High-frequency trading – a discussion of relevant issues - Xetra

Algorithmic /high-frequency tradingHigh-frequency trading – a discussion of relevant issues May 2013Regulation of algorithmic and high-frequency trading is in the scopeof MiFID II (1)EU Commissionlegislative proposalEuropean ParliamentamendmentsEuropean CouncilamendmentsArt. 2.1 (d) MiFIDRegulation andSupervision of HFTsHFTs to be supervised andregulated under MiFID IIHFTs to be supervised andregulated under MiFID IIHFTs to be supervised andregulated under MiFID IIArt. 4 MiFIDAlgorithmic Trading /HFT / HFT StrategyDefinitionDefinition for algorithmictradingNo definition for high-frequencytradingDefinition of algorithmic trading(30) / HFT (30a) and of HFTstrategy (30 b). HTF strategy isbased on two out of fivecriteria*Definition of algo trading (30) /and of high-frequency algotrading strategy (30 a). Thelatter is characterized by threecriteria**Art. 17.3 MiFIDLiquidity ProvisionContinuous liquidity provisionfor algorithmic tradingstrategies (firm quotes at alltimes)Applies only for thoseinvestment firms that areengaged in market making(scheme set by market venue)Applies only to thoseinvestment firms that follow amarket making strategyArt. 17.1 MiFIDRisk controlsInvestment firm that engages inalgorithmic trading shall havein place effective systems andrisk controls (Art. 17.1)Investment firm shall have inplace effective systems andcontrols (Art. 17.3)Investment firm that engages inalgorithmic trading shall havein place effective systems andrisk controls (Art. 17.3)* ‘High-frequency trading strategy' means a trading strategy for dealing on own-account in a financial instrument which involves high-frequency trading and has at least two of the following characteristics:(i) it uses co-location facilities, direct market access or proximity hosting; (ii) it relates to a daily portfolio turnover of at least 50 %; (iv) the proportion of orders cancelled (including partial cancellations)exceeds 20 %; (v) the majority of positions taken are unwound within the same day; (vi) over 50% of the orders or transactions made on trading venues offering discounts or rebates to orders whichprovide liquidity are eligible for such rebates.** High-frequency algorithmic trading strategy’ means an algorithmic trading strategy characterised by: infrastructure intended to minimise network and other types of latencies including proximity and colocation;system determination of order initiation, generating, routing and execution without human intervention for each individual trade or order; high message rates (orders, quotes or cancellations).29