LONDON, March 23 (Reuters) - Exchanges should slap higher fees on traders who cancel many of their buy and sell orders to stop potential abuses from ultra-fast high-frequency trading, a senior European Union lawmaker said on Friday.
“We need a deceleration of high-frequency trade, more retail investor protection and containment of excessive speculation,” said Markus Ferber, a centre-right German member of the European Parliament’s economic affairs committee.
Ferber is steering a sweeping reform of EU securities markets, known as MiFID II, through the bloc’s assembly.
It includes a requirement for traders to keep orders in the market for a minimum period making it more likely a buyer will be found.
Ultra-fast traders who use computer systems known as algorithms have been accused by critics of creating volatility by jumping in to flood markets with orders, only to cancel them in fractions of a second.
This process, nicknamed quote stuffing, can be used to artificially move a price one way or another for the trader to exploit with a real order.
“We need a minimum period for keeping an order before it can be cancelled, a so-called circuit-breaker,” Ferber said in a statement.
Ferber may push for an order to stay on an order book for at least 500 milliseconds.
“On top of that, additional cancellation fees ought to be introduced. That way ultra-fast transactions can be rendered less interesting and excessive speculation can be contained,” Ferber said.
As regulators take a closer look at HFT, exchanges in countries such as Germany and Italy are moving to introduce or reintroduce fees on traders who breach a pre-set order-to-trade ratio.
Traders fear EU regulators will introduce a “one-size fits all” ratio across several types of securities without taking into account any differences, said Remco Lenterman, managing director of Amsterdam-based IMC and chairman of the FIA European Principal Traders Association, a lobby for about 20 automated trading firms.
“We don’t see a link between message traffic and market abuse,” Lenterman said.
The introduction of minimum resting periods for orders “could result in a decrease in liquidity by hampering effective risk management”, the FIA said in a statement.
Automated trading has been “pivotal in improving market quality” and academic research showed it had cut trading costs, it added.
EU states have joint say with parliament on the reform and the approval process moves up a gear with Ferber’s report on the measure due to be published as soon as next week.
It may propose excluding trading shares on a planned new breed of trading platform, known as an organised trading facility or OTF, so they would be traded on a more heavily regulated platform such as an exchange.