High-Frequency Trading Faces EU Market Abuse Probe

(Bloomberg) -- High-frequency trading faces a European Union clampdown, as regulators investigate whether traders could use the practice to manipulate financial markets.

The European Commission, the EU’s executive arm, said it’s summoning hedge funds and banks “in the coming months” for fact-finding talks on the practice, as it considers stricter rules on market abuse due before the end of the year.

“We’re looking into high-frequency trading as part of the review of the Market Abuse Directive,” Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, said in an e-mail. “We want to make sure that the review captures technological developments.”

U.S. lawmakers have questioned whether the practice is benefiting Wall Street at the expense of individual investors. The Securities and Exchange Commission sought input from securities professionals on strategies used by high-frequency traders in January. EU officials met financial companies the same month to gather information.

High-frequency trading entails hedge funds and other firms using powerful computers to execute orders in milliseconds to profit from tiny discrepancies in the prices of shares.

“The high-frequency trading case is difficult because no- one is saying it does any harm,” Simon Gleeson, a regulatory specialist at Clifford Chance LLP, said in a telephone interview in London today. “No one has complained about it.”

Abusive Trading

The current Market Abuse Directive, which came into force in 2005, sets common rules across the 27-nation EU. The law requires firms to report suspected abusive trading to regulators.

“I will look at the Market Abuse Directive to extend its coverage,” Barnier said in a speech in London last month. “We cannot have different sanctions in case of non-application of the rules or abuse.”

Changes to the law would need to be approved by finance ministers and members of the European Parliament before entering into force.

The practice now accounts for 42 percent of the U.S. market, Celent, a consulting firm in Boston, said in a study in December. Proponents of the technique say it has lowered fees, boosted liquidity and increased volume. Firms such as Citadel Investment Group LLC, Getco Holding Co LLC, and Optiver Trading U.K. Ltd. operate high-frequency trading in Europe.