EU moves toward new regulatory crackdown on HFT
15 January 2014 11:22am
The European Union has agreed to introduce a plethora of new regulations governing high frequency trading (HFT,) commodity speculation and derivatives trading. The measures come shortly after the introduction of a cap on banker bonuses.
The revision to the Markets in Financial Instruments Directive (MiFID) is to be implemented by the end of 2016 and will impose tighter controls on the financial markets.
HFT has been attacked by EU lawmakers as a cause of volatility in financial markets. The revised version of MiFID is intended to act as a safeguard against a repetition of the flash crash of May 2010.
"The new rules agreed today are undoubtedly a step forward for transparency and curbing damaging practises in investment markets such as HFT," said Sven Giegold, a German Green Party MEP.
However, the plans have been criticised for damaging European competitiveness. EU lawmakers may also be forgetting the positive role HFT plays in increasing liquidity and the price discovery process as well as overestimating its impact on volatility.
Ed Parker, head of derivatives at law firm Mayer Brown, said:
Mifid will dramatically reshape the way firms operating in the financial services sector conduct their business. For the OTC derivatives market, there will be a seismic shift resulting in higher costs, tighter margins and reduced flexibility when hedging.
Britain's George Osborne said in a speech earlier today there's "a very real risk" that badly thought through EU laws will be imposed on the UK and that "damaging City of London would be bad for all of Europe."
Further regulation of commodities speculation was also welcomed."For the first time the EU will regulate commodities to tackle food speculation," said Arlene McCarthy, A Labour MEP.
This support for further controls on commodities trading comes in spite of the fact that there is little evidence that speculation drives up food prices. Speculation only drives up the price of a commodity if there is a physical hoarding of goods and inventories do not suggest this has taken place in recent years.
As Nobel prize-winner Paul Krugman has noted:
A futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price.