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 this blog first.

If you thought that my introduction was rather long winded, you will not be pleased to hear that your algo audit trails could look exactly like that too, if ESMA’s current proposal for record-keeping makes it into the final Level 2 text of MiFID II. ESMA suggests that audit trails should include all market data messages relevant when “algorithms make a decision to submit or not submit an order”. This unfortunate wording suggests that firms not only have to store market data when the algo decides to act (add, amend, cancel order), but also when the algo makes the decision not to do anything. How this could be relevant is beyond me, as I don’t see why doing nothing could harm the market. But I certainly do know that algos can decide to do nothing many times a second, thus easily increasing the size of your audit trail by a huge factor.

We will have to wait to see what ESMA finally decide on that point. In the meantime, I am not going to get a coffee or a tea, not going to read my emails and not going to schedule that meeting nor worry about the next piece of regulation coming. Instead, I think I might just go and buy some shares in a hard disk producer, just in case!

2 Responses to “What I did not do”
  1. Even since the price spike in HSBC shares, caused by simultaneously used PoV algos (see FCA Market Watch July 2014/No. 46), we know that automats can affect the markets badly. Assigning this e.g. to the heavy use of quoting engines used for market making at the bond market or fx it’s quite easy to imaging what machines can depredate if they are doing – nothing. Therefore it is quite easy to understand why competent authorities want to have a market data audit trail. The question is not if – the question might be how long do we have to keep market data records. Even ESMA wants us to monitor markets proactive and “neartime”.

  2. Christian Voigt says:

    Eckhart, I fully agree with you that poorly designed or operated algorithms may harm markets. The PoV example discussed by FCA just illustrates that point. Also, I see why regulators want to define minimum standards in regard to audit trails. The problems in the PoV example were caused because the algorithms send too many unlimited orders in a too short of time period to the market, i.e. they did something. If those PoV algos would have remained inactive, the trader would have been annoyed but the market would have not been disrupted.

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