As a result of the development of algorithmic trading and high frequency algorithmic trading (HFT), as a particular case of algorithmic trading, MiFID II-MiFIR imposes certain obligations on trading venues and IFs to protect the integrity and quality of the market.
The IF that engages in algorithmic trading shall notify the competent authority of its home Member State and that of the trading venue where the algorithmic trading takes place as a market participant.
Market making activities
IFs that, using algorithmic trading, pursue market making strategies, must enter into market making agreements with the trading venues where they develop such strategies.
In addition, trading venues must have market making schemes in place to ensure that market making agreements are entered into with a sufficient number of IFs providing firm quotes at competitive prices for certain financial instruments traded on continuous trading facilities (such as, inter alia, liquid shares and ETFs), and, where appropriate, taking into account the nature and scale of trading in the relevant trading venue.
Organisational requirements for IFs and trading venues
MiFID II-MiFIR addresses aspects such as the governance structure or the regulatory compliance function of the IF that carries out this activity, with certain requirements imposed on its configuration. The new rules also require that the staff in charge of the systems have adequate expertise on and knowledge of the trading systems and the algorithms used.
Capacity and resilience of the systems
The new regulatory framework establishes a series of guidelines and specific measures to ensure that the systems have adequate resilience and capacity. For example, trading venues are required to ensure that the capacity of their trading facilities is sufficient in accordance with the measures established by the implementing regulations and that they have, inter alia, operational mechanisms that allow trading to be automatically suspended or limited at any time during the trading session. In addition, both trading venues and IFs must carry out stress tests on their trading facilities and the algorithms used thereby.
Co-location and proximity services
In cases where a trading venue provides proximity or co-location services for the IT equipment of IFs in connection to the own market infrastructure, trading venues must ensure that access to those services is fair, transparent and non-discriminatory.
Order to trade ratio (OTR)
Trading venues must have systems in place to limit the proportion of unexecuted orders that can be entered into the system by each member or market participant.
MiFID II-MiFIR imposes an obligation on trading venues to make their fee structures transparent, fair and non-discriminatory. In this sense, it is required that the fee structure itself does not encourage the introduction, modification or cancellation of orders in such a way as to contribute to the creation of disorderly trading conditions or market abuse.
Tick-size (minimum price variation of a financial instrument)
The minimum variation in the price of shares and similar instruments is an element of market management and must be adjusted to the liquidity profile of the instrument.
Although in practice trading venues were already applying a minimum tick-size, the new rules establish harmonised measures at European level, based on price ranges and liquidity bands per number of transactions in the most liquid market.