High Frequency Trading

Germany’s Lower House Approves High Frequency Trading Bill

On February 28, the Bundestag (Germany’s lower house of parliament) approved a bill aimed to prevent the abuse and associated dangers of high frequency trading.  The bill requires that high frequency traders obtain authorization, which has been unregulated up to now.  It also requires market participants to ensure that they have properly configured trading systems which will not cause market disturbances.  Additionally, a fee will be imposed on traders who make excessive use of high frequency trading systems and limits will be introduced in respect to the ratio between abandoned and executed orders.

Bafin (the German regulator) will have responsibility for supervising high frequency trading and will have information and intervention rights under the proposed legislation.  In particular, it will have the power to request a description of algorithmic trading patterns and trading parameters, and can prohibit the use of certain algorithmic trading strategies if they violate exchange rules or cause disruption in the markets.  Trading strategies which are conducted with the intention of disturbing trading or deceiving the markets will be considered to be market manipulation.

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

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.

Commodities and Futures Trading Commission Offers First Draft Definition of High Frequency Trading

Scott O’Malia, a commissioner for the Commodity Futures Trading Commission, has proposed a seven-part test to be used as “building blocks” towards defining “high-frequency trading”. Mr. O’Malia suggests that an established definition of “high frequency trading” would form the first part of a three-stage regulatory approach aimed at addressing the acceleration of technologies in futures markets. It is unclear how these principles would work in practice or whether all of the requirements would need to be fulfilled to constitute “High Frequency Trading”.

The full text of Mr. O’Malia’s letter can be found here.