STOCK MARKET WATCH -- Thursday, 17 January 2013

[Demeter]

4. Traders warn Germany on HFT licensing

http://www.ft.com/cms/s/2/b87f4ac4-5e62-11e2-8780-00144feab49a.html#axzz2HvgVd3LT

...A proposal to licence financial market participants is a centrepiece of German plans for tighter regulation of high-frequency trading, or HFT – the use by automated traders of computer algorithms to generate trades in tiny fractions of seconds. Chancellor Angela Merkel’s government is moving unilaterally to place tighter curbs on HFT in advance of a pan-European overhaul of regulation, which is expected to take at least two more years. HFT has been blamed by some for bringing more instability to financial markets, and their role has been more closely examined by authorities globally after a series of high-profile incidents, such as the “flash crash” in the US in 2010.

But plans to oblige HFT traders to register in Germany, going beyond existing stock exchange laws, are being criticised as excessive by exchange groups including Deutsche Börse, and the FIA European Principal Traders Association, which groups Europe’s high-frequency traders. They warn that over-zealous regulation would drive trades away, possibly to less transparent venues.

HFT strategies are involved in about 40 per cent of trades through Deutsche Börse, which says high-speed trading plays a considerable role in narrowing spreads and improving market liquidity. The German parliament is holding a public hearing on Wednesday, at which exchanges and traders are expected to air their views on planned regulation.

Deutsche Börse says the bill would force many market participants to set up a branch or subsidiary in Germany to be able to register. It also says the requirement would hit any firms that use algorithmic strategies and not just high-frequency trading. Rainer Riess, managing director of Deutsche Börse and deputy chairman of the Frankfurt Stock Exchange, said the group was “very concerned” and warned such a registration requirement “would be an own goal for Germany’s financial centre”. About 70 per cent of trading on Xetra, Deutsche Börse’s cash equities platform, involves traders from outside Germany. Mark Spanbroek, general secretary of FIA EPTA, said: “We have to be very careful not to go from no regulation to over-regulation . . . This kind of rule will drive traders from the transparent environment of an exchange into less transparent over-the-counter transactions.” In a submission to German lawmakers Christoph Boschan of Börse Stuttgart, a regional exchange, said: “There is a danger that foreign market participants will withdraw from the German financial centre due to the high costs.”

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