Expectations for the use of algorithmic trading further clarified

We will integrate the recommendations of the European supervisory authority ESMA into our supervision of the sector. This briefing consequently has a number of implications for our priorities for the annual self-assessment under RTS 6, as required for firms engaged in algorithmic trading as well as providers of Direct Electronic Access (DEA).

Advance notice of the annual self-assessment request under RTS 6

Firms engaged in algorithmic trading and DEA providers are required to conduct an annual assessment of their trading systems, algorithms, trading controls, and the associated governance framework. This follows from Article 9 of Commission Delegated Regulation (EU) 2017/589 (RTS 6). In the third quarter of this year, we will request the validation report of this assessment process from a number of investment firms and banks. We align with the themes that ESMA highlights in the supervisory briefing.

AFM shares supervisory priorities with the industry

The following topics are of particular focus:
• AI and ML: We expect firms to have a concrete understanding of the risks associated with artificial intelligence (AI) and machine learning (ML), and to ensure that trading algorithms and strategies are explainable, auditable, and do not act unintentionally, with clear lines of accountability.
• Definitions and retesting of algorithms: We expect firms to apply a consistent definition of what they consider to be a trading algorithm, including when a material change to an existing trading algorithm has occurred.
• DEA: Pre- and post-trade controls are essential to limiting market and credit risks for both provider and user. We therefore include DEA providers and credit institutions in our information request.

Simplification and reduction of administrative burden

The digital resilience of firms remains an important area of attention for the AFM. With the entry into force of the Digital Operational Resilience Act (DORA), firms are subject to a comprehensive framework for business continuity and the mitigation of IT risks. To reduce administrative and operational burdens, firms are not required to include Articles 14 and 18 of RTS 6 in the annual self-assessment, as these topics fall within the scope of DORA.

In addition, firms are no longer expected to submit interim notifications under Article 17(2) and 17(5) of MiFID II. This means that investment firms and banks are only required to notify the AFM upon commencement and cessation of algorithmic trading on a trading venue in the Netherlands, and upon commencement and cessation of offering DEA.

Queries

For questions, please contact her@afm.nl.

More information

ESMA Supervisory Briefing on Algorithmic Trading in the EU