The European Securities and Markets Authority (ESMA) has confirmed the timeline for its new guidelines aimed at keeping better control over automated and computerised trading.
The pan-European securities watchdog’s new 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 are currently summing up feedback and expect the final guidelines to be completed by the end of the year,” an ESMA spokesperson told theTRADEnews.com. “The guidelines will be published early next year, possibly as early as January.”
Following the publication of the rules, national regulators will have two months to implement the guidelines via legislation or explain why they are not doing so. Market participants will then have a further month to comply. The guidelines will apply to all asset classes, including equities.
ESMA’s latest guidelines follow a consultation paper sent to market operators and trading firms in July titled ‘Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities’.
Market participants have expressed broad support for the guidelines, but have pointed out that the market-wide focus on reducing latency means the guidelines could impact more than just high-frequency trading (HFT) firms.
“This is more focused on market structure and the pressure placed on the whole system by low-latency trading in general. That is the real issue, not just HFT,” said Steven Wood, founder of Global Buy-side Trading Consultants and former global head of trading at Schroder Investment Management.
Adding that the regulators faced a ‘damned if they do, damned if they don’t’ scenario, Wood suggested the tight timeframe adopted by ESMA illustrates the seriousness with which market structure issues are being taken. “If they implement controls, they get criticised by free marketplace advocates,” he said. “If they don’t and there’s a systemic failure, then they get everybody complaining because the market has failed.”
Meanwhile Niki Beattie, managing director of UK consultancy The Market Structure Practice, pointed out that the MiFID II proposals recently presented by the European Commission are more contentious than the ESMA proposals.
The latest draft of MiFID II endorsed by the European Commission in October will impose new restrictions on HFT, confirm a ban on organised trading facilities from crossing against prop trading flow, and define new rules for access criteria between central counterparties and trading venues. It also includes proposals that could force market making algorithms to operate continually during market hours.
“MiFID II contains measures that are more contentious than this,” she said. “I don’t think the regulators in any way want to start looking at source code or the technical aspects of the algorithm. For one thing, they’re not qualified to do that, nor is it their responsibility. That’s not what this is about – it is about creating a sensible framework that ensures someone is checking that these algos are properly tested and performing in an appropriate manner.”
For example, Beattie suggests that identifying an algo as an arbitrage strategy that works in the oil sector, seeking arbitrage opportunities between three different venues, would be a sufficient description under the ESMA proposals. She also suggested that providing algos with a centralised numbering system, so that they can be easily identified in the event of a ‘flash crash’ type event, would be useful – although the ESMA proposal does not include such a measure.
“I don’t think this is overly onerous on the HFT firms, it’s not going to reveal their strategy or stop them from trading,” she added.