ESMA opens consultation on impact of algorithmic trading under MiFID II

The consultation paper seeks industry feedback on the market impact of requirements relating to algorithmic trading under the MiFID II regulations.

European watchdog ESMA has released a consultation paper seeking feedback from market participants on the impact of algorithmic trading requirements set out by MiFID II and MiFIR regulations.

The consultation explores algorithmic trading holistically including the authorisation regime, provisions for algorithmic and high-frequency traders, and the provisions applicable to trading venues that allow or enable market participants.

It also sets out to uncover potential market risk relating to circuit breakers, the deployment of speedbumps, and the sequence of trade confirmations to individual participants versus the public disclosure of transactions.

“Many provisions and requirements of MiFID II relate either directly or indirectly (e.g. direct electronic access or tick sizes) to algorithmic trading. This consultation paper, therefore, adopts a holistic approach to algorithmic trading and reviews all related provisions together with the aim of having the current framework operating more efficiently,” said ESMA.

Market participants are invited to submit their feedback to the report by 12 March when ESMA will prepare a review report for the European Commission to release by July next year.

Algorithmic trading has been at the forefront of many discussions by regulators globally in recent months. In February, UK financial regulator the FCA warned that the increased use of artificial Intelligence (AI) and algorithmic decision-making trading could lead to widespread market failures and flash crashes.

However, results of The TRADE’s Algorithmic Trading survey in October found that traders had found solace in the number of trades they executed algorithmically.

The report took data from 2011 to 2020 and found that 32% of surveyed funds indicated that they had an appetite to make use of additional algorithmic trading providers in the next year.