Germany Does What The SEC Hasn't - Prepares To Ban HFT
The EU assembly just voted affirmatively to impose a spate of rules to control 'high-frequency-trading that, as the WSJ reports, was advanced by Germany following their concerns that speedy traders have brought instability to markets. It is somehow reassuring that three-years after we first brought HFT to the mainstream's agenda, at least one nation is taking it seriously, doing something about it, instead of being filibustered into the 'liquidity-providing' meme. The rules will initially require registration, collect fees on excessive use of HFT methods, and install circuit breakers with the goals to "limit the risks associated with high-frequency trading" per a senior German FinMin; but the more stringent rules to come will have the greatest impact as they intend to include requirements for orders to rest on the exchange book for at least half-a-second, and potentially order-to-trade ratio caps. Not surprisingly, the HFTs believe a "one-size-fits-all approach would be very harmful." Indeed - to their profits.
BERLIN—Germany is set to advance a bill Wednesday imposing a spate of new rules on high-frequency trading, escalating Europe's sweeping response to concerns that speedy traders have brought instability to the markets.
The measure seeks to require traders to register with Germany's Federal Financial Supervisory Authority, collect fees from those who use high-speed trading systems excessively, and force stock markets to install circuit breakers that can interrupt trading if a problem is detected.
"The goal of the German law is to limit the risks associated with high-frequency trading," he said.
Germany's push comes as regulators and investors on three continents fret over the recent dominance of high-frequency traders, which often profit from paper-thin differences in stock and derivatives prices, and the role their computer programs may have played in some of the market's most frantic moments since the financial crisis.
In May 2010, in the so-called flash crash, the Dow Jones Industrial Average plunged 1,000 points before recovering most of its losses within hours. The exact causes of the selloff are disputed.
More recently, Knight Capital Group Inc. KCG +5.21% lost $440 million in a computer trading glitch...
... Germany hopes its bill will put pressure on other European leaders to support EU-wide regulation for high-frequency trading.
... establish the Parliament's position on a number of stringent new rules, including "speed bumps" for high-frequency trading.
These include the requirement for orders to rest on the exchange order book for a minimum of half a second—an eternity for firms accustomed to trading in millionths of a second—before they can be canceled or modified, and penalties for high cancellation rates.
On Aug. 1, France introduced a high-frequency trading tax as one of the three levies that comprise its financial-transaction-tax package.
In the U.S., regulators have struggled to get a grip on the issue. The Commodity Futures Trading Commission this year formed a group to define high-frequency trading in order to better track it, while the Securities and Exchange Commission has announced plans to build a "consolidated audit trail" that can monitor frenetic trading activity.
The SEC also is investigating whether some high-speed firms use special advantages provided by exchanges to gain an edge over ordinary investors, according to people familiar with the matter.
Industry advocates caution against regulations that could hamper the ability of traders to react quickly to market shifts and manage their risks.
Imposing caps on the number of trades or instituting order-to-trade ratios, as proposed in the German bill, could restrict traders from being able to revise their quotes, the price at which they buy or sell stocks, based on new information, they say.
"We think a one-size-fits-all approach would be very harmful," warns Remco Lenterman, chairman of the FIA European Principal Traders Association, which represents firms that trade their own capital.