German HFT law drops licence requirement, may add resting times

The central pillar of a German draft law to curb high-frequency trading requiring all firms to have a licence has been removed, while provisions for minimum resting times may be included.

The central pillar of a German draft law to curb high-frequency trading (HFT) requiring all firms to have a licence has been removed, while provisions for minimum resting times may be included.

HFT firms may be buoyed after strict licensing rules requiring firms to register to trade on venues that offer trading in German stocks was wiped by the upper house during a preliminary reading of the bill in parliament. 

“Bundesrat is worried that a licence requirement may cause firms using algorithmic trading strategies to retreat from German trading venues, with negative effects on liquidity,” Dr Andreas Wieland, associate at law firm Shearman and Sterling, told The licencing requirement also demanded firms carry at least €730,000 of initial capital.

The draft bill received general approval with suggested amendments during its first reading in the parliament’s upper house, the Bundesrat, last Friday, and will have its first reading in the lower house on Friday where the details will be etched out.

The act would amend the country's Securities Trading Act, the German Banking Act and Exchange Act to include provisions for HFT trading across all financial instruments and give German market regulator BaFIN more powers to supervise electronic trading. It was first mooted in July and a draft was formally enacted on 26 September. The final version of the law will likely crystallise in the first quarter of 2013.

The upper house has also demanded further investigation into adding minimum resting times to the bill, as reports surface that such provisions will not be included in the final version of Europe-wide MiFID II rules.

“Bundesrat also asked the Bundestag [the lower house] to assess whether minimum resting times would be a suitable instrument to prevent abusive trading practices, which were not addressed in the government draft,” Wieland said.

Algo worries 

Firms involved in algo trading could also face regulatory pressure, as the draft bill asks firms to document every change to an algo, potentially raising trading costs and forcing small- and mid-tier brokers to outsource their algo business.

Duncan Higgins, head of electronic sales at agency broker ITG, said the law would not alter his firm’s business practices and that regulatory standards already in place were stringent enough.

“Regulators will find it hard to have the level of resources to look at the details of every algo in every market. It would be overwhelming and it’s difficult to see how they would demonstrate the benefit,” Higgins said. “There’s a lot of investment required to operate an algo trading business. It could push up costs to some extent, but more likely support the trend of small, medium and even large sized brokers choosing to use an algo trading partner,” 

He added that commercially sensitive algo data would need to be protected by regulators.

The bill also takes aim at multilateral trading facilities (MTFs), stating that statutory orders could be issued to determine more detailed provisions on the amount of fees and appropriate order-to-trade ratios, with penalties for HFT firms posting excessive quotes.

Pan-European MTF BATS Chi-X Europe CEO Mark Hemsley said the aims of the law were sound, but cautioned that singling out MTFs would be unfair.

“We believe BaFIN is taking a sensible approach to addressing concerns about systems’ performance and the quality of market liquidity by leaving trading venues to decide, in conjunction with regulators, the appropriate parameters in their market. However it is important that regulated markets and MTFs have the same rights and obligations in this regard,” Hemsley said.

The current wording of the bill states venues could set their own tick-sizes, although BaFIN acknowledged that this area is already controlled under guidelines set by the Federation of European Securities Exchanges.

Earlier this year German MEP Markus Ferber, the spearhead of the European Parliament's reading of MiFID II, supported the idea of a German HFT law. MiFID II will include provisions to stem predatory HFT trading such as outlawing the maker-taker pricing model, which offers a rebate to firms that post liquidity, and asking venues to set order-to-trade ratios to limit excessive numbers of quotes being posted. The final text of MiFID II will be ironed out between the European Parliament and the Council of the European Union with input from the European Commission early next year, with implementation expected in 2015.