Algorithmic Trading

Automated traders must provide continuous liquidity - EC

Proposals designed to prevent algorithmic and high-frequency traders from abruptly withdrawing liquidity from Europe’s securities markets will remain a core plank of the European Commission’s MiFID review despite widespread industry criticism, according to Valérie Ledure, senior policy officer for securities markets at the EC’s Directorate-General of Internal Market and Services.

“We are committed to this proposal,” she told “That is not going to change. But we are open for constructive suggestions on how to improve the rule.”

Under the MiFID II proposal, algorithmic and high-frequency traders face mandatory continuous trading throughout the trading day, with liquidity to be provided on a regular and ongoing basis regardless of market conditions. Exchange members will also be required to screen their clients before they allow direct market access, to ensure all users have appropriate risk controls in place and do not exceed trading thresholds.

Market participants have expressed concerns that an obligation to trade regardless of market conditions could be applied beyond electronic market makers to hedge funds and long-only asset managers that only use algorithms to execute orders from portfolio managers. But Ledure insisted that the proposal was important to ensure that high-frequency trading (HFT) firms do not exit at times of market stress, such as the US flash crash of 6 May 2010.

“HFT firms are a concern for the EC – they bring liquidity but of course there is a risk,” said Ledure. “We want them to stay in the market and provide liquidity when it is most needed, not withdraw suddenly.”

However, she declined to acknowledge the difference between investment managers that use execution algorithms to implement a buy/sell order and those firms whose programs automatically respond to market signals.

As part of MiFID II, the EC’s proposals on the algorithmic and HFT obligations will now pass to the European Parliament and Council of European Union, with the expectation that the three bodies will come to an agreement by the end of 2012. Ledure estimates that a substantial implementation period will then be granted, with the rules to take effect by the end of 2014.

Market participants will have an early opportunity to discuss the new legislation at a meeting of the European Parliament’s Economic and Monetary Affairs Committee (ECON) on 5 December 2011. Markus Ferber, MEP, the rapporteur responsible for the ECON committee’s review of MiFID, has issued a questionnaire on MiFID II which explores all aspect’s of the EC’s proposed changes to MiFID. The deadline for responses is 13 January 2012.

In addition, the European Securities and Markets Authority (ESMA) has confirmed that it will publish its own guidelines on automated trading in Q1 2012. The guidelines are motivated partly by the fact that MiFID II is not expected to take effect until late 2014.

The ESMA guideline proposals require market participants to make available descriptions of their algorithms and trading strategies, provide real-time surveillance feeds and ensure that they have adequate pre-trade risk controls in place. The guidelines will complement but remain separate to the upcoming review of MiFID and the Market Abuse Directive.

“We want to address the risk linked to these trading technologies today,” said Ledure. “The ESMA guidelines are consistent with MiFID II. They are there to bridge the gap between now and MiFID II being applied.”