European Union financial services chief Michel Barnier has vowed to clamp down on high frequency trading with some of the toughest legislation in the world.
The controls, first outlined several months ago, include introducing mandatory tests of algorithms to minimise systemic risk, as well as introducing 'circuit breakers' to bring a halt to trading if price volatility spirals out of control.
"With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world," Barnier said in an e-mail statement. "While HFT trading might bring some benefits, we need to make sure that it doesn't cause instability, and isn't a source of market abuse. That's what these rules set out to achieve."
The proposed changes form part of the EU's overhaul of wider market legislation, known as Mifid. A vote will be made by the EU assembly tomorrow evening, and will be a step towards formal adoption by the parliament, with EU governments also having to sign off on the plans.
High frequency trading involves using complex computer algorithms to buy and sell large volume shares at high speed, to take advantage of micro pricing differences in different markets world wide. High frequency trades now make up around a third of the volume made on exchanges such as the London Stock Exchange.
The trading practice has become incresingly widespread, but it has proved to be controversial. The Flash Crash of 2010, which resulted in the Dow Jones Industrial Average briefly dropping almost 1,000 points, with anautomated trade execution system being blamed for the incident, focussed attention on the practice.
High frequency trading has come under the spotlight again in recent weeks, following claims by financial writer Michael Lewis in his book Flash Boys that securities markets are rigged in favour of high-speed traders.
In separate news, futures market CME Group has been sued this week by three of its users who alleged that information was sold high frequency-traders ahead of other traders. The company perpetrated "a fraud on the marketplace," according to a complaint filed April 11 in Chicago federal court.
Sign up for CIO Asia eNewsletters.