European Securities Watchdog Launches Supervisory Action on Algorithmic Trading Controls

The European Securities and Markets Authority (Esma), in collaboration with National Competent Authorities (NCAs), has initiated a Common Supervisory Action (CSA) to assess the implementation of pre-trade controls (PTCs) by European Union (EU) investment firms involved in algorithmic trading. This move comes in the wake of the May 2022 flash crash, underscoring the necessity for robust checks in algorithmic trading practices. PTCs play a pivotal role for investment firms in preventing and limiting the execution of erroneous orders on trading platforms. The CSA aims to gain detailed insights into the utilization of these controls across the EU.

Key focus areas of the CSA encompass the implementation of PTCs, the methodology for calibration, the establishment of credit and risk limits, monitoring and governance frameworks pertaining to PTCs, as well as the implementation and monitoring of PTCs in scenarios involving the outsourcing of trading activities to third countries. This initiative is part of Esma's broader efforts to ensure the consistent application of EU rules and promote stable and orderly financial markets.

The regulations governing PTCs are outlined in the Markets in Financial Instruments Directive II (MiFID II) and CDR 2017/589 (RTS 6), which detail the organizational requirements for firms engaged in algorithmic trading. Esma, along with NCAs, plans to conduct the CSA throughout the year 2024.

Esma's proactive stance in evaluating the implementation of algorithmic trading controls reflects the regulatory commitment to addressing potential vulnerabilities and risks associated with algorithmic trading practices in the EU financial markets.

By fLEXI tEAM