Algorithmic trading

BaFin Circular 6/2013 (BA) - “Requirements for Systems and Controls for Algorithmic Trading by Institutions” specifies the technical requirements for algorithmic trading by institutions in Germany and abroad. All institutions pursuant to § 1 (1b) KWG and § 53 (1) KWG must observe the circular (exception: branches of banks from the EEA) and, if necessary, document as precaution that they are not affected.

Algorithmic trading is characterised by the fact that a computer algorithm automatically determines the order parameters. This includes all trading transactions in accordance with MaRisk, trading in connection with the customer (for own account and for the account of third parties) on all trading platforms, as well as OTC transactions. Direct and promoted market access for customers is also affected. Institutions that engage in algorithmic trading must comply with the requirements of the circular, including:

• Algorithms must be clearly identified, and transactions must be clearly attributable to the associated algorithms and sub-algorithms and staff or customers
• The requirements concern the entire risk management process, from identification to control (particularly real-time risk limitation and contingency plans for stress situations).
• Institutions offering so-called direct or sponsored market access must also ensure proper risk management and prevent market abuse (incl. market manipulation) for their customers.
• In addition, the circular contains concrete technical requirements for the identification of transactions and the archiving of data.
• (Stress) tests are required for both the specialised and the technical applications during implementations as well as during operation.

The circular is to be implemented by mid-June 2014; implementation is complicated by the use of a large number of undefined legal terms in the circular.

BaFin’s recognisable goal is to make the risks from algorithmic / automated trading transparent and to take them into account appropriately in risk management.

In order not to unnecessarily over-fulfil requirements in the sense of the definitions of the Securities Trading Act and the BaFin circular and the underlying idea of proportionality, a careful review of how one’s own activities are affected (scoping) is a necessary and important prerequisite for efficient project design.

Our tried-and-tested scoping process model allows the requirements of the BaFin circular to be taken into account individually at an institution-specific granularity level with regard to algorithms and trading strategy.

Our scoping model is based on a proven scoping matrix for reviewing volumes, algorithms and trading strategies at an institution-specific granularity level, as well as on a proven catalogue of criteria as the basis for scoping.

Based on the results of the scoping, we help to assess the gaps in the requirements of the BaFin circular regarding trading, risk management, compliance and IT as efficiently as possible and to determine and implement the minimum adjustment requirements to comply with the circular in a meaningful way. In particular, we assist with the interpretation and application of the undefined legal terms and with questions regarding appropriately proportional action.

Our contribution to the success of algorithm trading projects is based on the following aspects:

• Our regular exchange with regulators, industry representatives and other experts on the interpretation of the BaFin circular increases the certainty of interpretation
• Our thematic discussions with a variety of concerned institutions give us a good overview of the industry, implementation efforts and challenges
• Our projects already underway to implement the circular demonstrate the implementation reliability of our approach
• Our specific process model, with the aid of means of a scoping matrix and criteria catalogue, allows for an individual consideration of the requirements of the circular on an institution-specific granularity level with regard to algorithms and trading strategy
• Results of this scoping serve as the basis for a sound gap analysis in trading strategy, risk management, compliance and IT
• Implementation based on our scoping model for efficient and targeted fulfilment of the requirements