EU drafts new regulation to clampdown on high frequency trading

The European Parliament has drafted a deal with national governments for tougher regulation of high frequency trading (HFT). The new measures will add to the plethora of new financial regulations already proposed by EU Commissioner, Michel Barnier, including shifting derivatives trading onto regulated markets and restrictions on commodity speculation.

Christian Social Union MEP, Markus Ferber who spearheaded the regulation, said in an email received by Bloomberg on Wednesday:

The negotiation team achieved a significant breakthrough on this issue.

The area of high-frequency trading is lacking suitable regulation. This is why it was high time to find a decent solution to this pressing problem.

The new regulatory system is to include a tick size regime, limiting the size of price movements on financial markets. The purpose of this regulation is to slow down high frequency trading. The agreement will also involve traders having their algorithms tested on venues and approved by European regulators.

Despite these restrictive measures, regulation enthusiasts did not have it all their own way. The preliminary deal does not include EU-wide penalty fees for traders who cancel, what are deemed to be, excessively large numbers of orders. These kinds of penalties will be left to the member states. The deal also excludes a European Parliament measure to set a minimum amount of time that orders must be kept in the market.

It is feared that the new clampdown on HFT is an overreaction to the flash crash of May 2010. European lawmakers may be forgetting the positive role HFT plays in increasing liquidity and price the price discovery process as well as overestimating its impact on volatility.