regulatory requirements. MiFID II -...

Algorithmic trading regulatory requirements. MiFID II

MiFID II - MiFIR - ESMA RTS – MAR

V. 01 -- 2017/10/11

Avda. Conde de Bugallal 61D 2ºA 36004 Pontevedra

[email protected]

Phone: +34886213038

Qbitia Solutions S.L. [B-94049624]

T.3741 F.185 H.PO-51991

1

www.qbitia.com

Contents

1. Related directives, rules and regulations .................................................................. 2

2. Definitions ................................................................................................................. 3

3. Preface ....................................................................................................................... 6

4. HTF and algorithmic trading firms requirements...................................................... 7

Organisational and management requirements ............................................... 7

4.1.1. Notification to authorities .......................................................................... 7

4.1.2. Compliance function ................................................................................... 9

4.1.3. Risk management function ....................................................................... 10

4.1.4. Staffing ...................................................................................................... 11

4.1.5. IT teams .................................................................................................... 12

Algorithms and trading systems resilience requirements ............................... 13

4.2.1. Testing and deployment of algorithmic trading systems and strategies . 13

4.2.1.1. Testing of algorithmic trading systems ............................................. 13

4.2.1.2. Deployment of algorithms ................................................................ 16

4.2.2. Post-deployment management ................................................................ 16

4.2.2.1. Annual self-assessment ..................................................................... 16

4.2.2.2. Management of important changes ................................................. 17

4.2.3. Means to ensure resilience ...................................................................... 17

4.2.3.1. Kill functionality ................................................................................. 17

4.2.3.2. Automated surveillance system to detect market manipulation ..... 18

4.2.3.3. Business continuity arrangements .................................................... 19

4.2.3.4. Pre-trade controls on order entry ..................................................... 20

4.2.3.5. Real-time monitoring ........................................................................ 20

4.2.3.6. Post-trade controls ............................................................................ 21

4.2.3.7. Security and limits to access ............................................................. 21

Requirements for firms engaged in HFT .......................................................... 22

5. Annex I. HFT messages rate .................................................................................... 24

6. Annex II. Market manipulation ............................................................................... 24


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

2

www.qbitia.com

1. Related directives, rules and regulations

Directive 2014/65/EU (MiFID II) [Entry into force 2018/01/03]i

Regulation UE 600/2014 (MiFIR)ii

Regulation UE 596/2014 (MAR)iii

Commission delegated regulation (EU) 2016/1052iv

Commission delegated regulation (EU) 2016/522v

ESMA Regulatory technical and implementing standards (RTS 6-12). [MiFID II/MiFIR]

Commission delegated regulation (EU) 2017/565vi

Commission delegated regulation (EU) 2017/580vii

[RTS6] Commission delegated regulation (EU) 2017/589viii

Commission delegated regulation (EU) 2017/590ix

ESMA Briefing ESMA70-145-238


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

3

www.qbitia.com

2. Definitions

Investment Firm (IF). Any legal person whose regular occupation or business is the

provision of one or more investment services to third parties and/or the performance

of one or more investment activities on a professional basis.

Services and investment activities:

Reception and transmission of orders in relation to one or more financial

instruments.

Execution of orders on behalf of clients.

Dealing on own account.

Portfolio management.

Investment advice.

Underwriting of financial instruments and/or placing of financial instruments

on a firm commitment basis.

Placing of financial instruments without a firm commitment basis.

Operation of an MTF (multilateral trading facility).

Operation of an OTF (organised trading facility).

Regulated market. A multilateral system operated and/or managed by a market

operator, which brings together or facilitates the bringing together of multiple third-

party buying and selling interests in financial instruments in the system, in accordance

with its non-discretionary rules, in a way that results in a contract, in respect of the

financial instruments admitted to trading under its rules and/or systems, and which is

authorised and functions regularly and in accordance with the provisions of Directive

2014/65/EU.

Multilateral trading facility (MTF). A multilateral system operated by an investment

firm or market operator, which brings together multiple third-party buying and selling

interests in financial instruments in the system, in accordance with non-discretionary


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

4

www.qbitia.com

rules, in a way that results in a contract, in accordance with the provisions of Directive

2014/65/EU.

Organised trading facility (OTF). A multilateral system, which is not a regulated market

or MTF and in which multiple third party buying and selling interests in bonds, structured

finance product, emissions allowances or derivatives are able to interact in the system

in a way which results in a contract, in accordance with the provisions of Directive

2014/65/EU.

