High-frequency traders in the European Union (EU) are set toface some of the toughest rules in the world, as legislators backedrules that they said would curb volatility and make marketssafer.

The limits include standards meant to keep the price incrementfor securities from being too small, mandatory tests of tradingalgorithms, and requirements that market makers provide liquidityfor a set number of hours each day. The curbs are part of revampedEU markets legislation approved by the European Parliament votingin Strasbourg, France.

The price increment rules and other measures requiring tradingto stop if “price volatility goes beyond a certain level” will slowdown high-frequency trading “to a more manageable pace,” MarkusFerber, the legislator who led the assembly's work on thestandards, said in an email before today's vote.

High-frequency trading in stocks grabbed headlines after theplunge known as the flash crash in May 2010, during which the DowJones Industrial Average briefly lost almost 1,000 points.Controversy returned with the publication of Michael Lewis's book“Flash Boys” on March 31. Lewis argues that the $22 trillionU.S. stock market is rigged in favor of speed traders, whom he saysprey on slower investors by getting faster access toinformation.

High-frequency trading involves using powerful technology andcomputer programs to execute orders in thousandths or evenmillionths of a second, profiting from fleeting discrepancies insecurity prices across different trading venues.

“Traders can move billions within milliseconds and thus enforcemarket volatility and even bring down whole stock exchanges, as the2010 flash crash has shown,” Ferber said. “This set of new ruleswill make European financial markets safer and more resilient.”

Under the EU measures, traders must have their algorithms testedon venues and authorized by regulators. Michel Barnier, the EU'sfinancial services chief, has said that the standards will be “oneof the strictest set of regulations for high-frequency trading inthe world.”

The assembly's vote paves the way for national governments inthe 28-nation bloc to give their final sign-off on the legislation,which in addition to high-frequency trading covers topics rangingfrom commodity-derivatives speculation to the establishment of anew type of trading platform.

The measures overhaul the EU's existing financial-marketrulebook, known as Mifid. While the law is set to apply two and ahalf years after it's published, some individual measures havelonger transition periods.

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