EU agrees preliminary deal to rein in speed traders

Tue Oct 22, 2013 9:12am EDT

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* EU ditches minimum order time in tentative deal

* Progress on allowing sponsored market access

* Key negotiations on MiFID set for November

* HFT sector says much detail to be worked out

By Huw Jones

LONDON, Oct 22 (Reuters) - The European Union has reached a tentative deal to rein in the type of ultra-fast trading that accelerated a plunge in Wall Street stocks in 2010 and set regulatory alarm bells ringing across the world.

In the Wall Street "flash crash" three years ago, the Dow Jones Industrial Average dropped about 700 points in minutes, partly due to the high-frequency traders unloading their securities as the market tumbled.

High-frequency traders dart in and out of markets to exploit price differences faster than the blink of an eye. Critics say it can be a recipe for speculation and volatility, while advocates say the traders bring additional liquidity to markets.

High-speed trading is already widespread. It accounts for some 30 percent or more of trading volumes on some of Europe's exchanges like the London Stock Exchange and other trading venues.

Lithuania, which holds the European Union presidency, said in a note seen by Reuters that the European Parliament and EU states have "broadly agreed" on a package to regulate speed trading.

"The European Parliament took into account the Council's (of EU states) concerns and it was preliminarily agreed on a possible compromise package," the note said.

The package is part of a revision of an EU law known as the markets in financial instruments directive or MiFID, which is being updated to reflect rapid advances in trading technology and apply lessons from the 2007-09 financial crisis.

But crucially for all traders, not just speed traders, the package excludes a so-called a minimum resting period that the EU parliament had demanded.

This would have required a share order to stay on an order book for 500 milliseconds, effectively killing off high-frequency trading and other dealers too who now operate at much faster speeds measured in microseconds.

Officials from member states and the share trading industry said the parliament had backed off after winning several concessions.

These include a binding system for common tick sizes or the smallest increment in price that a share trades at. The parliament wants to stop platforms varying the tick size to attract the traders. "This means there will be no race to the bottom," said one exchange industry official.

The package also includes a requirement for exchanges and trading venues to synchronise their clocks to make it easier to spot abuses, plus the testing algorithms or computer software used by the traders.

Remco Lenterman, chairman of the FIA European Principal Traders Association and managing director of IMC, one of the world's biggest high-frequency trading firms, said there was widespread opposition to the minimum trading time, not just from the high-frequency sector.

"Some are sensible proposals and some a bit less so, but I feel a lot of important detail still needs to be worked out," Lenterman said.

Exchanges have already begun to crack down on high-frequency trading by fining speed traders for placing too many orders that are then cancelled, something that could affect prices.

The parliament had also wanted to ban sponsored access, saying the practice of allowing speed traders to use someone's else's trading code to transmit orders directly to a market was risky. Sponsored access now looks set to stay but under tough controls, the presidency note outlined.

The deal on speed trading and progress on market access has raised hopes of an overall agreement in principle on MiFID during a series of negotiations planned for November.

Remaining hurdles include who will take the lead in imposing limits on how big a position a trader can build up in commodities markets and how should those limits be defined.

There is also the issue of how strict should the application of MiFID be on traders from outside the EU who want to do business in the 28-country bloc, and whether trading platforms can link up with any clearing house they want to.

The revised MiFID law would probably take effect in 2016.

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