Trade surveillance in Germany

MAR prohibits insider dealing, the unlawful disclosure of inside information and market manipulation, and it reaches further than a regulated market. The prohibitions cover financial instruments admitted to trading on a regulated market, on a multilateral trading facility and on an organized trading facility, instruments whose price depends on one of those, emission allowances and benchmarks. An order placed outside a venue in an instrument traded on one is in scope.

Manipulation in MAR comes with an indicative list in its annexes: securing a dominant position over supply, moving a closing price, abusing media access to voice an opinion on an instrument after taking a position. Those indicators are what a surveillance system's scenarios are built from, because an alert that cannot be mapped to a named indicator is hard to explain to anyone.

Article 18 MAR requires an issuer, and anyone acting on its behalf, to keep a list of everyone with access to inside information. Most firms need two shapes of it. A deal-specific list exists per piece of inside information, so a company with three live projects keeps three lists. A permanent insiders section covers the people who have access to all inside information at all times, which is a short list and not a convenience for filling the other one.

The implementing regulation fixes the fields, and they go further than a name: given name and surname, birth surname where different, work and personal telephone numbers, the company name and address, the function and reason for access, the date and time at which access was obtained, the date and time at which it ceased, date of birth, national identification number, personal address. Each insider acknowledges the duties in writing. The list goes to the authority on request, in electronic form, and is kept for five years after it is created or updated.

The field set is why the list fails in practice. Personal data of that depth cannot be assembled on the afternoon BaFin asks for it, so firms that hold the data in advance pass the inspection and firms that collect it on demand do not.

Article 19 MAR makes a person discharging managerial responsibilities, and persons closely associated with them, notify their own transactions in the issuer's instruments to the issuer and to the authority within three business days. The issuer publishes them within the same window. The duty starts once a threshold of 5,000 euro in a calendar year is reached, which member states may raise to 20,000 euro.

The same article sets the closed period: thirty calendar days before the announcement of an interim or year-end report, during which a manager may not deal in the issuer's instruments for their own account. An exemption exists for exceptional circumstances and for transactions under an employee scheme, both on the issuer's permission. The practical control is a calendar that is maintained before the results date is fixed, because a manager who sells in week four has no retrospective remedy.

Article 11 MAR builds a safe route for disclosing inside information before a transaction, where an issuer or its bank needs to gauge investor interest. The disclosing market participant assesses whether the sounding involves inside information, tells the recipient so, obtains consent to receive it, informs the recipient of the resulting restrictions, and keeps a record of what was said to whom and when. The record is the whole point: it converts a disclosure that would otherwise be unlawful into one with a documented basis.

Recipients carry their own duty to assess whether what they heard is inside information, independently of what the discloser said. A buy-side firm that takes soundings therefore needs a wall-crossing log of its own, and the two logs are what an investigation compares when a trade follows a call.

Article 16 MAR puts the duty on market operators, investment firms operating a venue, and any person professionally arranging or executing transactions: arrangements, systems and procedures to detect and report suspicious orders and transactions, and a report to the authority without delay when a reasonable suspicion arises. The delegated regulation on STOR sets the template and requires the report to explain the reason for the suspicion, not merely to attach the data.

A STOR covers orders as well as executed trades, which is the part firms underestimate: a pattern of cancellations that never executed is reportable. The report goes to BaFin for the German market, the firm does not tell the client, and a decision not to report is documented as carefully as a report, because an authority that finds the alert later will ask what happened to it.

Each German exchange runs a Handelsüberwachungsstelle, a trading surveillance office required by section 7 of the Börsengesetz. It is an organ of the exchange, independent in its work, and it records trading and settlement data, investigates anomalies and reports findings to the exchange management and to the state exchange supervisory authority. The Frankfurt Stock Exchange's office is the one most German order flow passes.

Three layers therefore look at the same trade: the firm's own surveillance, the exchange's office, and BaFin's market supervision. Our page on compliance in Frankfurt covers the exchange side in its local setting, and trading in Frankfurt covers the venues.

Article 17 of Directive 2014/65/EU adds a separate layer for a firm that trades algorithmically: systems and risk controls sized to its business, testing of algorithms, kill functionality, and records of its algorithms sufficient for a supervisor to reconstruct a decision. A high-frequency trader keeps a time-sequenced record of every order, cancellation and execution, for at least five years and in a form the authority prescribes.

For the surveillance team this changes what an alert looks like. An algorithm that produces thousands of orders per second generates patterns no human intent explains, so the question moves from "who did this" to "which version of which strategy, under which parameters". Our page on algorithmic trading in Germany covers the controls side.

Yes, where they relate to a transaction. Article 16(7) MiFID II requires an investment firm to record telephone conversations and electronic communications that relate to the reception, transmission and execution of client orders and to dealing on own account, including conversations intended to lead to such a transaction even when none follows. Clients are told in advance, and the records are kept for five years, or up to seven where the authority requires it.

That archive is the raw material surveillance actually uses. An order-book alert says that something unusual happened; the chat line thirty seconds earlier says whether anyone intended it. Firms that keep the two data sets in systems that cannot be queried together own an archive without a search function, which is the common finding in this area.