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Traders can still influence EU article

When the European Parliament approved the Investment Services Directive, including the controversial Article 27, hearts sank across the City of London.

Investment banks and brokers fear the article, which requires all systematic internalizers to execute orders at the quoted price, is a backdoor concentration rule that will force volume on to exchanges by making it uneconomical to trade off exchange as principal for a large proportion of orders.

The directive must still be adopted by the EU?s Council of Ministers, but it will become a reality. However, the magnitude of the article?s impact is uncertain and there is still time to influence key details that could have profound implications.

The definition of standard market sizes is a concern. Firms that trade as principal below the standard size will be required to quote firm prices, effectively turning them into market makers. The standard market size will be calculated as the average value of shares traded over a period of time. A high standard size would require traders to commit capital to ensure prices for a large proportion of trades.

?What we want to see now is that definitions of standard market size are sufficiently realistic so as not to damage liquidity,? says Alan Yarrow, chairman of the securities trading committee at the London Investment Bankers Association.

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