German HFT Rules: Global Consequences
Tim Healy, FIX Trading Community Global Marketing and Communications Manager, and Hanno Klein, Co-Chair of the Global Technical Committee and Senior Vice President Deutsche Börse IT.
The recent introduction of the German High Frequency Act has highlighted to the market that over the coming months it will be necessary to examine how they will need to organise their businesses to adhere to the legislation being laid down. This will not just be a case of obtaining the appropriate license but also technical in nature with the need for certain order types to be flagged.
Earlier this year, the FIX Trading Community Global Technical Committee produced an extension proposal of the FIX Protocol standard that highlighted the key business requirements from a technical perspective. The key requirement is to add the ability to convey regulatory information on all order and quote related messages.
The FIX Trading Community recommends using the existing field ComplianceID (376) to convey an identifier that uniquely specifies an algorithm or trading strategy. The nature of the identifier may only be known to the submitter and the regulator to which they have to report to. This will allow anonymity to be preserved towards the execution venue who may not be entitled to know the strategy behind the identifier.
ComplianceID (376) is already available on order maintenance and trade reporting messages. To comply with the Act, it will be added to single quote messages, mass order and quote messages as well as to the instrument definition request message. Hence it will be available on the full set of about 20 FIX message types that are relevant for high frequency trading:
- NewOrderSingle, NewOrderMultileg, NewOrderList, NewOrderCross
- OrderCancelReplaceRequest, MultilegOrderCanceReplace, CrossOrderCancelReplaceRequest, OrderCancelRequest
- OrderMassActionRequest, OrderMassActionReport
- Quote, QuoteRequest, MassQuote, MassQuoteAck
- ExecutionReport, TradeCaptureReport, TradeCaptureReportAck, TradeMatchReport
A further requirement is the ability to support a free format text field for additional, unstructured compliance information. The respective regulator may use this and define the usage of such a field to obtain different kinds of information going beyond a simple identifier. The extension proposal foresees a new field ComplianceText for all messages that already have or will have the field ComplianceID due to this extension.
It is important to note that the forthcoming extensions are not specific to the German regulatory environment and can hence be used for other jurisdictions that require to convey regulatory information on a per order or per quote basis in a generic manner. Given that these regulatory requirements are anticipatory ahead of the full revision of MiFID II, it may well be that other venues adopt similar standards going forward.