European Regulators Focus on Automated Trading Ahead of MiFID II

The majority of EU regulators have integrated the European Securities and Markets Authority guidelines into their supervisory methods and increased

esmaA European Securities and Markets Authority (ESMA) review published yesterday found that the supervision of automated trading has become more consistent among the different national regulators in the European Union.

ESMA reviewed how the thirty financial authorities across the EU have implemented its guidelines on automated trading into their day-to-day supervision of trading platforms. The guidelines set out systems and controls requirements for investment firms and trading platforms operating in an automated trading environment.

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The report focused on the top twelve regulators supervising trading platforms with the most significant automated trading volumes. Overall, ESMA says the majority of authorities have integrated the guidelines into their supervisory methods and increased their level of supervision over automated trading activity.

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ESMA mainly looked at threats the markets have previously faced such as high-frequency trading (HFT), algorithmic trading and cyber-crime. The review did not address the growing fields of social and copy trading nor the development of regulation for related platforms.

Emerging Challenges

Looking at the national implementations, ESMA says its review identified some good practices regarding the supervision of IT-standards, governance and security at trading platform level, as well as consideration of cyber-security, trading halts and real-time surveillance of direct market access.

Besides identifying good practices, the review also highlights challenges associated with automated trading. The speed of technological developments, market fragmentation, increasing variety and numbers of financial instruments, increasing complexity, and the rise in data compared with limited supervisory resources are some of the areas which will determine the future focus of ESMA. The growing cross-border aspect of trading also requires a high level of cooperation among regulators, the review finds.

Steven Maijoor, ESMA Chair, commented: “Ensuring that automated trading is properly controlled both by firms engaging in it and at the trading venue level is key for ensuring market integrity. The good level of compliance with ESMA’s guidelines shows that European algorithmic trading has already gotten sounder. We now have to focus on tackling those remaining challenges identified by our review in order to have a proper set of systems and controls in place governing algo trading before MiFID II will introduce these as legal provisions at Directive level by 2017.”

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