* France's Lagarde says HFT should be banned in some cases
* UK's FSA: tougher rules must be targeted, proportionate
* Bank of France's Noyer says HFT is a real problem
(Updates industry reaction)
By Huw Jones and Nick Vincour
LONDON/PARIS, Nov 25 (Reuters) - Britain and France flagged on Thursday a looming crackdown on ultra-fast share trading that featured in May's brief "flash crash" freefall on Wall Street, alarming regulators and investors globally.
French Economy Minister Christine Lagarde said a form of computerised trading known as high-frequency trading (HFT) may need banning in some cases.
"My natural tendency would be at least to regulate, to oversee it very strictly and after a cost-benefit analysis of these methods, maybe to forbid it," Lagarde told a parliamentary commission hearing on financial speculation.
"Or at least give market authorities the power to forbid it in circumstances that are considered exceptional," she added.
Britain, Europe's biggest share trading centre and where HFT accounts for about a third of trading on the London Stock Exchange, also signalled that tougher rules were needed but that they must be proportionate and targeted.
HFT was simply the evolution of trading to a much faster pace due to advances in technology, said Alexander Justham, director of markets at the UK's Financial Services Authority.
"We are not here to turn the clock back," he told a TradeTech 2010 markets industry conference.
Computerised trading and methods such as algorithmic trading and HFT transact a huge number of trades in microseconds.
"If you drive so fast, the technology should be that you can brake as fast as well," Justham said.
Justham said HFT has narrowed bid/offer spreads but the jury was out on whether it has led to more efficient trading and on whether it has created unfair advantages in trading.
Justham said there were key differences between the U.S. and EU share markets such as controls on who can trade and availability of "circuit breakers" to slow sharp moves.
"We are absolutely not complacent about the general risk of what all this means. Has the playing field been tilted?" Justham said.
Bank of France Governor Christian Noyer told the same French parliamentary panel on Wednesday evening that HFT was a real problem.
"I would only see advantages if it was scrutinised as much as possible," Noyer said.
Industry officials said HFT takes place on regulated markets.
"The main issues are around credit derivatives and structured derivatives, all of which are happening in the dark. We're probably the most transparent part of the market," said Kee-Meng Tan, managing director at Knight Capital, a trading services provider.
Jim Farachi, director at Getco, a key player in HFT, said: "High frequency trading firms are market makers who utilise technology to provide liquidity to the market in a more efficient way than pit or phone trading."
The U.S. Securities and Exchange Commission, the FSA's equivalent on Wall Street, said this month it will take further steps to make markets more stable after the flash crash by zeroing in on lightning-fast computerised trading that could "go crazy".
MIFID REVIEW
Exchanges like the LSE and the Madrid bourse are taking steps to attract HFT firms as they face downward pressure on general volumes due to the weak economy.
Tougher regulation is inevitable, however.
European Union share trading rules, known as markets in financial instruments directive or MiFID, introduced in November 2007 have sparked competition in share trading, greater use of computerised trading and fragmentation of markets.
The EU's executive European Commission is due to present legislative amendments to MiFID by next summer with the European Parliament and EU governments having the final say.
Justham said that the review should look at tougher limits on "carve outs" for some firms from MiFID's transparency rules and look at forcing a wider spectrum of trading firms to report trades so that regulators have a full and speedy picture of the market when things go wrong.
Trading firms may also need to "stress test" their computerised trading models or algorithms before they go live.
Justham later told Reuters that any policy changes for markets in Britain would come under the umbrella of the MiFID review but there could be changes in the way the FSA supervises the domestic market in the meantime.
The MiFID review will also crack down on dark pools or anonymous, off-exchange trading venues that have flourished.
"The proliferation of dark pools was a tragic error and I would like us to come back to it," France's Noyer said, noting that it was up to market supervisors to address the matter.
Britain's government announced earlier this week it was sponsoring a study by scientists into the impact of HFT on London as a financial centre over the coming decade and this would help shape the MiFID review. (Additional reporting by Jean-Baptiste Vey in Paris and Luke Jeffs in London; Editing by Ruth Pitchford)