The German government started working on the High Frequency Trading (HFT) Act in July 2012. The law entered into force on 15th May 2013, with an implementation period of six to nine months. While the final law is in German, BaFin (the German financial regulator) provided an English website that outlines the key points of the Act and a second web page with FAQs.
The German HFT Act covers the following:
- Supervision: Firms trading exclusively on their own account and providing no additional banking services were not supervised by BaFin before the introduction of the German HFT Act. Most HFT firms fall into this category. Thus, the Act explicitly introduced BaFin supervision for HFT firms. This requirement covers not only German trading firms but also any foreign trading firm even if it trades only indirectly via DMA on German markets.
- Risk Controls: 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 their trading systems should have sufficient capacity and appropriate trading limits. Furthermore, their systems must function in such a way as to prevent the creation of a disorderly market, and prevent market abuse.
- Market Manipulation: The Act broadens the definition of market abuse. It adds certain behaviour to the definition of market abuse, such as entering an order without the intent to trade but with the aim to signal misleading or incorrect information.
- Order to Trade Ratio and Tick Size: Exchanges are required to define a minimum tick size and order to trade ratio that is appropriate for each specific instrument.
- Electronic Identification of Algorithmic Trading: The Act mandates that exchanges have to implement rules requiring all exchange members to flag all algorithmically generated orders with a unique key when sent to a German exchange so as to allow the market surveillance system to allocate all orders to the generating algo. The State of Hesse, which regulates the Frankfurt Stock Exchange and Eurex, published implementation guidelines. In addition, Fidessa’s own approach to the challenges around algo flagging* has been recommended by the FIA, FIA Europe and FIA EPTA in their joint response to the ESMA MiFID II consultation.
- Management of Order-to-Trade Ratio: The Act requires trading firms to manage their own order-to-trade ratio on a monthly basis.
It is noteworthy that most of these points appear in similar form in current drafts of MiFID II / MiFIR, MAD or MAR. However, those European legislations are not expected to be implemented before late 2016.
* First presented at IDX, London, June 2014
Last updated 5th August 2014