Germany Hits The Brakes On High-Frequency Trading
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The German government is set to become one of the first in the world to impose strict limits and regulations on the practice of high-frequency trading (HFT), reported the New York Times on Monday, as concerns continue to grow over HFT impact on stock market volatility.
The German government is set to become one of the first in the world to impose strict limits and regulations on the practice of high-frequency trading (HFT), reported the New York Times on Monday, as concerns continue to grow over HFT impact on stock market volatility.
HFT, as defined by Reuters, is the process of plugging algorithms into computers to “generate numerous, lightning-speed automatic trades designed to make money from arbitrage on razor-thin price differences and movements.”
In the past, high-frequency traders have been blamed for the “Flash Crash” in 2010 – when the Dow Jones Industrial Average plunged about 1,000 points only to recover those losses within minutes – while analysts say that the practice can amplify market movements, increase market fragility, inflate asset price bubbles, and worsen market crashes.
Related: “Flash Crash” Report: No Model of Clarity, Explanation, Future Prevention
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The German draft legislation, as such, “is deliberately arranged so that the Finance Ministry has the capability of making things more precise through provisions, and the stock markets are required by the law to be aware when the next trick from high-frequency traders pops up,” said a government official, speaking on condition of anonymity, to NYT.
And according to a draft law seen by Reuters, German high-frequency traders in the future will need prior authorisation before they engage in such activity, while excessive order-to-trade ratios will also be curbed.
[quote]“We estimate that up to 40% of the trading sales in Germany [are] now being generated by this kind of trade, and estimates for some foreign markets are even higher,” told a senior official from the German finance ministry to the Wall Street Journal. “The goal of the German law is to limit the risks associated with high-frequency trading.”[/quote]The bill must now be approved in cabinet on Wednesday before moving on to the Bundestag, or the lower house of the German parliament. According to WSJ, similar legislation may also be discussed by the European Union in Brussels soon, with pressure on other European leaders to support EU-wide regulation.
Needless to say, high-frequency trading firms are unlikely to welcome tighter rules. Remco Lenterman, chairman of the FIA European Principal Traders Association, told WSJ, “we think a one-size-fits-all approach would be very harmful. These order-to-trade ratios could be harmful if not set on the right level.”
Related: Greed On Speed: The Sins Of High-Frequency Trading
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Related: Computers To Replace Equity Traders
Deutsche Börse, the main German stock exchange, though backed the proposal and said that it would welcome the greater supervisory powers that regulators would have under the proposed law.
[quote]“It is good for all parties acting on the German financial market that we now have legal certainty how to deal with high-frequency traders,” the exchange said, as cited by NYT.[/quote]
