* 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 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
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
"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
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,"
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.