Germany’s “Best of …” HFT law

A Europe-wide consolidated regulatory framework can have many advantages for the financial industry. Laws such as MiFID II, MAD II and EMIR create a level playing field that simplifies competition on a pan-European scale. However, in the last couple of months a number of national legislations have been enacted that make the playing field a bit more uneven, again. There are, for example, the French and Hungarian transaction taxes (which are not the same), and the Spanish and Italian covered short sale bans (which are also not the same). The latest addition to this series is the German draft legislation to prevent risks and abuse of high frequency trading (Germany’s HFT law).

The current draft proposes a number of interesting points. Interesting insofar as it makes so few new points, but includes so many old ones.

The HFT law will close a gap in the existing German legislation. Currently, HFT firms trading only on their own account do not require a licence from the regulator and they are not supervised. The new HFT law mandates that such companies must obtain a licence and be continuously supervised by BaFin.

Firms that engage in HFT-type business must fulfil a number of requirements to ensure that markets are not distorted or interrupted. This means, for example, that trading systems should have sufficient capacity and appropriate trading limits. Furthermore, systems must function in such a way as to prevent the creation of a disorderly market, and prevent market abuse. These requirements sound very similar to the already implemented ESMA guidelines.

The HFT law mandates that exchanges must charge for an excessive amount of received messages relative to the executions (aka order-to-trade ratio). A very similar point is raised in the MiFID II proposal of the European Commission in Art. 51.

The HFT law also mandates exchanges to define minimum tick sizes. Again, that point is raised in the MiFID II proposal of the European Commission in Art. 51.

The new law sees the definition of market abuse broadened. It adds certain behaviour, such as entering an order without the intent to trade but with the aim to signal misleading or incorrect information, to the definition of market abuse. This appears to be very similar to the new proposed definition of market abuse in the MAR proposal of the European Commission in Art. 8.

In terms of timeline, the HFT law is still at an early stage. Germany’s Federal Ministry of Finance still welcomes comments on the draft until August 17th 2012. However, an ambitious plan suggests that the law may enter into force as early as Q3/Q4 2012.

The content of the HFT law is, for the most part, already covered either in the ESMA guidelines or mentioned in the current MiFID II and MAD II proposals. Thus, the German HFT law reads like a “best of” current legislative proposals. However, with neither MiFID II nor MAD II finalised yet, it seems odd that Germany is aiming to implement its own law so quickly and cannot wait for the rest of Europe.

Comments
2 Responses to “Germany’s “Best of …” HFT law”
  1. steve grob says:

    Interesting that Australia’s ASIC is coming out with HFT regulation too. This includes proposals for fines of upto 1M AUD for any fiirm that cannot trace origins of its orders or messages

  2. Christian Voigt says:

    The new German HFT regulation seems to have a massive scope. According to a recent FT article (http://www.ft.com/cms/s/0/50eaf73a-0702-11e2-92ef-00144feabdc0.html#axzz27N85N0lC) “Switzerland-based hedge funds using London intermediaries, for example, will have to be certified by German regulators to trade in the country.”

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