October 12, 2010 / 11:51 AM / 9 years ago

UPDATE 2-EU Commission targets high-frequency stock trades

* Risk in quick evolution of rapid trading-EC’s Barnier

* To work with U.S. regulators toward new rules

* Manipulation, malfunction safeguards also eyed in MiFID

* “Excessive speculation” in crops markets-Barnier (Adds details on proposals, Nasdaq CEO)

By Jonathan Spicer

PARIS, Oct 12 (Reuters) - High-frequency trading of stocks requires extra regulation given the risks it poses and the European Commission will work with U.S. counterparts to craft new rules, said Michel Barnier, the EC’s commissioner for internal markets and services at the European Commission.

Barnier, the French commissioner in charge of the EU’s regulatory overhaul across markets, also warned on Tuesday that “excessive speculation” in the crop derivatives markets is “abnormal and unacceptable.” He said the Commission would make specific proposals on Nov. 15.

The comments, delivered via video link to the World Federation of Exchanges conference in Paris, shed some light on what sweeping changes the Commission has planned for the European bloc’s securities trading rules, known as the Markets in Financial Instruments Directive (MiFID). [ID:nLDE68J1KY]

Computer-based high-frequency trading, which increasingly dominates the electronic markets, requires more supervision “considering the risks in how quickly this business evolves,” Barnier told the conference.

He added that the Commission would work closely with U.S. regulators to get “effective regulations” for this type of trading, in which proprietary firms, hedge funds and banks send rapid-fire bids and offers to make markets and earn profits from tiny price imbalances.

The U.S. Securities and Exchange Commission is examining high-frequency trading, and issued an Oct. 1 report that said it played a part in exacerbating the May “flash crash,” in which the Dow Jones industrial average rapidly plunged some 700 points before sharply rebounding. [ID:nN01141642]

The Committee of European Securities Regulators (CESR) is advising the EC on drafting amendments to MiFID and has recommended major changes that will alter business models of stock exchanges, brokers, banks and new trading venues.

ROCKING THE BOAT

Barnier acknowledged that the 2007 MiFID had “rocked the boat quite a bit” by promoting competition and the emergence in the last few years of so-called multilateral trading facilities, or MTFs — a heated topic at the conference here.

The EU needs market-wide regulation of MTFs and trade repositories showing the record of daily trading, Barnier said. New regulatory powers to prevent “market malfunctions” will be included in the MiFID II proposals, he added.

Robert Greifeld, CEO of trans-Atlantic exchange operator Nasdaq OMX Group Inc (NDAQ.O), said high-frequency trading has brought with it a lot of controversy. “But for regulators to get into saying, ‘This is too fast,’ is to me going a step too far,” he told the conference earlier Tuesday.

The U.S. SEC is considering saddling HFT with formal market making obligations meant to ensure there is liquidity in stressful times, while others want rules that would force traders to post quotes for at least one second.

Barnier said both citizens and regulators need to come to terms with the new marketplace. “Complexity is not an excuse for lack of transparency,” he said.

Turning to derivatives, the commissioner said regulators “need to get to the next level” on oversight, adding that better tools are needed to detect and punish manipulation. “I am deeply convinced that excessive speculation on crops markets is both abnormal and unacceptable,” he said.

Barnier had previously said he planned to use the MiFID review to reform commodity markets. European commodity markets are under pressure to tighten regulation as the United States pushes forward with plans to tame speculative activity with limits on traders’ positions. (Reporting by Jonathan Spicer; Editing by Greg Mahlich and Andrew Callus)

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