The European Commission has proposed extending the Markets in Financial Instruments Directive (MiFID) to redress market abuse and volatile trades highlighted by the financial crisis. Experts warn that arbitrage is always around the corner.
"It's probably unnecessary to point out that the week we are going through is a decisive week for Europe. I think … we are showing that we are finding a response to the crisis," Michel Barnier, the EU Commissioner for the internal market said at a press conference yesterday (20 October).
The commissioner yesterday announced a series of measures to prevent high-frequency trading from causing volatility in markets and to stamp out abuses in a host of trades and platforms which have emerged since 2003.
He was also referring to a summit of EU leaders being held this coming Sunday to stem the rising tide of sovereign debt.
The financial crash in 2008 unveiled a swathe of financial practices which by definition circumvented regulation and have subsequently been identified as causing market distortions, such as high-frequency trading.
The Markets in Financial Instruments Directive (MiFID), which yesterday received an upgrade, aims to dampen the kind of trading that is carried out by automated platforms based on momentary price swings within the space of 2-3 seconds. For example, traders will not be allowed to withdraw from trades immediately, causing price disruption.
Many blame the original MiFID's narrow scope for giving rise to such trading and warn that traders will always find a way to sidestep EU regulation.
"MiFId has opened up markets but it has not dealt with arbitrage," Bob Penn, a financial lawyer at the London branch of Allen & Overy told EURACTIV.
Many also blame MiFID for the emergence of so-called Dark Pools – trades that are concealed from the public – and Broker Crossing networks, which take business away from stock exchanges.
The Commission said yesterday it will attempt to drive these trades onto a new platform category, an Organised Trading Facility, to create a more level playing field, more transparency and less volatility.
In an early sign that the Commission's co-legislator, the European Parliament, will lobby for a stricter MiFID, the French Green MEP, Pascal Canfin argued the proposals did not address the fragmentation of the equity market in Europe and the development of 'Dark Pools.'
Canfin argues that the EU is in danger of legalising trading that should be eliminated.
In addition the EU also announced that all countries must impose mandatory criminal sanctions for insider trading and market manipulation.
Clamping down on market abuses
In an upgrade to the Market Abuse Directive, countries will have to extend these sanctions to a range of trades that have become market makers in recent years, such as over the counter commodity derivatives and carbon credits. Commodity derivatives have in the past had a detrimental effect on world food prices.
The Commission does not outline how tough sanctions should be in spite of earlier rhetoric in December 2010 on putting traders convicted of market abuse in jail.
An EU official said it will review the situation in four years and impose concrete sanctions if none have emerged at a national level.
Bob Penn doubts that harmonisation of sanctions is possible as these are often cultural.
"It will be an uphill battle persuading regulators and law enforcement authorities to act in the same way," Penn said.
He cites an example from 2008 when Porsche had secretly been buying Volkswagen shares, making the company one of the largest globally. At the time, Porsche was eyeing a merger with VW.
In the UK this would clearly have counted as market manipulation, while in Germany it did not, Penn pointed out.