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Business

Germany acts to slow ultra-fast securities trading

The German government has adopted a draft law to curb high-speed trading. Critics are skeptical the law will avoid stock market abuses and excessive volatility. Advocates say the plan will remove price inefficiency.

The draft law, adopted by Chancellor Angela Merkel's cabinet on Wednesday, will require traders to get special permission from German stock market regulators before using computerized high-speed trading (HST) in financial markets.

Trading platforms applying the method, must disclose the mathematical algorithms on which their trading programs are based, and label transactions being performed by a computer system.

In addition, stock markets in Germany will need to install circuit breakers, which automatically suspend trading when markets become disorderly.

"The law is another cornerstone in German financial market regulation, and will make financial markets more crisis-resistant," the Finance Ministry said in a statement.

Trading platforms, based on HST, are able to place and pull millions of orders within a second, exploiting split-penny price differences for profit. Currently, the strategy accounts for up to three-quarters of trading volume on stock markets, as well as on future and derivative markets.

HST advocates say it boosts market liquidity and removes price inefficiency. But critics argue HST might lead to market abuses and excessive volatility. They attribute a flash crash on Wall Street in 2010 to ultra-fast trading, when US blue chip stocks sagged 600 points within five minutes after an erroneous trade was exacerbated by HST.

Earlier this year, the European Parliament in Brussels drafted proposals for a reform of securities trading rules. The proposals include greater restrictions on HST than envisaged under Germany 's draft law.

The EU lawmakers seek to impose a minimum 'resting' period for orders on a trading platform, as well as limiting the ratio between orders performed and those cancelled.

uhe/jlw (AP, Reuters, dapd)