The battle to slow down and regulate high frequency trading in Europe has taken another step forward as German derivatives exchange Eurex rolls out fines for a two month test period aimed at slowing some known HFT practices.
Recently Italy announced a transaction tax aimed at slowing trading, but the methodology in Germany seems to be even more precise. Eurex’s fines are designed to stop the rapid placing and canceling of orders, known as quote spam, that is so prevalent in U.S. markets.
The controls…include an “order-to-trade ratio”, or OTR. Members that enter, modify or delete a certain number of orders compared with the number of completed trades, will face sanctions.
There is a fair amount of subjectivity that remains as far as the actual monetary penalties. Those decisions will be made by an internal discipline committee which is chosen by the exchange. Eurex outlined an example of a scenario where fines would be imposed.
..if a firm enters 900,000 transactions in a single month in a product that has a transaction limit of 350,000, it will be charged €143,750 for excessive usage. The calculation is based on trading volume, market making thresholds and tiered thresholds that define an excessive system usage fee per transaction. The fees range from €0.05 per transaction for violating a limit by less than 50%, rising to €0.50 for transactions that surpass the limit by 100%.
In addition to the order-to-trade ratio, penalties will also be handed out for “excessive system usage based on daily limits for the number of transactions sent by a single participant.” The rules also define what exactly high frequency trading is, a requirement for firms considered HFT to register with German authorities, and the flagging of algorithm-generated orders.