Draft amendments to MiFID II tabled by an influential European Parliament committee include a ban on direct electronic access to exchanges and a minimum holding period for equity orders to curb high-frequency trading (HFT) volumes.
The amendments, contained in a document seen by theTRADEnews.com, also include a detailed definition of HFT and scale back proposals by the European Commission that would have required all users of algorithms – including institutional investment firms – to engage in liquidity provision.
According to the document, ending the practice of direct electronic access – i.e. where a firm is able to trade directly on a trading venue or exchange using its broker’s membership – will “avoid the risk that firms with insufficient controls in place create disorderly market conditions”.
Further, MEPs have proposed that trading venues put controls in place to make sure orders entered on their systems are valid for at least 500 milliseconds.
“We need a minimum period for keeping an order before it can be cancelled, a so-called circuit-breaker,” said Markus Ferber MEP, who is responsible for guiding MiFID II through the Parliament on behalf of its Economic and Monetary Affairs Committee (ECON), in a separate statement last Friday. “On top of that, additional cancellation fees ought to be introduced. That way ultra-fast transactions can be rendered less interesting and excessive speculation can be contained.”
Concerns about the introduction of a minimum resting period for orders have already been aired by trade body the Futures Industry Association’s European Principal Traders Association (FIA EPTA).
Remco Lenterman, chairman of FIA EPTA, said the practice “could result in a decrease in liquidity by hampering effective risk management”. The trade body added that automated trading technology has proven its social utility by transferring risk in capital markets in a more effective and efficient way as well as lowering the costs of access for corporates and issuers.
The amendments include a definition of HFT which refers to market participants that deal on their own account and meet at least four of five characteristics. These comprise: the use of co-location; a daily portfolio turnover of at least 50%; an order to trade ratio that exceeds 4:1; a cancellation ratio of over 20%; and where over 50% of orders are made on trading venues that offer rebates for liquidity provision, which would include maker-taker fee tariffs offered by the majority of multilateral trading facilities.
Firms that fall under these criteria will be required to offer liquidity at competitive prices with the result of providing liquidity on a continuous basis. This is a less extensive approach than the initial draft of MiFID II issued by the European Commission in October 2011, which captured all users of algorithmic trading strategies.
The draft amendments are currently circulating among members of the ECON committee and will be discussed in a meeting near the end of April. Once ECON has finalised its amendments, the text will then pass to the Council of the European Union for a further reading. Implementation of MiFID II is expected during 2014 at the earliest.