March 29 (Bloomberg) -- European Union regulators may win powers to ban new financial instruments before they are sold, as part of an overhaul of the region’s market rules.
Such “precautionary” bans would be justified if a security “gives rise to significant investor protection concerns or poses a serious threat to the orderly functioning and integrity of financial markets,” according to a report by Markus Ferber, the lawmaker leading work on the measures in the European Parliament.
Ferber is seeking to bolster last year’s EU plans to revamp the region’s market legislation, known as Mifid. The rules were proposed by Michel Barnier, the EU’s financial services commissioner, to plug regulatory gaps exposed by the financial crisis that followed Lehman Brothers Holdings Inc.’s 2008 collapse. The crisis has shown that regulators need to be able to intervene in “disorderly markets,” the commission said when the plans were unveiled.
Ferber is also backing calls from other lawmakers in the parliament for high-frequency traders to face punitive fees when they create market volatility by placing excessive numbers of canceled orders.
Such traders should also be required to keep orders in the market for at least half a second before withdrawing them, Ferber said in an interview yesterday.
“Over 90% of orders in high-frequency trading are withdrawn or canceled before execution,” Ferber said. “So one could say there is more speculation behind it than real business interest.”
The fees for canceling too many orders should be obligatory “for all regulated markets in the European Union,” he said.
High-frequency trading, often used by hedge funds, entails using powerful technology and complex computer programs to execute orders in milliseconds to profit from fleeting discrepancies in the prices of shares across different trading venues.
Separately, the EU parliament today approved a deal on legislation to force trading of some over-the-counter derivatives through clearinghouses to safeguard financial markets.
The rules will empower EU regulators to decide on the types of derivatives that should be centrally cleared. Traders who flout the rules would face penalties including fines.
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