Trading venue. Any regulated market, MTF or OTF.

Algorithmic trading. 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 or for the processing of orders involving no determination of any trading

parameters or for the confirmation of orders or the post-trade processing of executed

transactions.

High-frequency Algorithmic Trading Technique. Any algorithmic trading technique

characterised by:

- Infrastructure intended to minimise network and other types of latencies, including at

least one of the following facilities for algorithmic order entry:

co-location,

proximity hosting, or

high-speed direct electronic access.

- System-determination of order initiation, generation, routing or execution without

human intervention for individual trades or orders.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

5

www.qbitia.com

- High message intraday rates which constitute orders, quotes or cancellations. A high

message intraday rate is defined by the submission on average of any of the following1:

a) at least 2 messages per second with respect to any single financial instrument

traded on a trading venue;

b) at least 4 messages per second with respect to all financial instruments traded

on a trading venue.2

For the purposes of this section, the above calculations will include

messages concerning financial instruments for which there is a liquid

market in accordance with article 2, section 1, point 17, Regulation

(UE) n.o 600/2014. Messages introduced for the purpose of dealing

on own account that meet the criteria of article 17, section 4,

Directive 2014/65/UE, will be included in the calculation.

For the purposes of this section, messages from clients of direct

electronic access will not be included in the calculations of the

intraday messages rate.

For the purposes of this section, grading venues are required to make

available to the firms concerned, on request, estimates of the average

of messages per second on a monthly basis two weeks after the end

of each calendar month taking into account all messages submitted

during the preceding 12 months.

1 Commission delegated regulation (EU) 2017/565, Article 19. The number of messages for each type of order can be consulted in Annex 1 of RTS 9. 2 The minimum number of messages sent to be considered HFT can be consulted in Section 7 Annex I of this document.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

6

www.qbitia.com

3. Preface

The evolution and growth of trading, in particular algorithmic trading, and the media

and political pressure3 have led to the development of a new legislation, MiFID II, that

is accompanied by new regulations (MiFIR and MAR), in addition to detailed technical

rules to implement it (ESMA RTS).

The aim of this regulatory changes is to avoid the abusive practices carried out by some

market participants in the past and to reduce the risk of market anomalies caused by

algorithmic trading and, particularly, HFT.

Those regulatory changes focus on five key aspects with the objective described above:

Greater transparency requirements and technology capacity for markets

(exchanges, MTFs, OTFs).

New rules for those who act as clearers.

New requirements for direct electronic access (DEA) and direct market access

(DMA) providers.

More obligations for algorithmic trading firms.

New requirements for investment firms engaged in high frequency algorithmic

trading.

It should be noted that the new regulations do not seek to limit or forbid algorithmic

trading or HFT. In fact, MiFID II itself states the importance of preserving and promoting

these practices, as they improve liquidity, reduce spreads and lower short-term

volatility, among others. In short, they lead to a better order execution for clients,

especially for retail clients.

3 As a consequence of market anomalies, such as the “Flash Crash” in May 2010 or the “Tweet Flash Crash” in April 2013, as well as the news about a number of illegal practices that were common in the market (Flash Boys by Michael Lewis).


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

7

www.qbitia.com

Qbitia presents this document with the aim of helping IFs to comply with MiFID II

requirements regarding algorithmic trading. This document has two main objectives:

Being a guide on duties and requirements for IFs and other participants involved.

Describing the way those MiFID II duties and requirements are met by using the

algorithmic trading platform Qcaid.

4. HTF and algorithmic trading firms requirements

Organisational and management requirements

IFs shall adopt a set of procedures to monitor its algorithmic trading systems and

operations:

Procedures to approve the development of new algorithms.

Procedures to approve the deployment and subsequent updates of trading

algorithms.

Procedures to solve problems identified when monitoring trading algorithms.

Separation and assignment of tasks and responsibilities of trading desks on the

one hand, and risk control and compliance functions on the other.

Notification to authorities

IFs engaged in algorithmic trading, whether HTF or not, shall notify this to:

The competent authorities of its home Member State (CNMV in Spain).

The trading venues at which the IF engages in algorithmic trading as a member

or participant of the trading venue.

