French Finance Minister Pierre Moscovici revealed Thursday the outlines of planned banking reforms including a ban on high frequency trading and speculation with food commodity derivatives, as well as limits on proprietary trading.
Moscovici said the reforms, which he plans to submit to the cabinet next month, aim to "separate activities that serve the real economy from speculative operations that banks conduct on their own account."
Banks would be forced to create separate units to conduct such trading which would face much higher regulation.
Moscovici told a forum organised by France's AMF financial market regulator that banks would be "prohibited from carrying out certain highly criticised speculative activities such as speculation on agricultural commodity derivatives or high-frequency trading."
A number of major banks and funds use high-frequency trading where computer algorithms take advantage of small differences of prices on different markets and can carry out thousands of trades in a fraction of a second.
Supporters say the practice provides liquidity to the market, but critics say it puts small investors at a disadvantage and that it can be disruptive.
The "flash crash" of May 6, 2010, when the Dow Jones index plunged 700 points in a matter of minutes, wiping out a trillion dollars of value, was blamed on one firm's algorithm selling off 75,000 stocks in 20 minutes.
Derivatives, or financial instruments whose value depends on that of an underlying asset, are widely used in the agricultural sector to protect against price fluctuations.
But speculation with agricultural commodity derivatives has often been blamed for magnifying rises in food prices.
The reforms would also reinforce market regulators and require banks to prepare plans on how they would wind up operations that have gone bust.
French banks declined to comment on Moscovici's proposals.
Only Societe Generale and BNP Paribas practice high-frequency trading.
© 2012 AFP
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