Germany Adopts New Prudential Rules for High-Frequency Trading
Cleary Gottlieb Steen & Hamilton
On May 15, 2013, the German Act on the Prevention of Risks Related to, and the Abuse of, High-Frequency Trading (Gesetz zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel) entered into force. The Act preempts in part a regulation of algorithmic trading that has been proposed on the European Union level in connection with the revision of the European Markets in Financial Instruments Directive (“MiFID II”). In particular, the Act introduces new prudential requirements for proprietary trading firms engaging directly or indirectly in high-frequency trading (“HFT Firms”) on organized markets or multilateral trading facilities in Germany. Subject to certain transition periods, HFT Firms must obtain a license for financial trading institutions and comply with the minimum capital and organizational requirements for financial trading institutions set forth in the German Banking Act. The Act also requires exchanges and other trading venues in Germany to implement prudential limitations on high-frequency trading, and to comply with certain organizational requirements. In our memorandum, we provide an overview of the high-frequency trading activities subject to regulation and the licensing requirements for HFT Firms under the Act.