Germany BaFin Describes Planned Regulation of HFTs

The German regulator BaFin released the attached materials regarding planned requirements under proposed high-frequency trading ("HFT") legislation, which included information on new rules that would be authorized by proposed legislation that the federal German government is considering. The required elements of the legislation would include the following:

HFT traders would be required to be authorized by BaFin;

HFT systems would be required to have effective risk controls including the following elements:

• their trading systems are resilient, have sufficient capacity and are subject to appropriate trading thresholds and limits;
• no erroneous orders are transmitted and that the system's functioning in a way that may create or contribute to a disorderly market is prevented; and
• their trading systems cannot be used for a purpose that violates market abuse regulations or trading venues' regulations;

Certain trading practices would be deemed manipulative (quote stuffing, momentum ignition, layer and spoofing, each as defined in the attached);

Trading venues must have in place measures to limit volatility, and must charge separate fees for excessive use of the trading venues, particularly for cancelled orders;

HFT will be required to ensure an "appropriate ratio" between cancelled and executed trades;

Algo trades will be subject to electronic tagging; and

Securities regulators will have authority to obtain information from algo traders.