From today's New York Times. Let us hope we quickly follow!
Germany Wants Rules on Superfast Stock Trading By MELISSA EDDY and JAMES KANTER Published: September 25, 2012
BERLIN — Germany aims to be one of the first countries to attempt to put the brakes on high-frequency trading, the lightning-speed, computer-driven force that has been rattling stock markets across the globe.
Chancellor Angela Merkel’s government is expected to sign off on draft legislation Wednesday that would establish a set of checks and balances on those involved in such trading. The proposed measures include requiring that all high-frequency traders be licensed; mandating clear labeling of all financial products traded by powerful algorithms without human intervention; and limiting the number of orders that can be placed without a corresponding trade. Traders violating the limits, which would be set once the law took effect, would face a fine.
“The goal of the German law is to limit the risks linked to high-frequency trading,” a government official said Tuesday in Berlin, insisting on anonymity because the legislation had not yet been approved by the government.
The measure, which would require passage by both houses of Parliament before it could take effect, has been written with an eye toward similar legislation now under discussion in Brussels that could eventually apply across the 27-nation European Union, the official said.
Steps to pass European-wide legislation on high-frequency trading are expected to move ahead Wednesday, when the influential Committee on Economic and Monetary Affairs of the European Parliament will vote on how to update the current law that governs securities trading to take account of newer technologies.
The Europeans are not alone in their concern about high-speed computerized trading, which has led to several notorious market disruptions in recent years.
The most recent disaster occurred in early August in the United States, when problems with newly installed software caused the high-frequency trading firm Knight Capital to sustain $440 million of losses over the course of two trading days. The problem led the firm’s computers to rapidly buy and sell millions of shares in over 100 stocks for about 45 minutes after the markets opened on a Wednesday. Those trades pushed the value of many stocks up, and the company’s losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price the next day.
The Knight calamity raised alarms on Wall Street. Yet despite a U.S. Senate hearing on such trading last week, and a roundtable scheduled for next Tuesday by the U.S. Securities and Exchange Commission, no new curbs have yet been proposed for high-frequency trading in the United States.
In Berlin, German officials have acknowledged that the technological advances of recent years have led to irrevocable changes in the nature of trading and that the fast pace must be accepted. By adopting tighter controls, they say they hope to protect the interest of all market participants.
The German draft legislation “is deliberately arranged so that the Finance Ministry has the capability of making things more precise through provisions, and the stock markets are required by the law to be aware when the next trick from high-frequency traders pops up,” said the official who spoke only on condition of anonymity.
While high-frequency trading firms are unlikely to welcome tighter rules, Deutsche Börse, the main stock exchange, based in Frankfurt, said it would welcome the greater supervisory powers that would be given to regulators under the proposed law.
“It is good for all parties acting on the German financial market that we now have legal certainty how to deal with high-frequency traders,” the exchange said last week.
The European legislation under discussion, if approved in committee, is expected to become the basis for negotiations between representatives from the European Parliament and individual E.U. governments. Upon completion of that process, the draft measure would need the further approval of the full European Parliament and all 27 of the Union’s member states before becoming law.
The legislation would seek even tighter controls on fast trading than the German proposal. Among the most closely scrutinized aspects of the E.U. measure are rules aimed at limiting the ability of algorithm-driven trading to exaggerate volatility in financial markets.
Markus Ferber, the lawmaker appointed by the European Parliament to report on the proposal, has recommended including rules to slow down trading by a half-second; requiring all trading venues to institute ways to bring trading to an immediate halt; and making it more expensive for traders to cancel large volumes of orders.
Those rules were needed to “curb mere volumes brought by high-frequency trading” and “to restore genuinely liquid, orderly and fair markets,” said Benoît Lallemand, a senior research analyst at Finance Watch, a private group based in Brussels. “Only such markets can serve the real economy.”
Mr. Lallemand said he expected the committee to approve Mr. Ferber’s recommendations Wednesday. “The focus then should be that governments come up with an equally ambitious proposal,” he said, though he said there was still the possibility that the legislation could be watered down.
James Kanter reported from Brussels. Jack Ewing in Frankfurt and Nathaniel Popper in New York contributed reporting. Germany Wants Rules on Superfast Stock Trading By MELISSA EDDY and JAMES KANTER Published: September 25, 2012
