PARIS (Reuters) - France’s financial regulator wants off-exchange share trading scaled back in a reform of European Union securities laws, underlining its hardline approach.
Off-exchange or over-the-counter (OTC) share trading is so opaque not even regulators are capable of providing reliable figures about its size, Jean-Pierre Jouyet, chairman of France’s Financial Markets Authority (AMF), said.
The size of the OTC market has been estimated at 15-40 percent of the overall European market, with the actual figure nearer the top end of the range, Jouyet told the International Capital Market Association annual conference.
“Whatever the case, this ad hoc form of trading should remain the exception,” he said. “The volume of OTC trades must, therefore, be reduced and execution of share transactions in transparent, organized multilateral facilities encouraged.”
The EU’s executive European Commission was due to publish proposals to reform its MiFID securities trading rules in coming months, so they can broadened to cover assets like bonds or commodities.
EU members, such as France and Britain, have been speaking out -- the former to toughen up the rules while the latter, the bloc’s biggest trading center, wants to preserve competition that has reduced exchanges’ market shares.
Banks have also been hitting back, saying the power of bourses was set to increase with the planned merger of Deutsche Boerse (DB1Gn.DE) and NYSE Euronext NYX.N and, therefore, users should have a choice of where they want to trade.
Daniel Trinder, managing director, global head of regulatory policy at German lender Deutsche Bank (DBKGn.DE), said Jouyet’s comments were not a surprise ahead of the MiFID reform.
“A lot of this is tactical positioning between key member states. France follows market developments very closely and is extremely knowledgeable,” Trinder told Reuters.
“When they get to some of the substance, they are far more balanced. Europe tends not to move through radical steps,” Trinder said, adding he was confident market users will continue to have a choice of where to trade.
Jouyet called for a precise definition of OTC trades to only include trades that do not influence prices on exchanges.
Regulators must have access to all order books so they can detect price manipulation, as has already been done in the United States, Jouyet said.
Improved transparency for the stock market must also be applied to bond, derivatives and securitization.
“The only difference is that with some of these markets, we sometimes have to start from scratch, being careful to tailor the rules to each market and each instrument as each one has its own specific features,” Jouyet said.
British financial services minister Mark Hoban has said the EU should not to simply replicate a share trading model on bonds and other securities in blanket fashion.
Jouyet also took a hard line on an EU’s derivatives crackdown which will require derivatives trades to be reported to repositories so they can be tracked by regulators. Several repositories have sprung up, some in the United States.
“To guarantee the European regulator access to the data, we need a trade repository located in Europe and governed by rules guaranteeing these regulators unconditional access.”
Jouyet said there must also be closer look at the types of liquidity in the stock market, including that provided by so-called high-frequency traders.
HFT traders dart in an out of markets over the course of a trading day to exploit tiny changes in prices at ultra-fast speed. They have been accused of causing volatility.
“As you have probably realized, the big question I am raising here is that of the social utility of high frequency trading,” Jouyet said.
“This permanent instability is a source of concern among investors,” Jouyet said, adding there may be a need to impose a minimum period of time before an order can be withdrawn and even curbs on speed.
Europe should copy the United States and introduce “circuit breakers” to allow regulators to control markets when automated trading gets out of hand, Jouyet said.
Editing by David Holmes and Dan Lalor