The Article 5 of the Commission Delegated Regulation (EU) 2017/590 requires IFs which

execute a transaction to ensure that it is identified with a validated, issued and duly

renewed ISO 17442 legal entity identifier code in the transaction report. According to

the ESMA briefing ESMA70-145-238, MiFIR requires a number of entities to be identified

through the LEI:


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

8

www.qbitia.com

investment firms that execute transactions in financial instruments;

the clients (buyer, seller) on whose behalf the investment firm executes

transactions, when the client is a legal entity;

the client of the firm on whose behalf the trading venue is reporting under MIFIR

Article 26.5, when the client is a legal entity;

the person who makes the decision to acquire the financial instrument, when

this person is a legal entity e.g. this includes investment managers acting under

a discretionary mandate on behalf of its underlying clients;

the firm transmitting the order;

the entity submitting a transaction report (i.e. trading venue, ARM, investment

firm); and

the issuer of any financial instrument listed and/or traded on a trading venue.

The above entities shall need to be identified with an LEI even if they had no previous

legal obligation to obtain one and regardless of where they are operating or legally

based.

According to its criteria and up to five years after its use, the competent authority can

require:

The logic of algorithms that have been working, their description and the records

of their changes. See section 4.2.1.1. Testing of algorithmic trading systems.

Regulatory compliance assurance protocols.

Pre-trade and post-trade risk controls.

Trading limits for each algorithm and for the set of algorithms used by the IF.

Those IFs engaged in algorithmic trading shall record the details of each message

submitted to the trading venue with its corresponding time stamp immediately

after submission. The records must be in accordance with specifications of

Article 28 and of Appendix II of RTS6-Comission delegated regulation (EU)

2017/589. Please see article 6.2 Requirements for firms engaged in HFT of this

document for a complete reference.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

9

www.qbitia.com

Regarding time stamps, the Article 50 of the Directive 2014/65 requires that all trading

venues and their members or participants synchronise the business clocks they use to

record the date and time of any reportable event.

In order to comply with the aforementioned requirements, Qcaid provides a

discretionary and automatic system to save algorithms and register messages. Qbitia’s

systems are synchronized with the systems of the trading venues. Two specific services

are offered:

To those firms that have an infrastructure for securely saving information, Qcaid

provides a connection to the firm’s back-office system for automatic information

delivery.

To those firms that request it, Qcaid offers a “safe storage” system with a reliable

third-party certificate of deposit.

Compliance function

Independence

Regulatory compliance supervision control shall be an independent function in every IF,

not carried out by the staff responsible for algorithmic trading. There must be a

guarantee of total independence, so the compliance staff pay, whether fixed or variable,

shall not be linked to the performance of the algorithms in any way.

Compliance function can be outsourced to a third party.

Knowledge

IFs shall ensure that the compliance staff has, at least, a general understanding of how

the algorithmic trading systems and trading algorithms of the investment firm operate.

The compliance staff can achieve this by being in continuous contact with persons within

the firm who have detailed technical knowledge of the firm's algorithmic trading

systems and algorithms.

Control


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

10

www.qbitia.com

Compliance staff shall have sufficient authority to challenge staff responsible for

algorithmic trading where such trading gives rise to disorderly trading conditions or

suspicions of market abuse (according to MAR).

In addition, compliance staff shall have, at all times, contact with the person or persons

within the investment firm who have access to the ‘kill functionality’, or direct access to

that kill functionality. This emergency functionality should allow users to:

Immediately cancel any or all of its unexecuted orders submitted to any or all

trading venues.

Stop the execution of any or all algorithms.

Identify which algorithm and which trader or trading desk is responsible for each

order than has been sent to a trading venue.

Qbitia ensures the compliance with the requirement “kill functionality” in a redundant

way through its algorithmic trading platform Qcaid and its associated systems.

Risk management function

Ref. Article 23 of Commission delegated regulation (EU) 2017/565

1. IFs shall take the following actions relating to risk management:

a) establish, implement and maintain adequate risk management policies and

procedures which identify the risks relating to the firm's activities, processes and

systems, and, where appropriate, set the level of risk tolerated by the firm;

b) adopt effective arrangements, processes and mechanisms to manage the risks

relating to the firm's activities, processes and systems, in light of that level of risk

tolerance;

c) monitor the following:

I. the adequacy and effectiveness of the investment firm's risk management

policies and procedures;


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

11

www.qbitia.com

II. the level of compliance by the investment firm and its relevant persons with

the arrangements, processes and mechanisms adopted in accordance with

point (b);

III. the adequacy and effectiveness of measures taken to address any

deficiencies in those policies, procedures, arrangements, processes and

mechanisms, including failures by the relevant persons to comply with such

arrangements, processes and mechanisms or follow such policies and

procedures.

