ECON reconvenes to settle stance on HFT, BCNs
The European Parliament’s
Economic and Monetary Affairs Committee (ECON) will meet next week to finalise
its version of MiFID II, with debate on high-frequency trading (HFT) likely
to lead the agenda following a new UK government study.
Two meetings of ECON are
scheduled for 10 and 13 September in Strasbourg, with a vote on the final MiFID
II text set for 26 September.
Prominent areas of discussion for
MEPs as they enter the final stages of debate on MiFID II are likely to be HFT
and the treatment of broker crossing networks (BCN), which could fall under a
new regulatory regime in the revised directive.
ECON was initially due to
finalise its version of MiFID II in July but the sheer number of amendments tabled
by MEPs meant the decision was deferred until after the Parliament’s summer
The debate on HFT has gathered
pace during the MEPs’ break, with the German government proposing new
regulation to control HFT activity and the publication of a report by
Foresight, a UK government-funded investigation into
The Foresight report, authored by 35 finance academics and professionals, examined some of the HFT proposals in the European Commission’s original
MiFID II text last October and initial amendments made by Markus Ferber MEP,
the figurehead for ECON’s reading of the directive, and sent its preliminary findings directly to MEPs.
The study analysed the requirement
for all algorithmic trading strategies to be in continuous operation throughout
the trading day, a harmonised circuit breaker regime across European trading
venues, order-to-execution ratios and minimum tick sizes. The Foresight report
also looked at Ferber’s added proposal to impose a minimum resting time of 500
milliseconds for all orders.
found that minimum resting times would expose liquidity providers that place
orders across multiple markets to increased risk, as they would be unable to
cancel stale orders. It also cautioned that order-to-execution ratios could
curtail beneficial strategies and suggested that fees on excessive orders
charged by exchanges could be a better option. The report backed a coordinated
approach to circuit breakers that would halt trades in extremely volatile
market conditions and supported the need for a coherent tick size regime across
markets to limit excessive competition for liquidity.
policy advisor to Olle Schmidt MEP and member of the Alliance for Liberals and
Democrats in Europe, said the Foresight report would help stimulate further
debate on the HFT proposals and matches his group’s stance on minimum
resting times, a view held by only one other group in ECON.
“This report gives us more facts
and arguments to support our position on minimum resting times – we believe it
will harm the market,” he said. “The report also backs our views on circuit
breakers and market making obligations.”
In a statement to
theTRADEnews.com, Ferber agreed the Foresight document would boost the evidence
already accumulated, adding that many points in the report supported the
“The document concludes that coherent
tick sizes across Europe might be a desirable option,” he said, adding that he believed a
wide range of views on HFT had already been considered during the ECON process.
“The process is still ongoing,
although it would have been better to have such a report at an earlier stage of
the procedure as we are already negotiating the compromises in ECON,” he added.
Further discussion on how to
control HFT was raised in August after German lawmakers drafted legislation to bring HFT firms under the
control of the national financial watchdog. Ferber has backed the German proposals
despite the fact they would come into affect in mid-2013, at least six months
before MiFID II is due to be enforced.
Following the European
Commission’s October 2011 draft of MiFID, Ferber issued a public questionnaire
seeking views on the proposals. He used the feedback and subsequent meetings
with MEPs to form his own amendments to the Commission text, which were
released in March. Other members of ECON then submitted their suggestions for
After ECON's version of MiFID II is finalised, the Council of the European Union, a collection of member states' finance ministers, will agree a separate version of the text, before both versions are reconciled, with input from the European Commission.
Another area of contention in the MiFID II debate will the treatment of broker crossing networks. In its October draft, the European Commission proposed the creation of the organised trading facility (OTF), a new umbrella trading venue category that would capture BCNs and new markets that would emerge as a result of OTC derivatives
regulation. OTFs would be given a degree of discretion on how they match orders, according to the Commission's proposals.
In his amendments, Ferber suggested
that OTFs should exclude equities, thereby forcing BCNs, which are currently classified as over-the-counter trading
in MiFID, to reclassify as MTFs or systematic internalisers (SI). As MTFs,
brokers would lose the ability to decide who can access their BCN and how
trades are matched. Reclassifying BCNs as a SI would prohibit brokers from matching
two client orders and oblige them to publish quotes that are below ‘standard
market size’. Brokers maintain that discretion on how orders are matched in their BCNs are part of a service offering that aims to achieve best execution for buy-side clients.