Draft legislation would
authorize the German Federal Financial Supervisory Authority
(BaFin) to oversee high frequency trading with a special right to information
that would enable better surveillance of firms engaged in algorithmic trading
and the systems used for the trading. In particular, under the draft High Frequency Trading Act, BaFin could
require from the firms a description of their algorithmic trading strategies
and the specifics of the trade parameters or trade limits. In addition, the
legislation would authorize exchanges to ban the use of a specific algorithmic
trading strategy if it violates exchange regulations or to remedy undesirable
situations that could have an adverse impact on the orderly conduct of exchange
trading. In order to aid in regulatory surveillance efforts, the draft would
require electronic identification for orders generated algorithmically. The
German federal government is committed to the Act, which is designed to curb
the risks associated with algorithmic high frequency trading. The legislation
must be considered by the Bundestag and the Bundesrat.
High frequency traders must
be authorized by BaFin, including traders admitted to a trading venue as
trading participants, as well as firms to which trading participants grant
electronic access to the trading venue. However, pursuant to the EU passport
under the Markets in Financial Instruments Directive (MiFID), securities firms domiciled
in another EU state with state approval for trading on their own accounts would
not need additional authorization in Germany.
Under the draft, asset
management companies, investment services enterprises and investment stock
companies engaged in algorithmic trading must structure their trading systems
so that they do not disrupt the market. Specifically, firms engaged in
algorithmic trading must ensure that their trading systems are resilient, have
sufficient capacity and are subject to appropriate trading limits. Algorithmic
trading is defined as trading in financial instruments for which a computer
algorithm automatically determines the specific order parameters, such as a
decision to initiate an order, its timing, price and quality.