The European Securities and Markets Authority (ESMA) published the MiFID II/MiFIR review report on algorithmic trading. It concludes that no fundamental issues have emerged with respect to the MiFID II algorithmic trading regime which has overall delivered on its objectives.
In one section of the report that highlights consultation feedback, ESMA noted that respondents agreed with the analysis indicating that the circuit breaker mechanism has achieved its objective of protecting markets against episodes of extreme volatility affecting some instruments or the whole market. This has been evidenced during the recent volatility events. Some replies compared circuit breakers to short selling bans and consider the former to be a more efficient mechanism contributing effectively to the orderliness of trading.
The report makes recommendations that aim at both simplifying the regime and making it more efficient. The report therefore includes some proposals to the European Commission on targeted Level 1 amendments. It also identifies issues which will be followed up by ESMA via amendments to technical standards or additional guidance on a number of topics.
Topics include:
- the concepts of “algorithmic trading” and “Direct Electronic Access”;
- the authorization regime for EU and non-EU algorithmic trading firms (including HFT firms) deploying their strategies on EU trading venues;
- the organizational requirements for investment firms, including the notification and testing requirements of algorithmic traders to competent authorities; and, the self-assessment exercises to be performed by investment firms;
- organizational requirements for trading venues, including the self-assessment exercises to be performed by trading venues, circuit breakers, the fee structures, order to trade ratios; and market outages; and
- a review of MiFID II provisions which are indirectly relating to algorithmic trading activities (e.g. tick size and market making).
This report will be submitted to the European Commission and is expected to be taken into consideration for further legislative proposals on the MiFID II regime. Regarding Level 2 provisions, the amendments of existing technical standards discussed in the report will be subject to specific consultations to be published shortly.