Europe’s most senior markets regulator has warned that new rules agreed by Brussels may not fully catch potential market abuse by high-frequency traders.
Steven Maijoor, chairman of the European Securities and Markets Authority, said new rules agreed on Wednesday would strengthen its ability to monitor markets but oversight of complex trading strategies could still be difficult.
European policy makers on Wednesday finalised new rules to tackle insider trading and market abuse and clamp down on attempted manipulation of the foreign exchange markets and benchmarks such as Libor.
“We believe that, with robust consolidated post trade information, almost all misconduct can be detected either at firm, venue or market level,” he said. “A true minority, like cross-market layering, will still be hard, but not impossible to detect,” he told delegates at the annual meeting of the Federation of European Stock Exchanges in Berlin.
Regulators have become concerned about their ability to monitor markets and hand out tougher penalties amid the growing use by investors of high-speed computers to trade in and out of markets in fractions of seconds.
Mr Maijoor said he was most concerned about layering – in which a brokerage deliberately makes and then cancels large amounts of orders, creating a false impression of liquidity in a stock. Under European rules, exchanges and trading venues are largely responsible for monitoring suspicious trading patterns.
Arlene McCarthy, the rapporteur in the European parliament for the Market Abuse Review, told the conference that: “We didn’t get where we wanted to be on cross-border surveillance . . . but we did want to impress the states that there can be co-operation.”
“We’ve been told that it will have to be dealt with in Mifid as we were told it’s a structural markets issue. It’s a little bit negative,” she said.
Mr Maijoor also stressed to regulators to clarify rules for a single operator of a unified system to report the prices of trades from across fragmented markets. Unlike the US, Europe lacks a price reporting system, known in the industry as a consolidated tape.
Take-up of various industry initiatives has been weak, with users complaining that the service is too expensive and quality of information poor. Critics also argue that the provision of trade data are an important generator of revenues for incumbent exchanges.
“I do not know if the new rules will effectively bring at least one truly, full consolidated tape; but I think that it would be a lost opportunity if, as some say, they did not,” he said. “We know how important it is to get a consolidated tape. For market surveillance, for assessing the quality of services to investors, you need to have an overview of the market.”
Policy makers in Brussels are preparing for final negotiations over the legislation governing the region’s securities markets, known as Mifid. Discussions to finalise the new rules are expected to be completed by the end of the year.