RegAT – round 2

Regulation AT forges ahead, this time with a Round 2 panel convened on June 10th at which the CFTC focused the discussion on five major sticking points: 1. Amendments to the proposed definition of direct electronic access (DEA) 2. Quantitative measures to establish the population of persons 3. Alternatives to require each person defined as an “AT Person” to implement and utilize... Read More

Regulatory algebra

Algorithmic trading and market access are under increased pressure from regulators everywhere, adding new layers of complexity in the quest for a single, global, normalised trading experience. Buy-sides often use Sponsored Access (SA), Direct Market Access (DMA) or Direct Electronic Access (DEA) via brokers across different regions. With MiFID II and RegAT each defining those terms,... Read More

All ‘ayes’ on RegAT

Last week, following an open meeting on the subject, the CFTC’s motion to move forward with its proposed Regulation on Automating Trading (RegAT) was passed unanimously by 3 to 0. Following a brisk set of opening remarks by Commissioners Bowen and Giancarlo, and a statement by Chairman Massad, the Division of Market Oversight valiantly attempted to present a case for the CFTC... Read More

Don’t be fooled by statistics

The definition of algorithmic trading under MiFID II is extremely broad, essentially capturing any functionality that determines any parameter of an order automatically. That begs the question, what order flow qualifies as not algorithmic? Hand on heart, how many traders can claim to exclusively use native exchange order types and not rely on at least one of the friendly little... Read More

One step forward, one step back

Market making, at its core, is a simple exchange where the market maker gives immediate liquidity and takes the bid/ask spread in return. This is set to become much more complicated in MiFID II as ESMA is mandated to introduce market making obligations. Under ESMA’s latest draft investment firms using algorithmic trading for market making for at least 30% of the available trading... Read More

Algorithmes de type franḉais

Just as we’re all getting used to the idea of having to flag algos on an EU-wide basis under MiFID II by 2017, the French regulator recently published further guidance under the French banking bill that came into force in July last year. Amongst other things the French bill targets algorithmic trading/HFT and this recent notice calls for French entities to notify the regulator... Read More

What I did not do

When I got into work this morning, I decided not to return a missed call, not to review a document, not to read a report, not to ask some colleagues for advice, not to fill in my timesheet for last month, not to think about further job training and, most importantly, not to join an internal weekly meeting which was covering a topic not relevant to me. Instead I decided to write... Read More

Please lock the door behind you

Under MiFID II European regulators introduce new rules around algorithmic trading. Whether it’s algo IDs, enhanced audit trails or business clock synchronisation, none of these items would have been on the agenda if it were not for the rapid innovation in information technology over the past decade. Now ESMA is extending its reach into cyberspace, discussing issues such as cyber... Read More

Algo identifiers galore

With the German algo ID mandatory from 1st April, I was prompted to scan the latest MiFID II texts in this regard. Member states must require exchanges to be able to identify the different algorithms used for generating orders (Art. 51.6) which, on a high level, sounds just like the German HFT Act. To make things even more complex, MiFIR requires investment firms to identify in... Read More

Identity crisis for algos

Yesterday saw the publication of the XETRA and Eurex rule changes relating to the German HFT Act in which they provide details of how to implement the new RegulatoryID. Under the new rules it will no longer be enough simply to differentiate between algo and non-algo orders (such as under the current CME regime). Starting from 1st April 2014, all orders sent by an exchange member... Read More

Regulatory front-running

Front-running is regarded as a form of market abuse and is banned accordingly. Although it is widely accepted that MiFID II will implement new regulation on algorithmic and high-frequency trading, that doesn’t seem to have stopped the law makers indulging in a little ‘front-running’ of their own. First, Germany passed its HFT Act ahead of schedule and now France... Read More

The long arm of the law

The buy-side has traditionally been spared from the burden of most regulatory trade reporting requirements, passing this responsibility on to their brokers who hold the exchange memberships. But this principle looks to have been challenged by BaFin, the German financial regulator, with the introduction of its High Frequency Trading Act. One of the aims of the law is to ensure that... Read More

