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 "quote stuffing".
"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 cancelled.