European securities regulators are launching a compliance sweep to examine the pre-trade controls that investment firms have adopted to guard against “fat finger” trading goofs that have sparked wild market selloffs.
Along with various national regulators, the European Securities and Markets Authority (ESMA) is undertaking a joint supervisory action to assess the implementation of controls by investment firms that use algorithmic trading techniques.
The focus of the regulators’ review is the controls that are intended to prevent mistaken orders from making their way to the market — events that have periodically sparked sudden market crashes by touching off extreme volatility.
In the wake of one of these events — the “flash crash” in May 2022, which was blamed on a fat finger error by a trader at Citigroup — regulators have focused their efforts on ensuring that firms have adopted adequate pre-trade controls to prevent these kinds of trading mistakes.
Now, the regulators are conducting a followup review to gain more detailed insights into how firms use these controls.
Among other things, the review will cover the design and calibration of firms’ pre-trade controls, how credit and risk limits interact with these controls, and the oversight and governance of these measures.
The review is intended to ensure that the rules around trading controls are being applied consistently, and to help promote fair and orderly markets, ESMA noted.