European Parliament Affirms Mifid II Proposals To Curb HFT, Create OTFs

This follows a unanimous vote by the 27 member states in favor of the proposals, which took place in September.

The Parliament voted in favor of a minimum resting time for orders of 500 milliseconds, thereby restricting the freedom of high-frequency traders. Firms will also have to ensure that they have circuit breakers in place to ensure trading can be stopped in times of market stress.

Meanwhile, Organized Trading Facilities (OTFs), widely seen as analogous to Swap Execution Facilities (SEFs) in the US, would not process equities, instead being reserved for standardized derivatives contracts and bonds.

Lead MEP Markus Ferber says the vote, which went through with an overwhelming majority of 495 votes in favor to 15 against, shows political willingness to regulate all trading activity, regardless of where it takes place.

"This is the core of financial legislation," says Ferber. "We regulate financial markets, rather than individual financial products, as we used to do in the past. All trading facilities must be subject to rules, which is why we established the organized trading facility category. We also want to have clear rules on high-frequency trading, so as to curb speculation without harming the real economy. There is no risk-free financial market, but where there is financial trade, it should take place on regulated markets and be connected to the real economy."

There is no risk-free financial market, but where there is financial trade, it should take place on regulated markets and be connected to the real economy.

Rest Risk

Earlier in the week, a UK Treasury-sponsored report on computer-based trading criticized proposals for resting times. Speaking at a press conference for its release, the authors raised concerns that forcing orders to be maintained created large exposure risks for participants, allowing positions to be arbitraged.

"We have concerns over proposals such as minimum resting times, which we think are likely to be a poor way of controlling financial stability and raise issues about liquidity in terms of widening bid-ask spreads," says Professor Dave Cliff of the University of Bristol. "If you require people to post prices on the markets for a minimum period of time, that exposes them to the risk of being picked off by other market participants. That idea isn't something that we support, and it raises substantial issues about the quality of markets."