Europe's first direct curbs on ultrafast trading and investors who take bets on commodity prices moved a step nearer on Friday (26 October) when the European Parliament backed new securities rules.
Lawmakers want to tighten regulations on so-called high-frequency trading (HFT), which uses computers to dart in and out of markets in milliseconds and exploit tiny price differences, because they fear it makes markets more volatile.
They are also cracking down on speculation in commodities markets in a bid to reduce big price swings.
Meeting in full session in Strasbourg, the Parliament voted by 495 to 15 in favour of MiFID II, a draft law that updates EU securities rules to reflect lessons from the financial crisis and rapid advances in trading technology.
But it threw out an attempt to ban financial advisors from pocketing commission on the products they sell to consumers, sticking instead to requirements for better disclosure.
Law set to apply from 2014
The new rules include the introduction a synchronised clock for trading shares, bonds, commodities and other instruments across the EU so regulators can spot abuses more easily in a market where many exchanges and platforms trade the same shares.
Share orders would have to remain in the market for at least 500 milliseconds, far longer than HFT traders stay at present.
"That way, purely speculative business with high-frequency transactions will become unattractive," German MEP Markus Ferber, the centre-right lawmaker who is steering MiFID through Parliament.
The Parliament will now sit down with EU states to agree a final text that will become law around 2014, and the broad majority reinforces the lawmakers' negotiating hand.
Supporters of HFT argue it brings welcome volume to markets, making it easier for buyers and sellers to find counterparties.
The new rules also take aim at what some policymakers see as speculation in derivatives for commodities like food and oil by imposing caps on how many contracts can be held to avoid cornering markets.
Manufacturers who use derivatives to insure, or hedge, against risks of adverse price moves in raw materials would not be affected by the new position limits.
“A hedge fund, however, that only speculates on the price of steel, has no real need for that material and so his activities in the commodities markets should be limited,” Ferber said.
NGO claims loopholes remain in proposals
The latest compromise of the draft law being circulated among EU states takes a similar position.
The World Development Movement (WDM), an anti-poverty group, said lawmakers left loopholes which risk making the curbs ineffective. The limits should apply to all commodity contracts and for their full duration, the WDM said.
Arlene McCarthy, a British centre-left lawmaker who proposed the EU-wide ban on financial product commission that was rejected on Friday, said relying on disclosure won't work. Britain is introducing its own ban on commissions from January.
Parliament has proposed a stricter rule than the Commission's.
“High-frequency trade has not been regulated yet. To 'relax' high-frequency-trade, we call for a minimum resting period of 500 ms for orders and for fees for single high-frequency activities. That way, the purely sepculative business with high-frequency transactions will become unattractive,” said Ferber.
"With MiFID, we can create crisis-proof financial markets with an efficient supervisory structure. Besides, intransparent technical procedures that can quickly become systemic risks must be ruled out,” said rapporteur Markus Ferber MEP (Germany; European People’s Party).
“By refusing to ban commissions for investment advice, MEPs have lost a golden opportunity to put an end to wide-scale mis-selling of financial products,” said Monique Goyens, director general of The European Consumer Organisation (BEUC).
“Today’s vote has severely slowed much needed reform of the banking sector. Three European countries have already pressed ahead with national commission bans. The European Parliament has ignored a culture shift towards consumers’ interests coming first, not bank profit,” Goyens added.
“This updated legislation will create the tools and infrastructure needed to ensure scrutiny of trading without hindering technological innovation. Safeguards are being put in place that should give retail and long term investors confidence that they are not being subject to unfair practices in the market place,” said UK MEP Kay Swinburne, the European Conservatives and Reformists group economics spokesman.
"In an age of trading in micro seconds the regulator needs to be able to monitor exact chains of events across venues to properly tackle market abuse, so simple measures such as data reporting, synchronisation of trading clocks and improved transparency in all asset classes should be positive moves,” Swinburne concluded.
Draft EU financial market legislation that would curb food price speculation and high-frequency trading was put to vote on 26 October in the European Parliament, so as to provide a strong mandate for fine-tuning it in talks with member states.
In committee, MEPs inserted amendments to regulate commodity trading by the financial sector, speculation in which is widely blamed for food and energy price volatility.
These amendments would impose a maximum net position that traders may hold or enter into over specified periods of time and requirements for pre- and post-trade transparency.
In committee, MEPs also tightened up proposed rules on high-frequency trading, in which computers trade millions of orders per second, with little or no human intervention.
The proposed update of the financial instruments directive and regulation (MIFID/MIFIR) would lay down uniform trading rules to protect investors, enhance transparency and buttress financial market stability.
- 2014: ban on high frequency trading set to come into force