hft

German Legislation to Regulate Algorithmic Traders and Trading Strategies on German Trading Venues

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On July 30, the German Ministry of Finance presented new draft legislation in the form of an “Act for the Prevention of Risks and the Abuse of High Frequency Trading” (Entwurf eines Gesetzes zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel).

Highlights include:

  • Inclusion of an extended definition of proprietary trading which will trigger a license requirement as a financial services institution under the German Banking Act as well as supervision by the German financial authority (“BaFin”).
  • High Frequency Trading (“HFT”) firms will be subject to the general regulatory framework applicable to investment firms under the German Banking Act and the German Securities Trading Act including a proposed “speed limit” for electronic trading in its regulated markets and multilateral trading facilities.
  • Investment firms, management companies and investment companies that are engaged in algorithmic trading would be subject to specific organisational requirements.
  • Trading participants will be obligated to ensure an adequate ratio between their purchase and sales orders and transactions which are actually executed.
  • Increased Enforcement Powers of Stock Exchange Supervisory Authorities and BaFin.
  • Certain HFT strategies will in the future fall under the revised German market abuse rules.

The new legislation will be adopted after the summer recess and will come into force in Q3/Q4 of 2012.

Sub-Committee of House of Lords EU Select Committee Report on MiFID II Proposals

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On July 10, a sub-committee of the House of Lords EU Select Committee published a report on the European Commission’s legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC) (MiFID II). Report.

The sub-committee concludes that:

  • There is a risk that, if introduced, the provisions relating to third country access could lock third country firms out of the EU markets, which would have an extremely damaging effect on European financial markets.
  • While the committee understands the need for greater transparency, a “one-size-fits-all” approach to pre-trade transparency must be avoided.
  • There is considerable uncertainty about the implications of the proposals for a new category of organised trading facility (OTF), and the proposal to increase regulation of algorithmic and high-frequency trading (HFT).
  • The MiFID II proposals have been rushed, and risk creating confusion rather than providing clarity on the regulatory framework for investment.