BERLIN, Jan 27 (Reuters) - German Chancellor Angela Merkel’s centre-right coalition will on Monday decide on changes to a draft law to clamp down on ultra-fast trading on stock exchanges, which it sees as stoking excessive market turbulence.
High-frequency traders use computer algorithms to generate numerous, lightning-speed automatic trades that make money from tiny price differences in the market.
These trades hold investments for short periods only and have been blamed for causing market volatility, such as the “flash crash” in the United States in May 2010, when the stock market fell more than 1,000 points, or nearly 10 percent, within minutes.
Keen to avoid similar crashes on German exchanges, Merkel’s government wants to implement regulation requiring traders to register with stock exchange regulators and disclose their algorithms.
It also wants to limit the number of decimal points given in market prices and to prevent traders from requesting pricing information without intending to trade.
Other practices like “scalping”, which involves using misleading market signals to influence prices, will be classed as misuse.
Once the coalition has agreed on amendments to the draft law with the Bundestag lower house of parliament’s finance committee, it will need to be approved by the German parliament. Parliament is expected to approve the changes, as the coalition holds a majority in both the committee and the parliament.
The German government’s move to clamp down on speed trading comes as the European Union also plans to tighten regulation on such practices.
Sources have previously told Reuters that the German government is attempting to ratchet up the pressure for EU-wide regulation on the sector.
EU member states are discussing the rules governing high-frequency trading as part of a reform of MiFID securities trading rules. However, while the European Parliament wants to introduce a minimum holding period for securities of 500 milliseconds, Germany’s ruling coalition has rejected this.
Frankfurt stock exchange operator Deutsche Boerse has previously criticised the government for not waiting until Brussels comes up with EU-wide regulation.
“If Germany goes it alone on regulating high-frequency trade, it could hugely disadvantage Germany as a financial centre,” Deutsche Boerse said in a statement earlier this month.
“There is a danger that market participants from Germany will take their trade to other countries or to less well regulated markets,” it said.
High-frequency trading companies have expanded rapidly in the past decade and now account for some 70 percent of the daily turnover of shares in the U.S., according to some estimates. In Germany it is responsible for around 40 percent.
As such, speed trading is a major source of income for exchange groups. (Additional reporting by Andreas Kroener in Frankfurt, Writing by Michelle Martin, Editing by Gareth Jones and Alison Birrane)