MIFID And MIFIR On Algorithmic Trading ' And ' Provision Of Services And Establishment Of Branches By Third Country Firms..

Author:Mr Alix Prentice, Doron F. Ezickson, Adam Topping, Ramona Simms and Nick Shiren
Profession:Cadwalader, Wickersham & Taft LLP
 
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Introduction

This is the sixth in our series of briefings on MiFID and MiFIR. Below, we describe new obligations set out in MiFID that apply to investment firms engaging in algorithmic trading to have in place risk control measures, and authorisation requirements for third country firms providing services into or establishing a branch within the European Union as set out in MiFID and MiFIR.

A. Algorithmic Trading

Key Points

algorithmic traders will be required to provide continuous, ongoing liquidity; order routing systems are excluded from the definition of "Algorithmic trading"; investment firms operating as algorithmic traders must deploy a series of risk control measures, including trading thresholds and limits. Legislative Provisions

1. MiFID Article 4(30) (Definition): MiFID sets out an entirely new definition of "Algorithmic trading", which "means trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention. This definition does not include any system that is only used for the purpose of routing orders to one or more trading venues for the confirmation of orders".

2. MiFID Article 17 (Algorithmic trading): Investment firms engaging in algorithmic trading will now be subject to a number of systems, risk and operational requirements:

(i) to operate and maintain "effective systems and risk controls" in order to ensure resilient systems and capacity. These controls must include trading thresholds, limits and methods to prevent erroneous orders and other issues that contribute to disorderly markets, business continuity planning and effective anti-market abuse measures;

(ii) annually, the investment firm must provide their home state regulator with a description of its algorithmic trading strategies, details of the trading parameters and limits it deploys, its compliance and risk controls and details of tests performed on these systems;

(iii) algorithmic trading strategies must be "in continuous operation during the trading hours of the trading venue". In addition, the strategy must post firm quotes in order to provide "liquidity on a regular and ongoing basis to these trading venues at all times, regardless of prevailing market conditions";

(iv) investment firms providing direct electronic access to trading venues must put in place...

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