ESMA guidelines

ESMA guidelines on systems and controls in an automated trading environment.

On 24th February 2012 ESMA issued guidelines on systems and controls in an automated trading environment. The aim of these guidelines is to foster EU convergence in supervisory practices regarding automated trading and to help in providing a level playing field for investors.

The main guideline themes are as follows:

  • Clear, formalised Governance
  • Effective Training to maintain competency
  • Controlled management of Risk
  • Monitoring of trading activity
  • Managing Automated Trading
  • System Capacity, Resilience and Business Continuity Planning
  • Record Keeping and Periodic Review

Headline items for investment firms are listed below:

  • comply by 1st May 2012, subject to competent authority adoption
  • guidelines are based on existing MiFID current industry best practice with little need for any change envisaged by ESMA, hence the May date
  • guidelines applicable to Regulated Markets, MTFs, investment firms and firms providing DMA/SA (Direct Market/Sponsored Access)
  • organisational requirements for investment firms’ electronic trading systems (governance, capacity & resilience, business continuity, testing, monitoring & review, security, staffing, record-keeping for 5 years)
  • organisational requirements for investment firms to promote fair and orderly trading (blocking of orders by price/size parameters, trading permissions, pre-trade risk management, reporting/approval of overrides of pre-trade controls, order entry/compliance training, cross-market/platform monitoring for signs of disorderly trading, control over messaging traffic)
  • organisational requirements for investment firms to prevent market abuse – firms should have adequate systems in place, with auto alerts, to monitor trading activities (own traders, algos, clients and DMA/SA for market manipulation behavior (e.g. ping orders, quote stuffing, ramping, layering & spoofing), cross-market/cross-asset class and to flag anything likely to be suspicious – using sufficient level of time granularity
  • organisational requirements for investment firms that provide DMA/SA – naked access is prohibited, firms need to separately identify orders and transactions of DMA/SA clients and be able to halt trading

There was no official implementation period that you would normally expect with any change coming from Brussels, mainly because little change was envisaged by ESMA. The guidelines were cited as being based on industry best practice that was, in the main, already in place.

It is expected that the guidelines may be taken forward into legislation under MiFID II (and the review of the Market Abuse Directive, MAD).

Click here for an overview of the main guideline themes and discussion points.

Last updated 10th May 2013

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