EU lawmaker wants draft securities law beefed up

LONDON, March 26 Mon Mar 26, 2012 8:35am EDT

LONDON, March 26 (Reuters) - Banks should be banned from giving outside brokers direct access to markets as part of a crackdown on computerised high frequency trading, a European Parliament report said on Monday.

The report was the assembly's initial response to a draft law aimed at reining in computerised or algorithmic trading and other advances in technology which have made it harder for supervisors to see the full picture.

The European Commission, the EU's executive, proposed the draft law, known as MiFID II, last year and it is now before parliament and EU states for approval, with changes expected.

Markus Ferber, the German centre-right lawmaker who is the "rapporteur" steering the measure through parliament, said in his report that a tougher crackdown on high frequency trading or HFT was needed than outlined in the draft law.

Critics say HFT causes volatility by hitting markets with many orders that are quickly cancelled. HFT traders often use trading systems of banks and brokers to access markets directly.

"Your rapporteur suggests a more differentiated approach and proposes definitions for high frequency trading and a high frequency trading strategy to identify a particular subset of algorithmic trading, and in addition a ban of direct electronic access," Ferber said in his report.

Orders should stay in the market for at least 500 milliseconds before they can be cancelled, and exchanges should slap higher charges on traders who cancel many of the orders they place, the report added.

The planned new breed of Organised Trading Facility (OTF) platform for trading contracts currently handled between banks should be limited to non-equities, meaning mainly derivatives.

This would force shares currently traded off an exchange to move on to bourses or similar platforms that are more heavily regulated than OTFs.

Other members of parliament are set to challenge some of Ferber's proposals as will EU states like Britain. The aim is to approve a final text by the end of this year or early in 2013.

Other main changes proposed by Ferber include:

** A ban on a person holding more than one executive or two non-executive directorships at different trading venues at the same time

** All trading venues which trade commodity derivatives should have position limits, with alternative controls "an addition" rather than substitute

** EU market watchdog European Securities and Markets Authority (ESMA) should draw up guidance on what are "ancillary" services and thus exempt from the more onerous MiFID II rules

** Rejects proposal to ban investment advisors from accepting commission from companies whose products they sell, instead there should be more transparency

** All trading platforms should have "circuit breakers" in place to cut or slow down trading that becomes disorderly

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