High-Frequency Trading Targeted in EU Deal, Lawmaker Says

(Bloomberg) — European Parliament lawmakers have reached a draft deal with national governments onhighfrequencytrading curbs as part of a push to toughen the blocs financial market rulebook, said the chief legislator working on the plans.

The negotiation team achieved a significant breakthrough on this issue, Markus Ferber, the lawmaker leading on the measures, said in an e-mail. The area ofhighfrequencytrading is lacking suitable regulation. This is why it washightime to find a decent solution to this pressing problem.

The provisional deal, reached by legislators and officials from Lithuania, which holds the EUs rotating presidency, includes a so-called tick size regime limiting the minimum size of price movements on financial markets, Ferber said. This will slow downhighfrequencytrading significantly, he said.

Highfrequencytrading in stocks came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

The practice involves using powerful technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. Companies active inhighfrequencytrading have warned that interfering with their strategies would raise investor costs and harm financial stability.

Key elements of the draft deal were reached at a meeting of officials and lawmakers last week, Ferber said two days ago.

Circuit Breakers

Under the provisional agreement, traders will have to have their algorithms tested on venues and authorized by regulators to minimize systemic risk, Ferber said in the e- mail. Moreover, we introduced circuit breakers that will stop the trading process if price volatility gets toohigh.

Preliminary agreement has been reached on a possible compromise package, Lithuania, which holds the rotating presidency of the EU, said in a note to national officials dated Oct. 21.

While EU parliament lawmakers secured some of the curbs they had sought onhighfrequencytrading, they have also had to give up some of their goals, including EU-wide penalty fees for traders who cancel excessively large numbers of orders, according to the document.

Under the draft deal, such fees would be a national option for the member states, according to the document. The draft deal also excludes a parliament initiative to set a minimum length of time that orders must be kept in the market.

The drafthighfrequencytrading measures are part of a broader overhaul of the EUs financial-market rules proposed by Michel Barnier, the blocs financial services chief. Other parts of Barniers proposals seek to push more derivatives trading onto regulated markets, and restrict commodity speculation.

The measures, which must be voted on by the EU Parliament and approved by national governments in the 28-nation EU before they can take effect, would update the EUs Markets in Financial Instruments Directive, or Mifid.

A representative for the Lithuanian EU presidency in Brussels declined to comment.