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Directive 2014/65/EU1 (MiFID II) and Regulation (EU) No 600/20142 (MiFIR) provide for a number of review reports requiring the European Commission (EC), after consulting ESMA, to report to the European Parliament and the Council on various provisions. This final report covers the review provision on the impact of requirements regarding algorithmic trading including high-frequency algorithmic trading set out under Article 90(1)(c) of MiFID II.
This review report therefore adopts a holistic approach to algorithmic trading and reviews all provisions related directly and indirectly to algorithmic trading with the aim of both simplifying the regime and making it more efficient.
Section 2 provides for an introduction to the report.
Section 3 presents cross-cutting topics regarding algorithmic trading and high frequency trading. ESMA analyses the general provisions relating to algorithmic trading and high-frequency trading and, more specifically, the issues around the concepts of “algorithmic trading”, “Direct Electronic Access”, as well as the authorisation regime for EU and non-EU algorithmic trading firms deploying their strategies on EU trading venues.
Section 4 discusses the organisational requirements for investment firms that engage in algorithmic trading, including high-frequency traders. It includes more specifically proposals regarding the notification of algorithmic traders to competent authorities; the testing requirements and the self-assessment exercises to be performed by investment firms.
Section 5 focusses on the organisational requirements for trading venues that enable algorithmic trading on their systems. The report includes here recommendations and proposals regarding the self-assessment exercises to be performed by trading venues, circuit breakers, the fee structures of trading venues, order to trade ratios as well as market outages.
Finally, Section 6 addresses the other provisions that aim at better framing the activity of algorithmic and high-frequency traders such as tick sizes and market making, while also discussing new issues which have recently emerged on EU markets and are very closely associated to algorithmic trading. This includes the deployment of mechanisms called speedbumps and the sequence of trade confirmation to individual participants by trading venues versus the public disclosure of such transactions.