EN ECB -PUBL IC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 13 December 2012  
on high frequency trading  
(CON/20 12/107) 
 
Introduction and legal basis  
On 12 October 2012, the European Central Bank (ECB) received a request from the German Federal 
Ministry of Finance  for an opinion on a draft law on the prevention of risks and abuses in high frequency 
trading  (hereinafter the ‘draft law’).  
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the  sixth  indent of Article  2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft 
legislative provisions1, as the draft law relates to rules applicable to financial institut ions insofar as they 
materially influence the stability of financial institutions and markets . In accordance with the first 
sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 
has adopted this opinion.  
 
1.  Purpose of the draft law  
The draft law is intended to counteract the specific risks of algorithmic high  frequency trading. To that 
end, the draft law amends the Law on banking, the Law on the s tock exchange, the Law on s ecurities 
trading, the Law on i nvestment and further related laws . 
In that context, the definition of the term ‘ proprietary trading ’ is expan ded to include high frequency 
trading (HFT) , which uses algorithmic -based trading, generating purchase and sale signals within seconds 
and provides f or the holding of positions for a very short time . This aims  to eliminate a supervisory 
loophole and to bring high frequency traders under the supervision of the Federal Financial Supervisory 
Authority (BaFin).  
In addition, algorithmic trading  (AT)  is made  subject to stricter requirements, under  which investment 
services providers, investment trusts and self -managed investment companies which conduct AT are to 
ensure that in the future , from an  organisational point of view,  their trading systems are designed in such 
a way as to avoid market disruptions.  
Furthermore , certain tra ding practices which are intended  to disrupt or delay the functioning of trading 
systems or to mislead other trad e participants are included under  the definition of market manipulation.  
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
ECB -PUBLIC  
2 Moreover, in addition to the int roduction of a fee for excessive use of trading systems, an obligation is 
introduced whereby  trade participants are to guarantee an appropriate ratio between (1) order s placed , 
changes to and cancellations  of orders , and ( 2) business transactions  that are actually  concluded . A 
minimum tick size is introduced in order to counteract the trend towards ever smaller minimum tick sizes. 
In order to prevent a move towards  multilateral trading systems  to avoid such regulation, the draft law is 
also applicable to multilateral trading systems.  
The draft law also strengthens the intervention rights of the supervis ory authority for the  stock exchange 
and implements a specific right to  receive information and to submit proposals.  
 
2. General observations  
2.1  The ECB welcomes the draft law as it aims to curb risks for financial stability and to  contain 
market manipulation caused by high frequency trading. 
2.2 The ECB points out  that national legislation will need to be in line with forthc oming E uropean 
Union legislation , in particular (1) the proposal for a directive on markets in financial instruments 
repealing Directive 2004/39/EC of the European Parliament and of the Council2 (MiFID) , (2) the 
proposal for a regulation on markets in fina ncial instruments and amending Regulation on OTC 
derivatives, central counterparties and trade repositories3 (MiFIR) , (3) the proposal for a directive 
on criminal sanctions for insider dealing and market manipulation4, and (4)  the proposal for a  
regulation on insider dealing and market manipulation (market abuse)5. In that context, the ECB 
refers to its opinion on the se proposals6. 
 
3. Specific observations  
3.1 The ECB welcomes the fact that the draft law refers to  specific cases of market manipulation, 
referri ng to new trading techniques such as AT, which  includes  HFT . As stated in para graph s 10.1 
and 14.3 of the  aforementioned ECB opinion, although AT  practices may have legitimate purposes, 
they might also jeopardise  the liquidity and efficiency of financial m arkets, particularly in times of 
market stress, as they could disturb the normal functioning of the market and increase volatility, 
which would be contrary to the public interest.  
3.2 The ECB welcomes the establishment of a special right to information for the  stock exchange 
supervisory authority and also for the Trading Surveillance Office aimed at improving the 
monitoring of companies conducting AT. The ECB also supports the proposal under  which HFT 
companies which are not credit institutions or other financi al services institutions would be brought  
under the supervision of BaFin . In this regard, the ECB reiterates  that in its Opinion CON/2012/21  
                                                 
2  COM(2011) 656 final.  
3  COM(2011) 652 final.  
4  COM(2011) 654 final.  
5  COM(2011) 651 final.  
6  Opinion CON/2012/21 . All ECB opinions are available on the ECB’s website at www.ecb.europa.eu.  
ECB -PUBLIC  
3 it considered that all entities engaged in AT on a professional basis should be considered to come 
within the defin ition of investment firms and thus fall under the scope of the MiFID and be subject 
to supervision and monitoring of their activities by competent authorities. Ensuring comprehensive coverage of all entities professionally involved in HFT and AT would limi t potential circumvention 
of the proposed rules.  
3.3 The ECB notes that the draft law introduces an obligation for appropriate marking of orders. Such 
provisions may need to be adjusted in light of the requirements under the proposed MiFIR and 
relating to tran saction reporting details, with the introduction of a designation to identify the 
computer algorithms within the investment firm responsible for the investment decision and the execution of the transaction. In this regard, and as highlighted in Opinion CON/2012/21 , to 
facilitate cross -market surveillance and to prevent and detect market abuse, such unique identifiers 
should be developed for the identification of trades generated by any AT within and across trading 
platforms.  Furthermore, the introduction of  a trader  ID could be considered in order to be able to 
assign each order and each transaction  to the person responsible within the investment firm.  
3.4 The ECB welcomes the proposed g ranting of powers to the stock exchange supervisory authority to 
prohibit the use of a specific algorithmic trading strategy, notably with a view to preventing breaches of stock exchange regulations  and trading orders and to eliminate abuse. O pinion 
CON/2012/21  supported the empowerment of the E uropean Securities and Markets Autho rity to 
temporarily prohibit or restrict certain t ypes of financial activity or practice with a view to 
addressing a threat to the orderly functioning of financial markets or the stability of whole or part 
of the financial system.  
3.5 In line with the views ex pressed in O pinion CON/2012/21, the ECB welcomes the proposed 
introduction of appropriate organisational safeguards for trading venues, namely (i) volatility 
interruptions, (ii) an appropriate ratio between orders that have been suspended and transactions 
actually conducted on a stock exchange, and (iii) an appropriate minimum tick size for traded 
financial instruments.  
3.6 The ECB notes that the draft law introduces compulsory fees for the excessive use of stock 
exchange trading platforms , which are to be regu larly reviewed by the stock exchange supervisory 
authority within the scope of its supervision. While welcoming provisions  limiting the excessive 
use of suspended orders , it is important that such measures are clearly articulated , together with 
those to be  provided for  under the envisaged  legislative proposal on the Financial Transaction Tax . 
 
ECB -PUBLIC  
4 This opinion will be published on the ECB’s website.  
 
 
Done at Frankfurt am Main, 13 December 2012.  
 
[signed]  
 
The Vice -President of the ECB  
Vítor CONSTÂNCIO