Legislation that forms a major part of the European Union's response to the financial crisis will take a step forward next week despite intense opposition from the financial trades industry.
MEPs and officials from EU member states have been working to formulate a new law on financial trading ever since the European Commission made proposals last October. The Parliament's economic and monetary affairs committee is scheduled to hold a vote on Wednesday (26 September) that will provide an important indication of its eventual shape.
The most controversial aspect of the markets in financial instruments directive and regulation, known as Mifid II, is what it will say about high-frequency trading – the practice of using computer algorithms to generate trades by the fraction of a second. This practice has been blamed for creating sudden financial market crashes and volatility. MEPs are wrestling with the idea of imposing tough restrictions on the activity. Traders would have to publish buying and selling prices at all times in order to increase transparency, boost liquidity and preserve market stability.
Some MEPs want to go further and ban high-frequency trading altogether, a move that Ewald Nowotny, a member of the European Central Bank and the president of the Austrian central bank, urged last week (13 September). He told a conference that there was “no demonstrable net advantage” in allowing the practice.
However, some centre-right MEPs are warning that tight restrictions could be counter-productive – the same argument that the UK is using in the Council of Ministers, where negotiations are as fraught as in the Parliament.
The stakes were raised further with the publication on 31 August of a report commissioned by the government of the UK, where most of the EU's financial trades take place. It warned of the potentially “disastrous” consequences of restrictions that could force high-frequency traders out of the business and dramatically reduce liquidity in the markets.
Mifid II updates a 2007 law that introduced greater competition among financial exchanges and covered just equities. The draft legislation also aims to remedy some of the previous directive's weaknesses and forms part of the EU's contribution to measures aimed at shoring up the world's fragile financial system and limiting market turbulence. But the legislation goes much further than the original law, imposing a raft of new measures aimed at bringing in more transparency to financial trades and discouraging risky activities.
The Commission's original proposal was met with widespread criticism from the financial industry, and many observers fear that the Parliament and the Council are doing little to improve matters.
“The Parliament and, to some extent, the Council are addressing the sub-optimalities of the Commission's proposal,” said Christian Krohn, a managing director at the Association for Financial Markets in Europe (AFME), a body representing participants in wholesale financial markets. “But in other areas they are going in the opposition direction and taking otherwise beneficial and positive proposals from the Commission and undermining or diluting them, or deleting them entirely.”
Other contentious issues being considered by the Parliament include the removal of a waiver from having to publish the volume of certain large trades – a move which traders say would cut the amount of liquidity; and Parliament and Council plans to limit to non-equities a new kind of trading venue, known as an ‘organised trading facility'. Once the Parliament and Council of Ministers agree on their separate positions, they must approve a compromise text before it can become law.