Germany is the latest jurisdiction to tackle the issue of high-frequency trading, announcing new rules to govern the practice.
The German Federal Financial Supervisory Authority, known as BaFin, explained Thursday that its federal government has recently put forward new legislation to curb the potential risks associated with algorithmic high-frequency trading. The legislation has yet to be passed in final form.
Under the draft rules, high-frequency traders who are currently not supervised by BaFin will have to register with the regulator, including traders that are direct electronic access clients. Unfiltered access will be prohibited.
Additionally, firms such as asset managers that are engaged in algorithmic trading must structure their trading systems so that they do not disrupt the market. They will have to ensure that their trading systems are resilient, have sufficient capacity and are subject to appropriate trading thresholds and limits; they must prevent erroneous orders and market abuse; and, they will have to ensure that they have effective business continuity arrangements.
The act will also establish that certain algorithmic trading practices may be considered manipulative. Trading venues will have to take measures to ensure that exchange prices are being determined in an orderly way, even in the event of significant price fluctuations. Marketplaces will also have to charge added fees for excessive use of their systems, particularly if disproportionate amounts of orders are entered, changed, or cancelled; traders will be required to ensure an appropriate order-to-trade ratio; and trading venues will have to set an appropriate minimum tick size.