On September 28, 2021, the European Securities and Markets Authority (ESMA) released the “MiFID II/MiFIR Review Report on Algorithmic Trading.” While there were no fundamental issues uncovered by the report – and the regulatory regime for algorithmic trading as set out in MiFID II and MiFIR has for the most part delivered its objectives – there were a number of targeted recommendations from ESMA aimed at regulatory efficiency and leveling the playing field. Most notably, recommendations addressed contrasting views on the lack of a harmonized EU regime for third-country Direct Electronic Access (DEA) users, and the importance of well-calibrated tick sizes to support EU market competition.
Third-Country Firms and DEA Access
ESMA noted that the lack of a harmonized EU regime for third-country firms creates an uneven playing field between EU and non-EU firms, with the latter gaining a competitive advantage. To combat this, ESMA proposed to end requirements for DEA users only trading on their own account to be authorized as investment firms. To address the remaining issue regarding third-country high-frequency trading (HFT) firms, ESMA suggested leveling the field by requiring such firms accessing EU trading venues to be authorized as investment firms.
Tick Size Regime Applicable to Third-Country Shares
The UK’s withdrawal from the EU has added a new dimension to issues related to third-country shares. Brexit has not only increased the number of third-country shares, but also amplified the importance of well-calibrated tick sizes to support competition in EU markets.
ESMA is committed to ensuring that the competitiveness of EU firms and trading venues is not affected by this new financial paradigm and stands ready to pursue relevant initiatives if and where necessary.
In addition to DEA for third countries and tick size regime, other recommendations by ESMA included:
- Algorithmic trading requirements to be selectively applied to systematic internalisers: ESMA proposed to introduce a reference to systematic internalisers in Article 17 of MiFID II and a mandate for ESMA to further specify requirements applicable to systematic internalisers.
- Algo testing by investment firms: ESMA proposed to include a principle-based testing regime in RTS 6, under which testing should ensure certain outcomes, i.e., no contribution to excess volatility.
- Market-making arrangements: While the current market-making regulatory framework is working as expected, ESMA also sees merit in further simplifying the requirements to “benefit the resilience of liquidity.”
ViP: As an advanced, lead-gen surveillance platform that is MiFID II- and MAR-compliant, Validus can ingest and analyze algorithmic and HFT trade data in real time or T+1 to identify suspicious behavior by the algo or HFT system. Armed with this powerful statistical analysis suite, surveillance officers now have a rich source of information at their fingertips to truly understand the chain of events and make an informed decision upon receiving an alert.
Validus also provides the precise tools required to investigate cross-venue manipulation via DEA or other means within the EU or by third countries. Our reporting suite enables users to run analytical reports in real time to identify a specific account or colluding accounts that have traded across multiple venues in a specific instrument over a particular period. Our intuitive platform helps users understand the impact of the trading activity in question and creates a more detailed and thorough investigative process.
A key differentiator of Validus is our Robotic Process Automation (RPA), which plays a vital role in distinguishing between normal market-making activity and aggressive or suspicious market-making activity. It is our RPA that enables Validus to filter out the noise and false positive alerts to generate accurate alerts, ready for in-depth analysis by the officer.
About Eventus Systems
Eventus Systems is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.