HFT Rules Will Hurt German Liquidity, Exchanges Say

Restrictions on the minimum time orders must be held in German equity markets would do little to increase safety, the nation’s exchanges said as lawmakers debated proposed legislation.

“The political, easily understandable argument that the introduction of a speed limit leads to more safety on the road is not applicable one-to-one to the capital markets,” Stefan Mai, head of market policy and European public affairs at Deutsche Boerse AG, said in a phone interview yesterday. “It will just introduce more complexity. Imagine an Autobahn with traffic lights every 2 kilometers. Will it slow traffic down? No. Because when the lights are green, traffic will race anew.”

Lawmakers are scheduled to hold a public meeting at 2 p.m. today in Berlin to discuss curbs on high-frequency trading, with remedies up for debate including one that orders must be kept in the market for at least half a second before they are canceled. HFT has come under increased regulatory scrutiny in Europe and the U.S. after the so-called flash crash in May 2010, when the Dow Jones Industrial Average briefly lost almost 1,000 points.

“Minimum resting times for orders will increase volatility,” Artur Fischer, co-chief executive officer of Boerse Berlin AG who will attend the meeting at the Bundestag, Germany’s lower house of Parliament, wrote in an e-mail. “At times of high volatility, no trading will take place and prices will have to be estimated rather than be based upon real volume.”

Circuit Breakers

The proposed measures include the use of circuit breakers to halt trading in affected stocks during periods of high volatility. An excessive usage fee may be introduced to impose financial penalties on firms that bombard an exchange or trading platform with orders, which can move prices to the detriment of other market participants.

Deutsche Boerse, the operator of the Frankfurt exchange, is in favor of most of the proposals because “it brings more transparency to the markets,” according to Frank Herkenhoff, a spokesman for the company.

The German measures will be in addition to proposed EU regulation of the industry. Restrictions on HFT are needed to make markets safer, according to Dorothea Schaefer, research director financial markets at the German Institute for Economic Research in Berlin.

“A high level of systemic risk is embedded in HFT,” Schaefer said. “While a human trader can withdraw in times of high levels of market stress, events such as the flash crash prove that computer trading systems do not, which can be very dangerous.”

Increased Competition

Incumbent exchanges in Europe, such as Deutsche Boerse and London Stock Exchange Group Plc, have come under increasing competitive pressure from alternative trading platforms which have sought to attract technologically advanced, high-speed trading firms. Bats Chi-X Europe, the largest pan-European trading system, said it took 24.6 percent of the market for the region’s equities in 2012.

High-frequency trading accounts for 40 percent of share trading volume on Deutsche Boerse’s Xetra platform and 30 percent of volume on its Eurex derivatives exchange, the Frankfurt-based company said.

“What has hindered market participants shifting liquidity from the incumbent exchanges is that they know that these are the reliable exchanges with strong supervision and safety provisions in place and nobody will run the risk of doing unregulated, unstable things,” Mai of Deutsche Boerse said.

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