WRAPUP 2-Computerised trades in EU face tougher rules

* France’s Lagarde says HFT should be banned in some cases

* UK’s FSA: tougher rules must be targeted, proportionate

* Bank of France’s Noyer says HFT is a real problem

(Updates industry reaction)

By Huw Jones and Nick Vincour

LONDON/PARIS, Nov 25 (BestGrowthStock) – Britain and France flagged
on Thursday a looming crackdown on ultra-fast share trading that
featured in May’s brief “flash crash” freefall on Wall Street,
alarming regulators and investors globally.

French Economy Minister Christine Lagarde said a form of
computerised trading known as high-frequency trading (HFT) may
need banning in some cases.

“My natural tendency would be at least to regulate, to
oversee it very strictly and after a cost-benefit analysis of
these methods, maybe to forbid it,” Lagarde told a parliamentary
commission hearing on financial speculation.

“Or at least give market authorities the power to forbid it
in circumstances that are considered exceptional,” she added.

Britain, Europe’s biggest share trading centre and where HFT
accounts for about a third of trading on the London Stock
Exchange (LSE.L: ), also signalled that tougher rules were needed
but that they must be proportionate and targeted.

HFT was simply the evolution of trading to a much faster
pace due to advances in technology, said Alexander Justham,
director of markets at the UK’s Financial Services Authority.

“We are not here to turn the clock back,” he told a
TradeTech 2010 markets industry conference.

Computerised trading and methods such as algorithmic trading
and HFT transact a huge number of trades in microseconds.

“If you drive so fast, the technology should be that you can
brake as fast as well,” Justham said.

Justham said HFT has narrowed bid/offer spreads but the jury
was out on whether it has led to more efficient trading and on
whether it has created unfair advantages in trading.

Justham said there were key differences between the U.S. and
EU share markets such as controls on who can trade and
availability of “circuit breakers” to slow sharp moves.

“We are absolutely not complacent about the general risk of
what all this means. Has the playing field been tilted?” Justham
said.

Bank of France Governor Christian Noyer told the same French
parliamentary panel on Wednesday evening that HFT was a real
problem.

“I would only see advantages if it was scrutinised as much
as possible,” Noyer said.

Industry officials said HFT takes place on regulated
markets.

“The main issues are around credit derivatives and
structured derivatives, all of which are happening in the dark.
We’re probably the most transparent part of the market,” said
Kee-Meng Tan, managing director at Knight Capital, a trading
services provider.

Jim Farachi, director at Getco, a key player in HFT, said:
“High frequency trading firms are market makers who utilise
technology to provide liquidity to the market in a more
efficient way than pit or phone trading.”

The U.S. Securities and Exchange Commission, the FSA’s
equivalent on Wall Street, said this month it will take further
steps to make markets more stable after the flash crash by
zeroing in on lightning-fast computerised trading that could “go
crazy”. [ID:nN08221886]

MIFID REVIEW

Exchanges like the LSE and the Madrid bourse (BME.MC: ) are
taking steps to attract HFT firms as they face downward pressure
on general volumes due to the weak economy.

Tougher regulation is inevitable, however.

European Union share trading rules, known as markets in
financial instruments directive or MiFID, introduced in November
2007 have sparked competition in share trading, greater use of
computerised trading and fragmentation of markets.

The EU’s executive European Commission is due to present
legislative amendments to MiFID by next summer with the European
Parliament and EU governments having the final say.

Justham said that the review should look at tougher limits
on “carve outs” for some firms from MiFID’s transparency rules
and look at forcing a wider spectrum of trading firms to report
trades so that regulators have a full and speedy picture of the
market when things go wrong.

Trading firms may also need to “stress test” their
computerised trading models or algorithms before they go live.

Justham later told Reuters that any policy changes for
markets in Britain would come under the umbrella of the MiFID
review but there could be changes in the way the FSA supervises
the domestic market in the meantime.

The MiFID review will also crack down on dark pools or
anonymous, off-exchange trading venues that have flourished.

“The proliferation of dark pools was a tragic error and I
would like us to come back to it,” France’s Noyer said, noting
that it was up to market supervisors to address the matter.

Britain’s government announced earlier this week it was
sponsoring a study by scientists into the impact of HFT on
London as a financial centre over the coming decade and this
would help shape the MiFID review.
(Additional reporting by Jean-Baptiste Vey in Paris and Luke
Jeffs in London; Editing by Ruth Pitchford)

WRAPUP 2-Computerised trades in EU face tougher rules