2. Investment firms shall, where appropriate and proportionate in view of the nature,

scale and complexity of their business and the nature and range of the investment

services and activities undertaken in the course of that business, establish and maintain

a risk management function that operates independently and carries out the following

tasks:

a) implementation of the policy and procedures referred to in paragraph 1;

b) provision of reports and advice to senior management.

Where an IF does not establish and maintain a risk management function under the first

sub-paragraph, it shall be able to demonstrate upon request that the policies and

procedures which it has adopted in accordance with paragraph 1 satisfy the

requirements therein.

Staffing

An investment firm shall employ a sufficient number of staff with the necessary skills to

manage its algorithmic trading systems and trading algorithms and with sufficient

technical knowledge of:

- The relevant trading systems and algorithms.

- The monitoring and testing of such systems and algorithms.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

12

www.qbitia.com

- The trading strategies that the investment firm deploys through its algorithmic trading

systems and trading algorithms.

- The investment firm's legal obligations.

- The functioning of the automatic alerts systems.

- The functioning of the orders sending systems.

- The regulation related to market abuse (MAR, specially Commission delegated

regulation (EU) 2016/522).

The necessary skills shall be specified by the IF, which, in addition, shall ensure that they

remain up-to-date.

IT teams

The system and automated controls that must be implemented to ensure the correct

functioning of trading algorithms must be included and defined in the organization’s IT

strategy. The key points of this strategy should be security, risk control and resilience of

the IF’s main operational elements.

The definition and management of this IT strategy, as well as every software and

hardware element used in algorithmic trading, can be outsourced, although the

investment firm shall remain fully responsible for its obligations in this case. Therefore,

the investment firm shall have sufficient knowledge and the necessary documentation

to ensure effective compliance with its obligations.

The obligations mentioned in the previous paragraph are detailed in section 6 of this

document and the following ones.

As an external IT company, Qbitia proposes a series of measures to ensure compliance:

Providing all the documentation on infrastructure, connectivity, message flow

and control systems of the algorithmic trading solution Qcaid.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

13

www.qbitia.com

Training, both general and specific about Qcaid, in the fields related to

algorithmic trading, algorithms testing and validation methodologies and market

abuse, among others.

Algorithms and trading systems resilience requirements

Testing and deployment of algorithmic trading systems and strategies

MiFID requires IFs to have procedures and controls in order to ensure the proper

functioning, the stability and the adaptability of the algorithms in changing market

environments.

4.2.1.1. Testing of algorithmic trading systems

- Prior to the deployment or substantial update of an algorithmic trading system, trading

algorithm or algorithmic trading strategy, they must be tested in order to check that

they work correctly and that they do not affect the market negatively, especially

regarding market abuse according to Commission delegated regulation (EU) 2016/522

Annex II.

- Every IF shall establish clearly delineated methodologies and protocols to develop and

test trading algorithms and systems, especially:

The capacity of the algorithm design to work effectively in changing market

conditions.

The consistency between the intended behaviour of the algorithm (according to

its design) and its actual functioning. This should ensure that the algorithm:

o does not start operations in an unintended manner;

o complies with the IF’s obligations, especially those described in this

document;

o complies with the rules of the trading venues;


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

14

www.qbitia.com

o does not contribute to disorderly trading conditions, continues to work

effectively in stressed market conditions and, where necessary under

those conditions, allows for the switching off of the algorithmic trading

system or trading algorithm.

The fact that the system does not affect the market negatively, particularly the

aspects described in section 6 of this document, Annex II. Market manipulation.

[Annex II of development regulation of MAR, Commission delegated regulation

(EU) 2016/522].

- IFs shall keep records of messages and trading algorithms that are or have been active

and sending orders to the markets, according to the IF’s obligations. The IF shall keep

records of all the relevant changes in algorithms and systems, allowing it to determine:

when a change was made;

who has made the change;

who has approved the change;

the nature or description of the change.

- The deployment or substantial update of a trading system shall be authorised by the

person in charge of them. This person shall be designated by the senior management of

the IF.

