03 February 2014

FN: HFT firms face German slowdown after rules change

A number of US and European high-frequency trading firms face the prospect of radically altering their strategies in Germany after an 11th-hour update to incoming regulations. As of February 14, any firm trading in Germany on a high-frequency basis will be required to be licensed with BaFin.

Many firms had anticipated that holding a so-called 'local licence' with other EU regulators, such as the UK’s Financial Conduct Authority, would exempt them from this provision. However, BaFin informed firms on January 22 that this would not be the case, according to three people familiar with the matter. Not one firm has obtained a direct licence with BaFin so far, according to two people with knowledge of the situation. Firms not authorised by BaFin, or who do not intend to pursue authorisation, will be forced to stop trading on a high-frequency basis or face possible fines. Sam Tyfield, a partner at law firm Vedder Price, said: “BaFin has said firms [locally] authorised in the UK are not entitled to an exemption because their capital requirements are not equivalent to German rules".

A drop-off in trading would be harmful to exchanges such as Eurex, one of the world’s largest derivatives markets, which is owned by German operator Deutsche Börse and is a popular market for HFTs. A director at a UK-based HFT firm said: “BaFin has informed us that our local UK authorisation does not exempt us from the German licensing requirement. It is not entirely unexpected, but means we may change some of our trading strategies in Germany, or start trading on another European exchange.”

HFT firms are not typically required to register with national regulators in the same way as investment firms because they do not trade on behalf of clients. Obtaining authorisation can be costly, and makes the firms subject to stricter capital requirements and reporting procedures. Some HFT firms operating in Europe have become fully-authorised investment firms in their home EU state, while others operate with less-onerous ‘local country’ authorisations or have no authorisation at all.

Fully-authorised firms are able to “passport” their licence into Germany, but BaFin informed those with local authorisations on January 22 that the their capital requirements were not deemed strong enough. Germany is one of the first EU countries to pass new rules designed to clamp down on high-frequency trading. It passed legislation last May but affected firms were granted a nine-month grace period to comply with its most onerous requirements.

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