European securities regulators have published new guidelines that aim to improve regulatory oversight of algorithmic trading.
The European Securities and Markets Authority published its final report on guidelines for automated trading, which it says represents a comprehensive regime governing the operation of electronic trading systems by a regulated market, a multilateral trading facility, or investment firms. The guidelines will become effective by May 1, 2012.
They require markets and other trading systems to have controls in place to maintain the orderly functioning of the markets, including: adequate pre-trade controls, systems testing, mechanisms to constrain or halt trading in response to exceptional volatility, due diligence requirements for granting market access, and rules to prevent, identify and report possible market abuse.
They also impose requirements on investment firms that use algorithms, including governance requirements, pre-trade controls, and due diligence requirements for clients using direct market access. It also imposes record-keeping obligations.
“The publication of today’s guidelines is an important step towards improving the oversight of automated trading. ESMA is committed to ensure that technological innovation does not pose a risk to the orderly functioning of the markets and will continue to monitor closely the developments in financial markets, including those which could impact on the resilience of market infrastructures,” said Steven Maijoor, chair of the ESMA.