High-frequency trading will be regulated for the first time in Germany after a parliamentary committee approved a bill requiring firms that use the computer-driven strategies to register with banking authorities.
The proposed law means HFT companies would come under the Kreditwesengesetz, or KWG, banking legislation, forcing them to open a regulated office in Germany if they want to trade in the nation, according to a draft bill passed by the parliamentary finance committee today. The lower house of parliament is due to vote on the plans tomorrow.
Germany is the first developed market to legislate on HFT, which uses computers to buy and sell securities in fractions of a second and profit from price discrepancies. The practice attracted the attention of regulators after the so-called flash crash in May 2010, when the Dow Jones Industrial Average briefly lost almost 1,000 points.
“We have passed important legislation on high-frequency trading, closing a gap in a previously unregulated area of the financial market,” Ralph Brinkhaus, a lawmaker in Chancellor Angela Merkel’s Christian Democratic Union and a member of the committee that drafted the legislation, wrote in an e-mail. “This brings us another step closer to fulfilling our goal from the coalition agreement to leave no financial product, no financial actor, and no financial market unregulated.”
Merkel faces pressure from the opposition Social Democratic Party to impose stricter rules on the finance industry in the run-up to federal elections slated for September.
Obtaining authorization under the KWG may increase costs for start-up trading firms, according to Artur Fischer, chief executive officer of Boerse Berlin.
“HFTs are not banks with other people’s money, so why impose regulation which only costs money and serves no purpose?” Fischer wrote in e-mailed comments. “If you put only your own capital at risk you currently don’t need any kind of license. The proposed law wants to change that in such a way that, even if it’s only your own capital, as soon as you use computer algorithms you have to be regulated.”
Requiring HFT companies to obtain KWG authorization and have a physical presence in Germany may make global trading firms participating in German markets liable to pay the European Union’s proposed financial-transaction tax, or FTT, according to Axel Troost, a member of the Left party who sits on the financial committee.
“We want the FTT to wipe out HFT,” Troost said today in e-mailed comments. “The KWG registration is an important requirement to achieve this objective.”
The European Commission has tabled a plan for a transaction tax that would set a rate of 0.1 percent for stock and bond trades and 0.01 percent on derivatives deals. The EU is trying to curb what it sees as a patchwork of local levies with a tax that it believes could raise 30 billion euros ($40 billion) to 35 billion euros a year.
London or Luxembourg could be the beneficiaries of an FTT in Germany, as trading migrates to centers which are opposed to introducing the levy, according to Dirk Klee, country head of Germany, Austria and eastern Europe at BlackRock Asset Management Deutschland AG in Munich.
“Financial markets are global,” Klee said in an interview in Frankfurt today. “An FTT scenario that would only go ahead with a few countries would mean that assets would shift into countries which don’t have FTT. Germany could be disadvantaged.”
HFT accounts for 40 percent of trading volumes on Deutsche Boerse AG’s cash-market segment, Xetra, and 30 percent of transactions on Eurex, Europe’s largest derivatives exchange, according to the Frankfurt-based company.
Deutsche Boerse shares slipped 0.4 percent to 47.80 euros at the close of trading in Frankfurt today, trimming the 2013 advance to 3.4 percent.