- The allocation of responsibilities shall be clearly set, in addition to the allocation of

sufficient resources to comply with them.

- Internal procedures shall be defined to seek authorizations or instructions to act.

- Testing methodologies shall be adapted to the products, markets and trading venues

where the algorithm will be deployed.

- Conformance testing shall be carried out to test the conformance with trading venues,


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

15

www.qbitia.com

when accessing that trading venue as a member or when connecting to that

trading venue through a sponsored access arrangement for the first time (or

when there is a material change of the systems of that trading venue), and

prior to the deployment of an important update of the trading systems or

algorithms.

- Conformance testing shall be carried out to test the conformance with direct market

access providers,

when accessing that trading venue through a direct market access arrangement

for the first time, or when there is a material change affecting the direct market

access functionality of that provider, and

prior to the deployment of an important update of the trading systems or

algorithms.

- Every testing and validation of the trading systems and algorithms shall be undertaken

in an environment that is independent and separated from its production environment.

Qbitia enables users to comply with the compliance obligations described in this section,

especially regarding:

The provision of technology and testing environments, high-precision testing and

simulation of trading algorithms on the trading platform Qcaid.

The provision of methodologies and algorithm validation and testing protocols,

as well as by offering support to adapt them to the particularities of each

organisation.

The provision of systems to store information securely (algorithms, changes,

messages), according to what is described in 5.1.1

The capacity to configure the trading platform Qcaid to automatically respond to

disorderly market conditions.

The native compliance of all the conformance testing regarding access to trading

venues and data reception.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

16

www.qbitia.com

4.2.1.2. Deployment of algorithms

Prior to the first deployment of a trading algorithm or the deployment after a substantial

update, the IFs shall set predefined limits on:

the number of financial instruments being traded;

the price, value and maximum number of orders;

the maximum position that an algorithm can reach; and

the number of trading venues to which orders are sent.

Post-deployment management

4.2.2.1. Annual self-assessment

IFs shall annually perform a self-assessment and validation process, and on the basis of

that process issue a validation report. The IFs shall evaluate and validate the following:

- Its algorithmic trading systems, trading algorithms and algorithmic trading strategies.

- The stress testing of procedures and controls to guarantee resilience against increased

order flows. The procedures that shall be tested are detailed in 6.1.3 Means to ensure

resilience. The testing shall comprise:

Validating the functioning of procedures and controls by using the highest

number of messages received and sent by the IF during the previous six months,

multiplied by two.

Validating the functioning of procedures and controls by using the highest

volume of trading reached by the IF during the previous six months, multiplied

by two.

- Its governance, accountability and approval framework.

- Its business continuity arrangement.

- Its overall compliance with Article 17 of Directive 2014/65/EU [that is, the

requirements described in this document], having regard to the nature, scale and


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

17

www.qbitia.com

complexity of its business, according to Annex I of Commission delegated regulation (EU)

2017/589.

This report must be drawn out by the risk management function, provided that it has

been defined. Please see section 5.1.3 Risk management function. The report shall be

audited by the internal audit function and be subject to approval by the IF’s senior

management.

Qbitia offers IF’s a testing environment to perform the assessments on the algorithms.

In addition, it also issues the corresponding report about the evaluation of all the

systems and control functions that are managed by Qbitia.

4.2.2.2. Management of important changes

IFs shall ensure that any important change related to algorithmic trading is preceded by

a review of the impact of that change.

In addition, it shall be ensured that any change to the functionality of its systems is

communicated to traders in charge of the algorithm and to the compliance functions

and the risk management function.

Means to ensure resilience

4.2.3.1. Kill functionality

This emergency functionality shall allow IFs to:

Cancel immediately any or all of its unexecuted orders submitted to any trading

venue.

Stop the functioning of any or all algorithms.

Be able to identify which algorithm and which trader (or trading desk) is

responsible for each order that has been sent to a trading venue.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

18

www.qbitia.com

Qbitia ensures the compliance with the requirement of the “kill functionality” in a

redundant way through its algorithmic trading platform Qcaid and its associated

systems.

4.2.3.2. Automated surveillance system to detect market manipulation

1. IFs shall monitor all trading activity that takes place through its trading systems for

signs of potential market manipulation as referred to in Article 12 of Regulation UE

596/2014 (MAR), which is included in section 8. Annex II of this document.

