Proposals by Markus Ferber MEP, the European Parliament’s figurehead for its review of MiFID, to restrict high-frequency trading (HFT) are likely to be eased by other MEPs.
Members of the European Parliament’s Economic and Monetary Affairs Committee (ECON) are required to submit any amendments they have for MiFID II today, following draft amendments made by Ferber in March.
ECON members are expected to reject Ferber’s suggestion to ban direct electronic access (DEA), as well as his plan to impose a minimum resting period of 500 milliseconds for all orders.
In a document seen by theTRADEnews.com, Olle Schmidt MEP, a member of the Group of the Alliance of Liberals and Democrats for Europe, has proposed eliminating the minimum resting period and limiting the ban on DEA to naked sponsored access, i.e. the practice of accessing markets without pre-trade risks controls, only.
“Instead of banning all forms of direct market access, we think pre-trade risk checks need to be mandated, which is likely to be the common position of most MEPs,” Rickard Ydrenäs, policy advisor to Schmidt, told theTRADEnews.com.
Controls to ensure investors do not access markets without pre-trade risk controls are already included in guidelines from the European Markets Securities Authority, which came into force at the beginning of this month.
Ferber kicked off the ECON review of MiFID with a public consultation on initial proposals made by the European Commission last October. After responses to the consultation were collated, ECON held a meeting in February after which Ferber proposed his own amendments to the Commission text based on the overall feedback.
Ydrenäs also agreed with the need to control HFT, but added that the definition of the practice proposed by Ferber needs to be “fine-tuned”.
“Seeing as there is not much hope for a Europe-wide financial transaction tax, there is more focus on ways to curb speculation and curbs on HFT are one way of doing this,” he said.
While the European Parliament is required to reach an agreement with the Council of the European Union before MiFID II is finalised, it can only advise the Council on the FTT proposal. Given the growing reluctance of many European countries, including the UK, to back the tax, Ydrenäs considered the proposal to be “dead in the water”.
In his amendments, Ferber stated that HFT firms would be defined as market participants that deal on their own account and meet at least four of five characteristics. Firms that fall under the definition would be required to provide continuous liquidity to the market.
Schmidt has proposed an order-to-trade ratio of 250:1, rather than 4:1, for defining HFT, to restrict the impact of the proposal on more traditional investors.
“While we agree with the approach to place continuous trading obligations on HFT firms, we must ensure that algo trading conducted by pension funds is not captured,” said Ydrenäs.
Ydrenäs added that the potential for HFT firms to circumvent the definition so that they are not bound by continuous quoting obligations would need to be discussed by ECON members.
After the amends have been tabled, Ferber will produce another version of the directive that will be voted on by ECON in July. The Council of the European Union will then propose its version of MiFID II, before a final text is negotiated through the trialogue process, which involves the Parliament, Council and European Commission.