ESMA delves into HFT for MiFID II

The European Securities and Markets Authority, the pan-European financial regulator, has said it will use feedback to recent questionnaires on high-frequency trading to inform MiFID II proposals.

On 16 February, ESMA, which superseded the Committee of European Securities Regulators (CESR) at the start of this year, sent out separate questionnaires on HFT to approximately 150 respondents including market operators, buy-side firms, sell-side firms, industry associations and those engaging in low-latency trading. The responses, which were due on 25 March, will be handed over to a newly established ESMA taskforce that is running fact-finding exercises on microstructural issues including HFT, sponsored access, co-location, fee structures and tick sizes.

“The ESMA taskforce’s work on HFT is at an early stage, but is linked to the MiFID review and its proposals for market microstructure, of which automated trading is a significant part,” said a spokesperson for ESMA.High-frequency trading firms and others engaged in low-latency trading were quizzed on aspects such as the types of strategies they employ, how they access markets, which asset classes they trade, latency requirements, algorithmic development and risk management procedures. They were also asked for data from Q4 2010 related to order-to-trade ratio, number of orders per second and value of orders.

Regulated markets and multilateral trading facilities were asked about the number of high-frequency trading members they have, technology performance of trading platforms and data from Q4 2010 on the number and value of trades executed by high-frequency trading firms.

For the purposes of the questionnaire, HFT is defined as, “Trading activities that employ sophisticated, algorithmic technologies to interpret signals from the market and, in response, implement trading strategies that generally involve the high frequency generation of orders and a low latency transmission of these orders to the market. Related trading strategies mostly consist of either quasi market making or arbitraging within very short time horizons. They usually involve the execution of trades on own account (rather than for a client) and positions usually being closed out at the end of the day.”

In its recent MiFID consultation paper, the European Commission (EC) laid out a number of proposals that were designed to adapt the existing regulatory framework to account for the growth in automated trading and related issues. The paper suggested a broad definition for automated trading, with a sub-category for high-frequency trading included under this umbrella.

An automated trader would be defined as any participant that uses algorithms “to determine any or all aspects of the execution of the trade, including timing, quantity and price”.

The EC also proposed technical risk management standards to prevent system errors and monitoring of sponsored access arrangements, as well as the requirement for market participants to notify authorities of the algorithms they use.

In addition, all markets could be required by MiFID II to install their own circuit breakers, stress test their platforms for resilience and offer fair and equal access to co-location services.

As part of the automated trading reforms, ESMA could be given authority to set standards on tick sizes and circuit breakers. The EC was expected to propose new MiFID rules in May following the feedback received to its consultation, but this is likely to now be delayed until June.

anish.puaar@thetrade.ltd.uk

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