Share trading inside banks must be regulated directly and all derivatives eligible for clearing should be traded on an electronic platform, draft European Union plans showed on Thursday.

The EU's executive European Commission is due next week to publish its plans for sweeping reforms of the bloc's markets in financial instruments directive (MiFID) which forms a cornerstone of the single capital market.

MiFID has driven further competition, innovation and better protection of investors and there is evidence it has reduced trading costs per transaction and speeded up trading, the draft consultation paper says.

But as part of global efforts to tackle less regulated and more opaque parts of the financial system, "significant extensions" are required in MiFID as regards the organization, transparency and oversight of various markets, it added.

The consultation paper obtained by Reuters showed the EU's executive wants to crack down on trading inside banks and brokers which exchanges say reduces market transparency.

"The Commission services consider it appropriate to define and create a new sub-regime for crossing systems within the family of organized trading facilities," the document said.

"Such a regime would cover not only equities but also other types of financial instruments." It also says that derivatives contracts traded on the vast off-exchange market should be transacted on an electronic platform of some sort if they can be centrally cleared.

This backs agreement at the Group of 20 leading developed and emerging market countries (G-20) for standardized derivatives to be traded on platforms, where appropriate, rather than bilaterally between banks.

"At a minimum this would imply that trading on exchanges and electronic platforms becomes the norm when the market in a given derivative is suitably developed and when the shift to such platforms further the G-20 commitment," the document said.

The document said all clearing-eligible derivatives that are "sufficiently liquid" should move to either an exchange, a multilateral trading facility (MTF) or a new category of trading platform to be defined in MiFID.

This echoes a new law in the United States which also pushes derivatives trading onto electronic platforms and creates a new category of swap execution facility.

The consultation also proposes a new regime within MiFID to regulate the use of computer of high-frequency trading (HFT).

This refers to ultra fast execution of trades which has raised concerns among regulators, particularly after the "flash crash" on Wall Street in May when blue chips went briefly into freefall.

Proponents say it provides up to a third of liquidity on markets like the London Stock Exchange.

"Perhaps the most significant new risk arising from automated trading is the threat it can pose to the orderly functioning of markets in certain circumstances," the document said.

The EU executive outlines a specific regime for automated trading of which high-frequency trading would be a subcategory and proposes several requirements such as risk controls and ensuring that orders can only be cancelled after a certain period.