Graham Bishop.com

The second version of MiFID includes measures to control aspects of electronic trading and high-frequency trading for the first time.

The rules will include the following:

The need for all HFT firms to be regulated and licensed: Previously, firms that traded using their own capital were not subject to the MiFID rules. The revised rules mean firms engaging in high-frequency trading will need to adhere to MiFID for the first time.

A continuous liquidity provision obligation for marketmakers: This requires those using algorithmic trading strategies to make markets to adhere to a set of standards for providing liquidity. For example, a marketmaker would be required to run their strategies for a certain proportion of the trading day.

Controls for firms and trading venues: Firms that use algorithms to trade on markets and trading venues must have measures that prevent abuse and disorderly markets. Trading venues need to ensure their systems are resilient and properly tested to deal with a surge in order flow and should also have circuit breakers, which are mechanisms to temporarily halt trading in highly volatile market conditions.

Controls on direct access: Some HFT and prop trading firms that do not have exchange memberships access markets using the membership and connectivity of other firms. MiFID II enables regulators to ban this form of access if it is not subject to proper systems and controls.

Order-to-trade ratios: An important part of many HFT strategies is the ability to rapidly cancel and replace orders on trading venues in order to keep their strategies in-line with market conditions. However, high levels of order cancellation can also cause disorderly markets and can be a feature of abusive strategies that create a false impression of market activity. MiFID II encourages trading venues to impose fees for firms that have a high rate of cancellations.

Algorithm descriptions: Regulators will have the ability to ask firms for details of algorithmic strategies, including the trading parameters and risk controls. Firms that use algorithms will also need to keep sequenced records of all orders, including cancellations, and make them available to regulators on request.

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