20.10.2011
By Simon Miller
The European Union is aiming to crackdown on high frequency traders through the proposed Markets in Financial Instruments Directive 2 (Mifid2).
As the eurozone struggles through its sovereign debt crisis, the EU is aiming its guns at trades which are blamed for exaggerating market swings.
The proposed rules will demand that high frequency trading in shares or other securities are bought and sold at around the market price, effectively stopping algorithmic trading going against the market by using large orders that overshoot or undershoot normal prices to make a profit in the ensuing volatility.
Many HF traders will find themselves under the regulators as they will be classed as investment firms and will also have to reveal their trading strategies to regulators.
The proposals will also beef up the role and powers of regulators. Supervisors will be able to ban specific products, services or practices in case of threats to investor protection, financial stability or the orderly functioning of markets.
In addition, the commission proposes to empower financial regulators to monitor and intervene at any stage in trading activity in all commodity derivatives, including in the shape of position limits if there are concerns about disorderly markets.
Michel Barnier, the EU official in charge of regulating finance, said there was a need to draw lessons from the financial crisis and the rapid advances in trading technology.
He commented: "The financial crisis serves as a grim reminder of how
complex and opaque some financial activities and products have
become."
The proposed regulations will also open up integrated exchanges so that banks and brokers will have a choice of where to clear trades.
Despite possibly hitting the savings from their planned merger, Deutsche Boerse and NYSE Euronext welcomed the directive.
In a statement, the exchanges said : "The proposed amendments will lead to safer, sounder and more transparent financial markets in Europe," thus contributing to the Group of 20 industrialized and developing commitment from September 2009.
Deutsche Boerse said it agreed with the proposed mandatory trading of derivatives on organised trading venues, and improved trading transparency across a broad range of financial instruments including derivatives.
"As regards derivatives markets, we very much welcome the suggestions proposed by the EU Commission to extend pre- and post-trade transparency to derivatives, and to bring more derivatives trading onto organized venues such as regulated markets, multilateral trading facilities, or MTFs, and organised trading facilities, or OTFs, thereby strengthening competition," added Andreas Preuss, deputy chief executive of Deutsche Boerse.
The EU estimates the reform will impose a one-off compliance cost of €512m (£448m) to €732m on the finance industry with on-going costs of €312m to €586m annually.
The full proposals can be found here and the FAQs here
Other stories you may find of interest:
Impacting on investment
With emerging markets looking for investment, Simon Miller looks at the rise of impact investment and what risks entails in this socially aware vehicle
Journey’s end for Solvency II?
Solvency II, the long-mooted new capital adequacy regime for Europe’s insurers, is nearing implementation. Graham Buck reviews its progress
A very British Complex
Greater complexity leads to greater risks for banks according to Professor Simon Collinson, Warwick Business School and the Simplicity Partnership
