New ESMA guidelines for automated trading

From May 1, 2012 new rules will apply for automated trading, following the implementation of new ESMA guidelines. The European Securities and Markets Authority (ESMA) has adopted these guidelines in order to address recent developments in automated trading such as the growth of high frequency trading (HFT). The guidelines set out requirements for the systems and controls of financial market participants who are active in an automated trading environment.

The guidelines can be found on the AFM website. 

The ESMA guidelines address the following topics:

  • Assuring the robustness of electronic trading systems by establishing adequate procedures for the development, testing, use, and continuous monitoring of trading systems and trading algorithms;
  • Promoting fair and orderly trading by taking measures which address erroneous order entry and maintain pre-set risk management thresholds; 
  • The prevention of market abuse (market manipulation in particular) by installing adequate filters and monitoring mechanisms.

The members of ESMA (including the AFM) find it important to issue these guidelines now in advance of the upcoming recasting of the Markets in Financial Instruments Directive (MiFID). Given the urgency of the subject, they find it important to already now provide financial market participants with clarity on the systems and controls financial market participants should have in place in the current automated trading environment.

The AFM will use the guidelines in its supervision of market participants’ compliance with Dutch laws and regulations in force. The guidelines are addressed to investment firms and trading platforms. In addition, they will have implications for members of a trading platform who are not authorized as an investment firm, and for market participants who develop automated trading systems for investment firms and trading platforms.

The AFM was closely involved in the development of these ESMA guidelines. In her November 2010 report on HFT, the AFM called for strengthening the systems and controls requirements for market participants throughout the trading value chain. The new guidelines, which were originally published by ESMA on December 22, 2011, give practical realisation to this. The AFM considers that these guidelines offer a useful and realistic contribution to making the European financial markets more robust and resilient.

Additional information can be found on the ESMA website.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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