Germany's upper house of parliament on Friday backed rules to clamp down on high-frequency trading in financial markets, but said the draft legislation needed to be improved further.
High-frequency traders use computer algorithms to generate numerous, lightning-speed automatic trades that make money from tiny price moves in the market. Holding investments for short periods only, they have been accused of adding to market volatility and increasing the risk of a market meltdown.
The draft law, agreed by the Bundestag lower house of parliament in late February, will make traders subject to the supervision of BaFin, Germany's banking regulator. They will also require traders to get authorisation to trade, though they will not be forced to hold investments for minimum periods.
While the draft law recognises the risks associated with high-frequency trading, it does not adopt solutions to solve the problems, the upper house of parliament, the Bundesrat, said in a motion of resolution.
The Bundesrat, controlled by Germany's opposition parties, also questioned whether a European solution to the trading should be favoured over a German solution.
An European Union-wide reform is not expected to come into force until at least 2015 and Deutsche Boerse , which operates the Frankfurt stock exchange, has previously criticised the German government for not waiting, fearing that a unilateral approach would lose it business.
The draft law, which does not need to be revisited, still needs to be signed by Germany's federal president and is expected to come into force later this year.
The Bundesrat questioned whether it would be better to exclude certain commodity future transactions and government bonds from high-frequency trading.
"In this way it could be ensured that the biggest risks to the economy which could result from high-frequency trading, such as cyclically strengthened trade and so-called flash crashes, are limited," the Bundesrat said in its motion.
High-frequency trading companies have expanded rapidly in the past decade and now account for an estimated 70 percent of the daily turnover of shares in the United States. In Germany high-frequency trading accounts for around 40 percent.
(Reporting by Hans-Edzard Busemann; writing by Michelle Martin; Editing by Susan Fenton)