On July 30, the German Ministry of Finance presented new draft legislation in the form of an “Act for the Prevention of Risks and the Abuse of High Frequency Trading” (Entwurf eines Gesetzes zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel).

Highlights include:

  • Inclusion of an extended definition of proprietary trading which will trigger a license requirement as a financial services institution under the German Banking Act as well as supervision by the German financial authority (“BaFin”).
  • High Frequency Trading (“HFT”) firms will be subject to the general regulatory framework applicable to investment firms under the German Banking Act and the German Securities Trading Act including a proposed “speed limit” for electronic trading in its regulated markets and multilateral trading facilities.
  • Investment firms, management companies and investment companies that are engaged in algorithmic trading would be subject to specific organisational requirements.
  • Trading participants will be obligated to ensure an adequate ratio between their purchase and sales orders and transactions which are actually executed.
  • Increased Enforcement Powers of Stock Exchange Supervisory Authorities and BaFin.
  • Certain HFT strategies will in the future fall under the revised German market abuse rules.

The new legislation will be adopted after the summer recess and will come into force in Q3/Q4 of 2012.