The Regulation of Financial Innovations: High Frequency Trading - Algorithmic Trading
By self-regulating technology I mean that the algo watches itself. It controls:.
- High Frequency Trading (HFT);
- List of abbreviations.
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This is a fundamental design problem that exists in many algorithmic systems. In the quest for speed and competitive low latency the software designers and algo programmers do not have any incentive to put in place truly effective safety guards.
They program for speed, not safety of the market. Years ago a manager once told me that the difference between a programmer and an analyst is that a programmer writes code and trusts it and the analyst has lost some of his or her trust in the written code. Algo programmers are sometimes optimists trusting in their own code.
The hope in self-regulating algos may be misplaced. At an auto race there are race cars have minimum safety features. They are interested in speed. These include:. In the same way HFT systems need external controls.ovadokdrib.ml
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Here are the three levels of controls I believe to be best practice. As an industry we need to have external safety features. At a minimum I would suggest that algo systems have three levels of safety checks:. They should also check to make sure that the algo is not overstepping approved credit limits. At-Trade checks occur in the moments after the order or related transaction has been submitted.
And before you ask, yes I mean an entirely separate physical computer not a virtual machine running on the same hardware. These checks should be implemented in a way that would alarm, and if necessary stop or kill the algo.
Post Trade Risk is the last layer. This is typically the back office system or some other back office system that is checking for the overall position limits. These checks are looking at the position portfolio in its entirety. Ideally this system should be more real time than the batch clearing system. Best examples of checks performed at this level include:. In addition, they must also be submitted to the competent authorities responsible for supervising the trading venues concerned.
Investment services enterprises are thus required to submit notifications to BaFin in the following cases:. Under section 3 3 sentence 1 of the WpHG , enterprises that do not qualify as investment services enterprises under section 3 1 no. This means that the notification requirements may also apply to insurance undertakings and other undertakings if they are a member or participant of an organised market or MTF.
Finally, the notification requirements under section 28 1 sentence 3 of the German Investment Code Kapitalanlagegesetzbuch — KAGB may also be applicable to asset management companies.
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BaFin has created a template form which can be used by the investment services enterprises concerned to comply with the requirement to submit notifications to BaFin. The form must be sent by e-mail to the following e-mail addresses:. BaFin is not responsible for the supervision of stock exchanges domiciled in Germany. Stock exchanges are supervised by the stock exchange supervisory authorities of the federal states.
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Investment services enterprises that engage in algorithmic trading as trading participants on a German stock exchange or that offer DEA to a German stock exchange must therefore submit notifications to the competent supervisory authority for the stock exchange in question. The requirement to notify the stock exchange supervisory authorities may also apply to companies that are required to submit notifications under provisions that transpose the first subparagraph of Article 17 2 and the third subparagraph of Article 17 5 of MiFID II into the national laws of other EU Member States.
It is anticipated that the stock exchanges domiciled in Germany will inform their trading participants of the procedures for submitting notifications to the stock exchange supervisory authorities in a corresponding circular. Further information regarding procedures for notifying stock exchange supervisory authorities can be found via the links listed below.
Financial Markets - SAFE
Questions concerning procedures for notifying these authorities can be sent to the e-mail addresses provided. In order to counter the risks associated with algorithmic trading and high-frequency trading, German legislators issued the Act on the Prevention of Risks and Abuse in High-Frequency Trading — or the High-Frequency Trading Act Hochfrequenzhandelsgesetz in This Act contains provisions relating to high frequency and algorithmic trading.
High-frequency trading is a form of algorithmic trading. It is characterised by a large number of order entries, modifications or cancellations within microseconds. High-frequency traders seek to be as near as possible to a trading venue's server in order to derive speed advantages from the short distance the signals need to travel. The provisions of the German High-Frequency Trading Act were amended in order to take into account European requirements wherever required.
High-frequency trading is subject to authorisation under section 1 1a sentence 2 no.