Opinion of the European Central Bank of 13 December 2012 on high frequency trading (CON/2012/107)
Date: 2012-12-13
Institutions: European Central Bank
Subjects: Germany, financial institution, financial stability, financial supervision, market protection, national law, trading operation

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 13 December 2012 

on high frequency trading 

(CON/2012/107) 

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 institutions 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  stock  exchange,  the  Law  on  securities 

trading, the Law on investment and further related laws. 

In  that  context,  the  definition  of  the  term  ‘proprietary  trading’  is  expanded  to  include  high  frequency 

trading (HFT), which uses algorithmic-based trading, generating purchase and sale signals within seconds 

and  provides  for  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  trading  practices  which  are intended  to  disrupt or  delay  the  functioning  of  trading 

systems or to mislead other trade participants are included under the definition of market manipulation. 

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OJ L 189, 3.7.1998, p. 42. 

 
 
 
 
                                                 
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Moreover, in addition to the introduction of a fee for excessive use of trading systems, an obligation is 

introduced  whereby  trade  participants  are  to  guarantee  an  appropriate  ratio  between  (1)  orders  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 supervisory 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  forthcoming  European 

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  financial  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 these proposals6. 

3. 

Specific observations 

3.1  The  ECB  welcomes  the  fact  that  the  draft  law  refers  to  specific  cases  of  market  manipulation, 

referring to new trading techniques such as AT, which includes HFT. As stated in paragraphs 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 markets, 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 financial services institutions would be brought 

under the supervision of BaFin. In this regard, the ECB reiterates that in its Opinion CON/2012/21 

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5  
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COM(2011) 656 final. 
COM(2011) 652 final. 
COM(2011) 654 final. 
COM(2011) 651 final. 
Opinion CON/2012/21. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 

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it considered that all entities engaged in AT on a professional basis should be considered to come 

within the definition 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 limit 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  transaction  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 granting 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.  Opinion 

CON/2012/21  supported  the  empowerment  of  the  European  Securities  and  Markets  Authority  to 

temporarily  prohibit  or  restrict  certain  types  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  expressed  in  Opinion  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 regularly 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. 

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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 

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