The long arm of the law

The buy-side has traditionally been spared from the burden of most regulatory trade reporting requirements, passing this responsibility on to their brokers who hold the exchange memberships. But this principle looks to have been challenged by BaFin, the German financial regulator, with the introduction of its High Frequency Trading Act. One of the aims of the law is to ensure that algorithmic flow can be better monitored by the regulator. This will require all buy-side (as well as sell-side) automated trading strategies to tag their orders with a unique identifier. But like most draft legislation, it is ambiguous and does not adequately define how the tags should be constructed or exactly who should tag in what circumstances. In its current form, the draft legislation raises several questions which need to be addressed before its full implementation:

1. If a buy-side algo sends an order to a sell-side algo, who tags it? Just the buy-side as the originator, just the broker as the last owner, or both parties? What if my broker white labels another broker’s algo?
2. Exactly when does my spreadsheet portfolio management system become an automated trading engine required to tag orders? I want to automate to cut costs but this discourages me from becoming more efficient!
3. If I change my algo frequently, do I use a new ID each time? What about different versions of the same algorithm?

As ever, the devil will be in the detail, but as the long arm of the law extends its reach, it’s clear the buy-side can no longer hide behind the sell-side on regulatory matters such as this.

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