New notification requirement for entities engaged in algorithmic trading or offering direct electronic access (DEA)

Since 3 January 2018, investment services enterprises have had to comply with new notification requirements as a result of the transposition of the Second Markets in Financial Instruments Directive (MiFID II) into German law with the Second Act Amending Financial Markets Regulations (Zweites Finanzmarktnovellierungsgesetz – 2nd FiMaNoG). These notification requirements concern investment services enterprises that engage in algorithmic trading within the meaning of section 80 (2) sentence 1 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) (in the version applicable from 3 January 2018) or that offer direct electronic access (DEA) to a trading venue as referred to under section 2 (30) of the WpHG (in the version applicable from 3 January 2018). The notifications must be submitted to the competent authority for supervising the investment services enterprise concerned. 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. 4, 8 or 15 of the WpHG may also be subject to the notification requirements. 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.

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:

Notifications regarding engagement in algorithmic trading: algoanzeige @ bafin.de

Notifications regarding offering DEA to a trading venue: deaanzeige @ bafin.de

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. 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. Questions concerning procedures for notifying these authorities can be sent to the e-mail addresses provided.

Stock Exchange Supervisory Authority for Baden-Württemberg: Ministry of Economic Affairs, Labour and Housing of Baden-Württemberg (Ministerium für Wirtschaft, Arbeit und Wohnungsbau Baden-Württemberg)

Stock Exchange Supervisory Authority for Bavaria: Bavarian Ministry of Economic Affairs and Media, Energy and Technology (Bayerisches Staatsministerium für Wirtschaft und Medien, Energie und Technologie) (e-mail: algoanzeige @ stmwi.bayern.de and deaanzeige @ stmwi.bayern.de)

Stock Exchange Supervisory Authority for Berlin: Senate Department for Economics, Energy and Public Enterprises (Senatsverwaltung für Wirtschaft, Energie und Betriebe)

Stock Exchange Supervisory Authority for Hamburg: Ministry of Economic Affairs, Transport and Innovation (Behörde für Wirtschaft, Verkehr und Innovation)

Stock Exchange Supervisory Authority for Hesse: Hessian Ministry of Economics, Energy, Transport and Regional Development (Hessisches Ministerium für Wirtschaft, Energie, Verkehr und Landesentwicklung) (https://service.hessen.de/html/9496.htm)

Stock Exchange Supervisory Authority for Lower Saxony: Ministry of Economic Affairs, Labour and Transport of Lower Saxony (Niedersächsisches Ministerium für Wirtschaft, Arbeit, und Verkehr)

Stock Exchange Supervisory Authority for North Rhine-Westphalia: Ministry of Finance of the State of North Rhine-Westphalia (Ministerium der Finanzen des Landes Nordrhein-Westfalen) (e-mail: V-BoersenaufsichtNRW @ fm.nrw.de)

Stock Exchange Supervisory Authority for Saxony: Saxon State Ministry of Economic Affairs, Labour and Transport (Sächsisches Staatsministerium für Wirtschaft, Arbeit und Verkehr)

Further requirements for algorithmic trading

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 2013. 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 largely draw on the draft European provisions amending the Markets in Financial Instruments Directive (MiFID II). MiFID II has now been transposed into national law. The provisions of the German High-Frequency Trading Act were amended in order to take into account European requirements wherever required.

The requirements below continue to apply, also after the implementation of MiFID II:

High-frequency trading is subject to authorisation under section 1 (1a) sentence 2 no. 4 (d) of the German Banking Act (Kreditwesengesetz – KWG). Investment services enterprises engaging in algorithmic trading must have system and risk controls in place (section 80 (2) and (3) of the WpHG). Trading participants must flag orders generated through algorithmic trading (section 16 (2) no. 3 of the German Stock Exchange Act (Börsengesetz – BörsG)). Furthermore, they must ensure an appropriate order-to-trade ratio (section 26a of the BörsG). Trading venues must charge separate fees for the excessive use of exchange systems (section 17 (4) of the BörsG) and determine appropriate minimum tick sizes (section 26b of the BörsG). In order to address the risks associated with algorithmic trading systems, trading venues must also take appropriate measures in accordance with section 26d of the BörsG. These could be, for example, circuit breakers to reduce volatility.

After MiFID II was transposed into national law, the following additions/amendments were made:

In section 80 (3) sentence 2 of the WpHG, specific documentation requirements were introduced for investment services enterprises engaging in high-frequency trading. In addition, investment services enterprises engaging in algorithmic trading and pursuing a market making strategy must now provide liquidity to trading venues in accordance with section 80 (4) and (5) of the WpHG. Finally, the high-frequency trading characteristics mentioned under section 1 (1a) sentence 2 no. 4 (d) of the KWG were amended to take into account European requirements. This particularly concerns the criterion of high message intraday rates.

The provisions mentioned above are supplemented by Commission Delegated Regulation (EU) 2017/584, Commission Delegated Regulation (EU) 2017/589 and ESMA’s Q&As.

For this reason, BaFin has revised its FAQs on the German High-Frequency Trading Act.