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ESMA seeks to consolidate MiFID rules on trading halts in volatile markets

European markets could make more use of trading halts if there is significant price movement in a related market, following a public consultation announced by the European Securities and Markets Authority (ESMA). The European authority is considering introducing trading halts to control and constrain trading if there is a risk of significant volatility. Trading halts are already used in US markets, although last month, US stock exchanges proposed changes to how trading halts are used, since they have in the past been blamed for exacerbating financial market volatility.

ESMA's draft guidelines on trading halts come under the Markets in Financial Instruments Directive (MiFID II), which states that EU countries can implement a trading halt “if there is a significant price movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction.”

If trading halts are introduced, the relevant financial market authorities will have to monitor trading in the 'related markets'. The current public consultation is on how trading halts should be communicated to market participants and other venues. The consultation focuses on the following issues:

  • the calibration of trading halts ;
  • the dissemination of information regarding the activation of mechanisms to manage volatility on a specific trading venue; and
  • the procedure and format to submit the reports on trading halts’ parameters from National Competent Authorities (NCAs) to ESMA.

ESMA will consider all comments received by 6 December 2016 and will publish its final report in Q1 2017.

Halts can cause 'wild price swings'

This is a move that echoes a proposal put forward by US stock exchanges last month. The Wall Street Journal reported that the US stock exchanges proposed changes that would “overhaul the way trading resumes after a halt caused by wild price swings, advancing a new system that could reduce the number of trading pauses but lengthen how long they last.” The article explained that “The revisions are designed to respond to problems exposed by a market rout on Aug. 24, 2015, when safeguards intended to limit extreme volatility were blamed for exacerbating the market turmoil.”

Controls for high-frequency and algorithmic trading

The need for mechanisms to control and constrain volatile trading has increased as technological advances have given rise to high-frequency trading and algorithmic trading. These new types of trading practices can cause so-called flash crashes, where a sudden, significant price drop in an instrument occurs without any warning followed by a swift reversion of the price. Trading halts have been introduced by some exchanges and regulators and there is already provision for them in EU law (in guidelines issued by ESMA in 2012 and in MiFID II guidelines). This public consultation, therefore, seeks to consolidate the EU's stance and treatment of trading halts and perhaps to make them more effective and create greater stability in European financial markets.

CTMfile take: This consultation seems to indicate that ESMA aims to strengthen the EU's position with regards to trading halts and increase stability in EU financial markets.

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