Germany intends to be one of the first countries to try to put the brakes on high-frequency trading, the computer-driven force that has been rattling stock markets across the globe.
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Chancellor Angela Merkel’s government is expected to approve draft legislation on Wednesday that would impose additional controls on such trading. The proposed measures include requiring that all high-frequency traders be licensed, requiring clear labeling of all financial products traded by powerful algorithms without human intervention and limiting the number of orders that may be placed without a corresponding trade. Traders who violate 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 here Tuesday, speaking on condition of anonymity because the government had not yet approved the legislation.
The legislation, which is subject to approval by both houses of Parliament, was written with an eye toward similar legislation being discussed in Brussels that could eventually apply across the European Union, which has 27 member nations, the official said.
Steps to pass the broader legislation on high-frequency trading are expected to proceed Wednesday, when the influential Committee on Economic and Monetary Affairsof the European Parliament will vote on how to update the law that governs securities trading to take account of new 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 latest occurred in early August in the United States, when problems with newly installed software caused the Knight Capital Group, a New Jersey broker that specializes in computer-driven trading, to lose $440 million. The problem led Knight’s computers to rapidly buy and sell millions of shares in more than 100 stocks for about 45 minutes after the markets opened on a Wednesday. Those trades pushed the price of many stocks up, and Knight lost money when it had to sell the shares back into the market at a lower price the next day.
The Knight episode raised alarms on Wall Street and in Washington, but no new curbs have yet been proposed for high-frequency trading in the United States.
In Berlin, German officials have acknowledged that the technological advancesof 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 interests 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 anonymously.
While high-frequency trading firms are unlikely to welcome tighter rules, Deutsche Börse, the main German stock exchange, based in Frankfurt, said it would welcome the greater supervisory powers that regulators would have 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 talks between representatives from the European Parliament and individual governments. Upon completion of that process, the draft measure would need the approval of the full European Parliament and all 27 of the European Union’s members 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 European measure are rules aimed at limiting the ability of algorithm-driven trading to exaggerate volatilityin financial markets.
Markus Ferber, the lawmaker appointed by the European Parliament to report on the proposal, has recommended including rules to slow trading by a half-second, require all trading venues to institute ways to halt trading immediately and make 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 in Brussels. “Only such markets can serve the real economy.”
Mr. Lallemand said he expected the committee to approve Mr. Ferber’s recommendations on Wednesday. “The focus then should be that governments come up with an equally ambitious proposal,” he said, though he said the legislation still could be watered down.