2. For the purposes of the previous paragraph, each IF shall establish an automated

surveillance system which

a) monitors orders and transactions,

b) generates alerts and reports, and,

c) where appropriate, employs visualisation tools.

3. The automated surveillance system shall cover the full range of trading activities

undertaken by the IF and shall be designed and scaled having regard to the complexity

of the organization.

4. Any indications of suspicious trading activity shall be cross-checked and reported to

the staff responsible for monitoring the trading activities and to the

verification/compliance function.

Trading platform Qcaid has systems to prevent market manipulation activities in the

following fields:

Prevention of “over quoting”, control of ratio “Quote / Fill” or “OTR” (order-to-

transaction ratio).

“Auto-matching” prevention system.

System of prevention of excess of orders per time unit.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

19

www.qbitia.com

Market rejections management system and alarms.

4.2.3.3. Business continuity arrangements

IFs shall have business continuity arrangements to ensure trading continuity. These

arrangements shall effectively deal with disruptive incidents and, where appropriate,

ensure a timely resumption of the algorithmic trading.

Those arrangements shall be documented in a durable medium.

The arrangements developed shall include the following:

A governance framework for the development and the deployment of the

business continuity arrangement.

Design and evaluation of possible adverse scenarios relating to the algorithmic

trading systems, in particular, staff, work space, external suppliers, data centres

and loss or alteration of critical data and documents.

Procedures for activating and relocating the trading system to a back-up site to

operate the trading system from that site.

Staff training on the operation of the business continuity arrangements.

Usage policy regarding the kill functionality.

Arrangements for shutting down the relevant trading algorithm or trading

system where appropriate.

Alternative arrangements for the IF to manage pending orders and positions.

IFs shall ensure that their trading algorithms or trading systems can be shut down

without creating anomalies in the trading conditions.

The trading platform Qcaid is not built monolithically, that is, each functionality is

separated from the rest, so that an eventual malfunction does not affect the others.

Each of them works on redundant systems.

On the other hand, the interconnection of Qcaid with other third-party platforms

enables users to have totally independent control over each order and position.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

20

www.qbitia.com

Qbitia provides its clients with all the documentation about its continuity arrangements.

4.2.3.4. Pre-trade controls on order entry

IFs shall carry out the following pre-trade controls for all financial instruments:

Price collars with set price parameters for each instrument.

Maximum order values.

Maximum order volumes.

Maximum messages limits.

IFs shall have in place repeated automated execution throttles which control the

number of times an algorithmic trading strategy has been applied. After the executions

have repeated a pre-determined number of times, it shall be automatically disabled.

IFs shall set market and credit risk limits.

IFs shall automatically block orders from a trader if it becomes aware that that trader

does not have permissions to trade a particular financial instrument. In addition, IFs shall

block orders that can compromise their risk thresholds.

4.2.3.5. Real-time monitoring

An IF shall, during the hours it is sending orders to trading venues, monitor in real time

all algorithmic trading activity that takes place under its trading code for signs of

disorderly trading.

The real-time monitoring of algorithmic trading activity shall be undertaken by the

trader in charge of the trading algorithm or algorithmic trading strategy, and by the risk

management function.

The systems for real-time monitoring shall have real-time alerts to assist staff in

identifying unanticipated trading activities undertaken by means of an algorithm. IFs

shall have a process in place to take remedial action as soon as possible after an alert


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

21

www.qbitia.com

has been generated, including, where necessary, an orderly withdrawal from the

market.

4.2.3.6. Post-trade controls

IFs shall continuously operate the post-trade controls that they have in place. Where a

post-trade control is triggered, the IF shall undertake appropriate action, which may

include adjusting or shutting down the relevant trading algorithm or trading system or

an orderly withdrawal from the market.

Post-trade controls shall include the continuous assessment and monitoring of market

and credit risk of the IF in terms of effective exposure.

IFs shall keep records of trade and account information, which are complete, accurate

and consistent. The IF shall reconcile its own electronic trading logs with information

about its outstanding orders and risk exposures as provided by the trading venues to

which it sends orders, by its brokers or DEA providers, by its clearing members or central

counterparties and by its data providers or other relevant business partners.

Reconciliation shall be made in real-time where the aforementioned market participants

provide the information in real-time. An IF shall have the capability to calculate in real

time its outstanding exposure and that of its traders and clients.

For derivatives, the post-trade controls referred to in paragraph 1 shall include controls

regarding the maximum long and short and overall strategy positions, with trading limits

to be set in units that are appropriate to the types of financial instruments involved.

