EU cracks down on high-speed traders

LONDON/BRUSSELS (Reuters) - The European Union has proposed a crackdown on the high frequency traders many suspect of exaggerating market swings as part of a wider shake-up of securities rules that will also hit commodity speculators.

The move comes as the European Commission, which writes EU law, pursues radical financial reform after sagging interest has been recently revived by a worsening sovereign debt crisis and public protests from London to Frankfurt.

The new rules, if they come into force, will demand that high-frequency traders buy and sell shares or other securities at around the price the market is trading.

Officials believe this will stop them entering and exiting the market with large orders that far exceed or undershoot normal prices in the hope they can make a quick profit from the volatility that follows.

"I want to put an end to the reign of opacity," Michel Barnier, the EU's financial regulation commissioner chief, told reporters when announcing the plans Thursday.

The rules will essentially stop traders that use algorithms -- a computerised set of trading instructions -- from going against the tide of the market.

They would also be categorized as investment firms, putting many under the watch of regulators for the first time. They will also have to reveal their trading strategies to regulators.

"This will help guard against some of the most dubious trading practices high frequency traders indulge in," said Sony Kapoor, a financial expert with think tank Re-Define.

The proposals would also open the bloc's integrated exchanges so that banks and brokers have a choice of where to clear trades.

This could affect savings from the planned Deutsche Boerse (DB1Gn.DE) and NYSE Euronext (NYX.N) bourse merger. The London Stock Exchange (LSE.L) is also aiming for what is sometimes termed a "vertical silo" with its bid for the LCH.Clearnet clearing house.

LESSONS LEARNED

Barnier said there was a need to draw lessons from the financial crisis and rapid advances in trading technology.

The four-year-old Markets in Financial Instruments Directive (MiFID) has taken down barriers to competition in trading, allowing new players like Chi-X and Bats -- which are set to combine and won provisional approval in Britain Thursday to merge -- to challenge the likes of the LSE.

But competition has also caused markets to fragment and become less transparent for investors while advances in trading technology have made it harder for supervisors to monitor.

Thursday's announcement seeks to correct these failings.

"What Barnier is doing with these regulations is widening transparency beyond equities and into the debt and derivative markets, which are huge and have until now been left to themselves," said Karel Lannoo, a financial expert with Brussels think tank, the Centre for European Policy Studies.

"If these rules had been in place before, it could have helped avert the banking crisis. Now, of course, it will depend on how toughly the new rules are implemented."

The European Parliament and EU states have the final say and publication of the draft law marks the starting point of months of haggling.

The EU executive estimates the reform will impose a one-off compliance cost of 512 million euros to 732 million euros (447 million to 639 million pounds) on the bloc's financial industry with on-going costs of 312 million to 586 million euros annually.

Barnier also published a separate draft law to toughen up penalties for traders who manipulate markets by proposing pan-EU minimum criminal sanctions.

Thursday the International Organisation of Securities Commissions (IOSCO) said there is no hard evidence that high-frequency training harms liquidity or damages market prices, stopping short of recommending curbs such as the EU's proposal.

(Editing by Hans-Juergen Peters and Mike Nesbit)