EU regulators urge caution on fast trading curbs

LONDON, April 24 Tue Apr 24, 2012 9:19am EDT

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LONDON, April 24 (Reuters) - Tough curbs proposed by European Union lawmakers on ultra-fast trading should be ditched in favour of measures to keep the overall market stable and free of abuse, regulators said on Tuesday.

The European Parliament and the bloc's member states are approving a reform of securities trading rules known as MiFID, with specific elements curbing high-frequency trading (HFT).

HFT involves placing and then pulling multiple orders faster than the blink of an eye in a strategy which advocates say boosts market liquidity but critics fear can lead to market abuses and excessive volatility.

It represent between half and three-quarters of trading volume on top exchanges and a rising share of futures and other derivatives markets.

Some EU lawmakers want a minimum "resting" period for orders on a trading platform, and a minimum ratio of orders to actual completed transactions - two moves which some experts believe would kill off chunks of the HFT market. The lawmakers will next debate the reform on Wednesday.

Tim Rowe, manager of trading platforms at Britain's Financial Services Authority (FSA), said policymakers should focus on behaviour generally and more research was needed to avoid basing policy on fear.

"We are still running on anecdotes. We need more evidence. I have not yet heard an explanation why these are a solution to a problem when you don't yet know what the problem is. I can't see how resting times work," Rowe told the TradeTech 2012 conference.

A good reason was also needed before forcing trading platforms across Europe to re-engineer themselves, he added.

Piebe Teeboom, a senior policy advisor at AFM, the Dutch markets regulator, said the two "micro management" curbs under consideration should be taken out.

The focus should be on management of core trading systems such as introducing "circuit breakers" or suspending trading when markets become disorderly, he said.

The industry should go beyond the "good news" such as HFT being a boost to liquidity and have a more realistic sense of the risks, especially after the May 2010 "flash crash" on Wall Street, Teeboom said.

This refers to when U.S. blue chips went into a brief tailspin after the impact of an erroneous trade was exacerbated by ultra-fast trading systems, alarming regulators world wide.

Separately, the Bank of England's executive director for financial stability, Andrew Haldane, said in remarks made available on Tuesday that HFT was part of the "financial arms race" and may have created uncertainties in markets, such as during the flash crash.

"Liquidity mirages and message traffic congestion are nibbling away at the common good of market stability," said Haldane who is also a member of the BoE's new Financial Policy Committee which will have powers to directly intervene in market infrastructure from next year.

Haldane welcomed measures such as maximum order cancellation ratios and strengthening circuit breakers or suspension of trading, to curb speed races in financial markets.

But Peter Nabicht, executive vice president of Allston Trading, told TradeTech that regulators should be asking why people are executing trades and not how, as HFT "provides liquidity and removes price inefficiency."

Minimum resting times for orders introduce systemic risk into markets as traders would be stopped from withdrawing in response to news, Nabicht said.

Mike Williams, chief executive of Genesis Asset Management, said there was a need to restore investor trust in markets and it was "hard to fathom that someone could argue you did not have liquidity before you had HFT".

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