The Economic and Monetary Affairs Committee of the European Union unanimously approved wide-ranging reforms of the securities market Wednesday, including high-frequency trading.
Members of the European Parliament tightened up the EU’s proposal on high-frequency algorithmic trading, voting that all high-frequency trading orders should be valid for one half second. The rule means orders cannot be cancelled or modified for at least five hundred milliseconds. A millisecond is one-thousandth of a second.
All firms and trading venues also would have to ensure that trading systems are resilient and prepared to deal with sudden increases in order flows or market stresses. These could include Europe’s own “circuit breakers” to suspend trading.
The Securities and Exchange Commission has moved to establish single-stock and market-wide circuit breakers, post the May 6, 2010 Flash Crash and is testing limits on the upward and downward movement of stocks in a given trading session.
The rules are proposed to be added to the EU directive and regulation on markets in financial instruments (MiFID) and would apply to almost all market players.
“With this dossier the European Parliament takes a very important step towards transparent and efficient financial markets in the European Union,” said Markus Ferber, lead Member of the European Parliament Markus Ferber. “The main goals of the reform of the financial markets regulation are reducing systemic risk, guaranteeing financial market stability and an adequate investor protection. We now look to the (European) Council to join us in negotiations with the Commission, so that we can bring these proposals to a successful conclusion.”
The new rules, in proposed updates to the EU directive and regulation on markets in financial instruments, would apply to almost all financial instruments and almost all market players.
The updated market in financial instruments directive and regulation (MIFID/MIFIR) would lay down uniform trading rules for firms selling investment products, investment service providers and regulated markets. Investors would have to be offered financial products that are tailored to their needs, and so they should be less likely to be misled.
Members of Parliament also inserted amendments to regulate trade in commodities and commodity derivatives, speculation in which is commonly blamed for food price volatility. These would involve imposing thresholds, such as the maximum net positions persons can hold or enter into over specified periods of time.
All market players and trading venue operators would be required to lay down clear rules and procedures for fair and orderly trading, objective criteria for executing orders efficiently and transparent criteria for determining which financial instruments may be traded via their systems. They should also be properly prepared to cope with disruptions of these systems.
These uniform trading rules would apply to bonds, structured finance products and derivatives that can be traded on regulated markets, via a multilateral trading facility (MTF) or Organized Trading Facility (OTF).
