facing hunger worldwide.
"We ask for a strong regulation because there is a huge movement of food speculation that we definitely want to stop. It has a very bad impact on the Southern population, for peasants and consumers. It brings people to poverty because of speculation on for example cereals and sugar," said Virginie Pissoort, a food campaigner at the NGO 'SOS Faim'.
Pissoort said the EU does not have strong enough rules to prevent speculative practices on food commodities. "We hope the politicians are listening, and so far it's going in the right direction," she told EurActiv.
Leading Parliament legislator sees 'need of a strong regulation'
The demonstrators handed over a petition with 100,000 signatures from across Europe to German MEP Markus Ferber (European People's Party), who was appointed to steer the proposed legislation through the European Parliament.
"I can promise you that we will have a strong eye on this particular part of the MiFID in the negotiations with the Council as I really see there's a need of a strong regulation. Otherwise, there'll be speculation in areas where I really don't think it's necessary," Ferber told the protestors.
Ferber added that the European Parliament's text in his view was "very, very strong in comparison to what the Commission has proposed."
He added: "We invite the member states to follow our line, especially on this item as we see for the moment especially in the wheat market that speculation has started again that will create hunger in the third world".
MEP Arlene McCarthy from the Socialists & Democrats Group also said that the European Parliament is making a difference and produces a stronger ruling than the Commission.
"That is because of people power, and I think people make a difference, people matter and we can make a difference with your support," she said.
NGOs denounce 'loopholes' in the Parliament's text
NGOs were only half satisfied with the Parliament committee's vote yesterday, saying they welcomed the MEPs backing for introduction of mandatory limits on speculation.
They warned warned however about "a number of loopholes" that threaten to make the rules ineffective, including "an overly narrow definition of the limits to be imposed on speculation and generous exemption clauses excusing some companies from regulation."
"Unless these problems are fixed, harmful speculation will continue to fuel the devastating price volatility we are seeing on global food markets,” said Christine Haigh, from World Development Movement.
German MEP Markus Ferber (European People's Party), the European Parliament's lead rapporteur on the MiFID review, said legislators "ought to ban destructive speculation on financial markets".
"High-frequency trading has not been regulated yet. To decelerate high-frequency trading, we are calling for a minimum resting period of 500 milliseconds for orders and for fees for single high-frequency activities. This way, the purely speculative business with high-frequency transactions will become unattractive", said Ferber.
High-frequency trading was also singled out by the Socialists and Democrats group in the European Parliament, which supported the 500 millisecond break.
"Today, traders and investors use very sophisticated software to place orders in microseconds throughout the trading day," said S&D Group negotiator Robert Goebbels (Luxembourg). "Most of those orders are withdrawn from the system almost instantly. On average high-frequency orders stay in the system for 3 milliseconds."
"At least 80 to 90% of all orders on stock markets are submitted by high-frequency traders but at the end of the trading day only 20% of executed orders come from high-frequency trading.
"We need to stop this nonsense. It distorts the financial markets and increases volatility."
The Green group in the European Parliament hailed the MEPs backing on curbs to high frequency trading, saying it "should help protect markets against rogue interventions, such as the Knight Capital case this summer."
The Greens denounced however what they described as a "Socialist u-turn" on consumer protection. "A last minute amendment by the Socialist group stripped away proposals aimed at tackling conflicts of interest through commission payments," said Sven Giegold a German MEP who is the Green's finance spokesperson.
Anne van Schaik, accountable finance campaigner for Friends of the Earth Europe, said: "MEPs have a unique opportunity to curb food speculation in commodity markets. Negotiations are going in the right directions, but it is crucial that MEPs make sure the regulations work and put the hunger of people before the hunger of the financial sector."
The World Development Movement's director Deborah Doane said: "We are experiencing the third food price spike in five years, and each one forces millions of people into poverty and hunger. Speculation is a major factor in these spikes, and it is entirely avoidable. The EU can help stabilise food prices and prevent enormous suffering, but only if MEPs vote for strong regulation."
Marc Olivier Herman, Oxfam’s EU policy advisor, added: “Betting on food prices is unacceptable in a world where nearly 1 billion people are going hungry. Yesterday’s vote shows that there is a majority in the European Parliament in favour of limiting harmful financial speculation. However, the text adopted today falls short of what is needed to tackle food speculation.”
Christine Haigh, the World Development Movement’s policy officer, continued: “The text adopted yesterday by the Economic Affairs Committee contains dangerous loopholes: an overly narrow definition of the limits to be imposed on speculation and generous exemption clauses excusing some companies from regulation. Unless these problems are fixed, harmful speculation will continue to fuel the devastating price volatility we are seeing on global food markets.”
A World Bank report on the 2006-2008 commodity price boom argues that energy prices and commodity speculation played the biggest roles in the unexpected food price hikes that took place a few years ago.
The use of commodities by financial investors (so-called 'financialisation of commodities') may have been partly responsible for the 2007/08 spike, the report continued.
The European Commission underlined that the planned reform of the Markets in Financial Instruments Directive (MiFID), and the envisaged review of the EU directive on market abuse will provide an opportunity for "an ambitious overhaul of the markets of raw materials".
The Commission put forward its proposal to update MiFID in October 2011.
- Oct. 2012: The European Parliament will hold a vote on the MiFID. Negotiations are also underway in the Council on this legislation.
- Nov. 2012: European Finance ministers are expected to agree on their position at their meeting on November 13th at the earliest.
- Webpage: Investment Services Directive – Markets in Financial Instruments Directive (MiFID)
- Press release: MiFID review (20 Oct. 2011) [FR] [DE]
- Q&A: MiFID review (20 Oct. 2011)
Parliament political groups
- European People's Party (EPP): MiFID: European Parliament wants safer financial markets (26 Sept. 2009)
- Socialists & Democrats (S&D): 'We need to put the brakes on high-frequency trading' (26 Sept. 2009)
- Greens/EFA: Press statement on MiFID vote in EP committee (26 Sept. 2009)