Bless me, Father, for I have changed my algo

Managing algorithmic trading will become more difficult in the future. Regulators have already suggested in recent drafts of MiFID II and the German HFT Act that algos need to be registered/earmarked and their functionality reported to the competent authority if requested. The European Parliament (EP) takes the requirement a step further in its draft in Article 10a in MAR. Here,... Read More

The liquidity genie

Following on from the warnings to the contrary from the UK Foresight publication (see previous blog Some things in life are bad…), we have had a reaffirmation (if one was needed) last Friday from the plenary vote that the European Parliament is going to proceed to target speculation and high frequency trading through their new rules and regulations. The magic of the “Liquidity... Read More

Spotting a heart-shaped cloud in the sky

Last week the Foresight Project published its written report on HFT (see previous blog Some things in life are bad…) which gave a balanced picture with carefully drafted conclusions. However, during a presentation of the report’s findings on 23rd October, there was one particularly interesting issue that caught my attention. One of the speakers referred to a case, presented... Read More

A sensible request deserves a sensible response

The German government and the European Commission want to mandate earmarking of every algorithmic order in order to identify the originating strategy. The reason being that market supervisors have a difficult job keeping up with all those technical innovations in financial markets. In the good old pit trading days traders were restricted by physical limitations, but in a world where... Read More

Liquidity and the regulation of markets

Last week’s TradeTech in London included a talk about liquidity by David Lawton, the FSA’s Acting Director, Markets, during which he discussed all the hot potatoes that MiFID II has to offer.  For a change, this was not another piece of 500 millisecond nonsense but included some sensible and well considered arguments. Here are the highlights of his key points: •  ... Read More

Block Trade: Endangered species or old habit?

Currently, MiFID favours block trades by granting them privileges that regular sized trades do not receive. A block trade between two institutional investors is treated rather like a Sumatran elephant that is way up on the red list of threatened species. Regulators protect block trades by allowing for pre-trade transparency waiver and delayed post-trade reporting. At the other... Read More

Should have gone to Specsavers!

On first reading of the draft report from the rapporteur on MiFID II it is unclear from the wording if the ban on direct electronic access is only in the context of high-frequency trading. Surely this must be the case, otherwise we may as well all pack up now. Additional draft amendments to the MiFID text worthy of note are: •    the timeline is crystallising with the final... Read More

ESMA publishes its Final Report on Automated Trading guidelines – effective by 1st May 2012

22nd December 2011 – ESMA published its final report on guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities. In issuing these guidelines, ESMA rolls out a comprehensive regime governing the operation of electronic trading systems by a regulated market, a multilateral trading facility (MTF)... Read More

MiFID II should be a priority for every financial firm

There were two recurring MiFID II issues discussed at TradeTech Liquidity (24th Nov): the new OTF category does not fit the riskless principal/dual capacity model used by firms facilitating agency client order execution on existing broker crossing systems – business models will all have to change! According to Kay Swinburne the number 1 issue for the Rapporteur, for the... Read More

MiFID II Digest

While the 10 key takeaways from MiFID II may have given Steve indigestion, we are busy tucking in to the smörgåsbord of recently published MiFID II documents and snacking on all the published articles on the subject. From my reading so far, most looks as expected from the previous version that was leaked in August, with the following worthy of note: Organised Trading Facilities (OTFs)... Read More

Toto, I have a feeling we’re not in Kansas any more!

After much speculation it seems that another North American player will now be dominating the European trading landscape. It is surprising to learn that Kansas-based BATS Global Markets will pay the equivalent of £230 million (using today’s exchange rate) for the acquisition of Chi-X Europe. The latter firm has around 50 employees so the BATS deal suggests they are willing... Read More

More psychobabble?

The power of ‘thin slicing’ is a phrase used in psychology to explain the human’s ability to make sense of situations based on the thinnest slice of experience. I don’t know if this really works but Brussels appears to be doing exactly that. In an attempt to prevent systemic risk and another Flash Crash, the latest leaked MiFID II document (dated 7th October)... Read More

‘Guns don’t kill people – people kill people…’

This oft quoted statement used in gun control debates attempts to apportion responsibility to a person operating a firearm rather than demonizing the firearm itself.  In applying licensing laws to firearms it would seem challenging, at the very least, to license every gun manufactured or already in existence and thus legislation is often centred on the individual.  This echoes... Read More

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