Germany Turns Its Sights On High-Frequency Traders
Germany has become the latest European nation to look to impose rules to crack down on high-frequency trading, as new legislation in France to limit ultra-fast trading came into force today.
The German finance ministry this week published details of its High-Frequency Trading Act, which is designed to counteract the particular risks associated with HFT on Germany’s stock exchanges.
Automated trading has grown rapidly in recent years as technology has improved and equity markets have fragmented across multiple venues. Proponents of high-frequency trading say that more liquidity is being pumped into these venues, benefiting all investors.
Under the new German proposals, the definition of proprietary trading is being extended to include HFT, meaning that high-frequency traders will fall under the remit of Germany’s Federal Financial Supervisory Authority (BaFin), its financial regulator.
Market participants will be required to ensure that there are no disturbances to the markets, thereby preventing severe market swings. The new bill defines market manipulation, saying that trading activities that are not directed to a business transaction and disrupt the functioning of the trading system or delay or mislead trading participants will be punished. Stock market operators will also be able to impose a fee on participants for excessive use of the trading system under the plans, while market participants will be required to maintain an appropriate relationship between buying and selling orders and executed transactions. Alternative platforms in Germany, such as multilateral trading facilities, will also see the law applied to their venues.
“It is a very useful initiative from the perspective of a stock exchange that focuses on private investors,” said Christoph Boschan, managing director of the Stuttgart Stock Exchange, Germany’s second largest bourse behind Frankfurt.
The Stuttgart exchange is in agreement that BaFin’s powers are to be extended and the obligations of trading platforms and participants are specified.
“Overall, we see this as confirmation of our own efforts in the area of self-regulation in favor of private investors,” said Boschan. “In Stuttgart, we have had a restrictive approach to high-frequency trading for some time. Furthermore, it is in the interest of all financial market stakeholders that we create greater legal certainty in terms of the way we deal with high-frequency traders.”
The HFT bill is to be submitted to the German cabinet following the summer recess after consultation with the industry.
“High-frequency trading is a danger area that contributes to extremes on the market,” Elke König, head of BaFin, told Spiegel newspaper earlier this week. “The liquidity apparently created is an illusion because many of those deals are never actually executed. We could attach fees to these transactions that would render large-scale gambling for marginal yields unattractive. It would really make a lot of sense to institute this kind of a financial transaction tax.”
Meanwhile, in France, its financial transaction tax, which also includes a levy on high-frequency trading, came into force today.
To deter high-frequency trading, France is slapping a 0.01% charge on order cancellations above 80% of total orders with high-speed defined as 500 milliseconds. There is also a 0.2% levy on all share transactions issued by companies with a capitalization of more than €1bn as well as a tax on naked sovereign credit default swaps.
“Once you put a limit on things there is always going to be a way to find a way round it,” Yannick Naud, portfolio manager at Glendevon King Asset Management, a fixed income boutique based in London, told Markets Media.
The use of a financial transaction tax is also seen by governments as a way of deterring HFT, although the extent to which this works is hotly debated.
“The French financial transaction tax will mean the professional investor will just turn to swaps or derivatives,” said Naud. “I think, in the end, it’s the same as in the U.K. [which operates a stamp duty reserve tax of 0.5% on share purchases], the one that will be the most impacted will be the retail investor in France. So it’s not exactly the purpose of the tax, which was sold as a way to end speculation.”
Several countries in the European Union, including Germany, France, Italy and Spain, are expected to enact a joint financial transaction tax, perhaps as early as next year. France’s own version is seen as a barometer to its likely rollout. And the EU member states are also currently discussing the rules governing HFT as part of the updated MiFID II proposals, a key piece of securities reform looking to tighten up regulation in the wake of the 2007 original, that are currently snaking their way through the corridors of power in Brussels.
By contrast, in the U.S., which had a financial transaction tax from 1914 until 1966, support for it is in its infancy.
Trading and liquidity are areas in which education is needed.
Two of three fund managers expect equal or greater outlays under MiFID II.
'Best ex', dark trading and dual-listed shares are among issues.
The new EU regulations come into effect on 3 January 2018.
Brexit may end reciprocal fund access between the UK and the EU.