Yesterday saw the publication of the XETRA and Eurex rule changes relating to the German HFT Act in which they provide details of how to implement the new RegulatoryID.

Under the new rules it will no longer be enough simply to differentiate between algo and non-algo orders (such as under the current CME regime). Starting from 1st April 2014, all orders sent by an exchange member to a German venue must include a RegulatoryID referencing the history of any algos involved in creating that message. It will become necessary for trading firms to define a taxonomy of algos and get to grips with algo diversity.

For example, looking at the same automated trading system, some firms might argue that one single algo is in use with many different parameters, while others may claim that they run many separate algos in parallel with each fulfilling a distinct function. How would the new rules be applied in those circumstances? Also, the observed behaviour of a particular algo in the market could differ depending on whether it was run on older hardware or on the latest server technology in exchange co-location. Would that justify different RegulatoryIDs?

These questions will undoubtedly remain high on the global regulatory agenda for some time to come. The Exchange Supervisory Authority of the State of Hesse in Germany is planning to publish further guidance in mid-October, and similar Algo IDs are being discussed as part of both MiFID II and the CFTC’s Concept Release.