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According to some estimates, between 40 per cent and 50 per cent of transactions at the Deutsche Börse are based on algorithmic strategies. Buy and sell signals are issued at very short intervals, in some cases within fractions of a second, and financial products are only held for extremely short periods of time. Computer-based high-frequency trading using algorithms poses multiple risks of extreme and irrational price fluctuations, overloaded trading systems and new opportunities for abuse. The Federal Government has responded by drafting the High-frequency Trading Act, which will increase transparency, security and clarity.
The High-frequency Trading Act is a further building block in the new regulatory framework for financial markets. Consistent implementation of the new rules will make the financial system more resilient to crises. Germany is taking on a pioneering role with its draft legislation to regulate this area.
High-frequency trading will also be regulated more strictly at a European level under the revised Markets in Financial Instruments Directive, MiFID II. The German draft, which is modelled after the European Commission’s proposals, introduces national measures that anticipate and complement European efforts to regulate high-frequency trading.
The German Federal Government will work to close all existing gaps in supervision. To this end, the High-frequency Trading Act includes registration requirements for previously unregulated high-frequency traders.
The legislation will also impose stricter rules on high-frequency trading. In future, investment service providers and fund companies operating in this market segment will have to ensure that their trading systems do not negatively affect the market. The aim is to prevent extreme scenarios in which stock markets experience considerable fluctuations in a matter of minutes.