The European Union is considering introducing new regulations to limit and punish high frequency trading and algorithmic trading. The EU financial services chief, Michel Barnier, has said the tougher market-abuse rules are needed because current sanctions are too weak. Therefore the EU now wants to list “specific” examples of strategies using algorithmic trading and high-frequency trading” that should be banned and punished by regulators as market manipulation.
The draft proposal outlines various steps to clamp down on market abuse and to improve investor protection and reduce volatility.
“There are particular automated strategies that have been identified by regulators which, if carried out, are likely to constitute market abuse,” the document says. “Further identifying abusive strategies will ensure a consistent approach in monitoring and enforcement by competent authorities.”
In May 2010, the Dow Jones Industrial Average briefly lost almost 1,000 points due to high frequency trading, causing the so-called “flash crash”. Since then these high frequency traders have come under scrutiny by regulators both in the US and in Europe.
New sanctions have been suggested in the draft proposal, whereby regulators would be given more power to set maximum fines for financial services companies of at least 10 percent of their annual sales. Individual traders would face fines of at least 5 million euros ($6.8 million) for the worst infractions.
According to the new proposed regulations, “Traders found guilty of “intentionally” engaging in insider dealing and market manipulation should face criminal sanctions that are, “effective proportionate and dissuasive.”
The new regulations will have to pass approval from European governments and members of the European Parliament.