* Ferber proposes tougher high-frequency trading rules
* Takes harder line on commodity position limits
* Rejects ban on commission on products sales
(Adds detail, exchanges reaction)
By Huw Jones
LONDON, March 26 Banks should be banned from
giving outside brokers direct access to markets as part of a
sweeping crackdown on computerised high-frequency trading, a
European Parliament report said on Monday.
The report was the assembly's initial response to a draft
law aimed at reining in computerised or algorithmic trading and
other advances in technology which have made it harder for
supervisors to see the full picture and control markets.
The European Commission, the EU's executive, proposed the
draft law, known as MiFID II, last year and it is now before
parliament and EU states for approval, with changes expected.
Markus Ferber, the German centre-right lawmaker who is the
"rapporteur" steering the measure through parliament, said in
his report that a tougher crackdown on high-frequency trading or
HFT was needed than outlined in the draft law.
HFT is seen by some policymakers as having an unfair
advantage over other investors. Fast computerised trading also
played a role in the "flash crash" when Wall Street blue chips
briefly went into freefall in 2010.
HFT traders often use the trading systems of banks and
brokers to access markets directly and favour tactics such as
inputting many quickly cancelled orders, a technique nicknamed
"Your rapporteur suggests a more differentiated approach and
proposes definitions for high-frequency trading and a
high-frequency trading strategy to identify a particular subset
of algorithmic trading, and in addition a ban of direct
electronic access," Ferber said in his report.
He defined HFT as trading at speeds where "the physical
latency" (or speed of processing an order) of the system for
sending orders becomes "the determining factor".
HFT strategy would include four or more elements such as a
trader whose servers are next to those of the exchange; a daily
portfolio turnover of at least 50 percent; a ratio of orders to
trades that exceeds 4 to 1; most orders being unwound on the
same day; or where at least a fifth of orders placed are
Orders should also stay in the market for at least 500
milliseconds before they can be cancelled, and exchanges should
slap higher charges on traders who cancel many of the orders
they place, the report added.
HFT has increased volume on many exchanges and the
Federation of European Securities Exchanges urged caution on
Monday about taking such radical measures.
"We need to do some homework first. I don't think Ferber
wants to kill the market but wants to be on the safe side," FESE
Secretary General Judith Hardt told reporters.
Other exchange officials said a ban on direct market access
and requiring minimum periods for orders would damage liquidity
and force people to risk their capital when they don't want to.
All trading platforms should also have "circuit breakers" in
place to cut or slow down trading that becomes disorderly,
Ferber said, in another lesson from the "flash crash".
NO EQUITIES OTF
The planned new breed of Organised Trading Facility (OTF)
platform for trading contracts currently handled between banks
should be limited to non-equities, meaning mainly derivatives
This would force shares currently traded off an exchange to
move onto bourses or similar platforms that are likely to be
more heavily regulated than OTFs, a development stock exchanges
"I think Ferber's taken the right steps. Equities are much
too fragmented and OTFs would have introduced another layer of
fragmentation," Hardt said.
But exchanges were dismayed that Ferber wants to harden
controls on the size of positions commodity traders can hold, a
step policymakers say could help cool what they see as
speculation pushing up oil and food prices in recent years.
All commodity derivatives platforms should have position
limits, Ferber said. Other controls, such as risk management
systems would be "an addition" and not an alternative, as was
foreseen in the draft law. Ferber pushes the draft closer to the
U.S. rule of pre-set position limits in many commodities.
He also proposes a ban on a person holding more than one
executive or two non-executive directorships at different
trading venues at the same time.
Ferber rejects a proposal to ban investment advisors from
accepting commission on sales of financial products, in contrast
to the UK which plans to ban such commissions from 2013.
Other members of parliament are set to challenge some of
Ferber's proposals, as will EU states like Britain. The aim is
to approve a final text by the end of this year or early in
(Editing by David Cowell and David Holmes)