Post-trade monitoring shall be undertaken by the traders responsible for the algorithm

and the risk control function of the IF.

4.2.3.7. Security and limits to access

IFs shall implement an IT strategy with defined objectives and measures which:

a) is in compliance with the business and risk strategy of the investment firm and is

adapted to its operational activities and the risks to which it is exposed;


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

22

www.qbitia.com

b) is based on a reliable IT organisation, including service, production, and

development;

c) ensures an effective IT security management.

IFs shall set up and maintain appropriate arrangements for physical and electronic

security that minimise the risks of attacks against its information systems and that

includes effective identity and access management.

IFs shall annually undertake penetration tests and vulnerability scans to simulate cyber-

attacks.

IFs shall ensure that they are able to identify all persons who have critical user access

rights to their IT systems. IFs shall restrict the number of such persons and shall monitor

their access to IT systems to ensure traceability at all times.

Requirements for firms engaged in HFT

According to the description included in the definitions above, high-frequency trading

algorithmic technique is any algorithmic trading technique characterised by:

- Infrastructure intended to minimise network and other types of latencies, including at

least one of the following facilities for algorithmic order entry:

co-location,

proximity hosting, or

high-speed direct electronic access.

- System-determination of order initiation, generation, routing or execution without

human intervention for individual trades or orders.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

23

www.qbitia.com

- High message intraday rates which constitute orders, quotes or cancellations. A high

message intraday rate is defined by the submission on average of any of the following4:

a) at least 2 messages per second with respect to any single financial instrument

traded on a trading venue;

b) at least 4 messages per second with respect to all financial instruments traded

on a trading venue.5

For the purposes of this section, the above calculations will include

messages concerning financial instruments for which there is a liquid

market in accordance with article 2, section 1, point 17, Regulation

(UE) n.o 600/2014. Messages introduced for the purpose of dealing

on own account that meet the criteria of article 17, section 4,

Directive 2014/65/UE, will be included in the calculation.

For the purposes of this section, messages from clients of direct

electronic access will not be included in the calculations of the

intraday messages rate.

For the purposes of this section, grading venues are required to make

available to the firms concerned, on request, estimates of the average

of messages per second on a monthly basis two weeks after the end

of each calendar month taking into account all messages submitted

during the preceding 12 months.

In addition to complying with the global requirements, IFs that engage in a high-

frequency algorithmic trading technique shall record the details of each message

submitted to the trading venue with its corresponding time stamp immediately after

submission.

4 Commission delegated regulation (EU) 2017/565, Article 19. The number of messages for each type of order can be consulted in Annex 1 of RTS 9. 5 The minimum number of messages sent to be considered HFT can be consulted in Section 7 Annex I of this document.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

24

www.qbitia.com

IFs that engage in a high-frequency algorithmic trading technique shall update the

information referred to in paragraph 1 in the standards and formats specified in the

fourth column of tables 2 and 3 of Annex II of Commission delegated regulation (EU)

2017/589.

The records referred to in the previous paragraphs shall be kept for five years from the

date of the submission of an order to a trading venue or to another investment firm for

execution.

5. Annex I. HFT messages rate

The following table shows the maximum number of messages that an IF can send, in a

given time unit, before its trading activity can be considered HFT. The base is 24h.

Per instrument and trading venue

Per set of instruments in one trading venue

Messages/hour 7200 14400 Messages/day 172800 345600 Messages/month 5184000 10368000 Messages/year 62208000 124416000

6. Annex II. Market manipulation

Artícle 12 of Regulation UE 596/2014 (MAR): Market manipulation

1. For the purposes of this Regulation, market manipulation shall comprise the following

activities:

a. entering into a transaction, placing an order to trade or any other behaviour

which:


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

25

www.qbitia.com

i. gives, or is likely to give, false or misleading signals as to the supply of,

demand for, or price of, a financial instrument, a related spot commodity

contract or an auctioned product based on emission allowances; or

ii. secures, or is likely to secure, the price of one or several financial

instruments, a related spot commodity contract or an auctioned product

based on emission allowances at an abnormal or artificial level;

unless the person entering into a transaction, placing an order to trade or

engaging in any other behaviour establishes that such transaction, order or

behaviour have been carried out for legitimate reasons, and conform with an

accepted market practice as established in accordance with Article 13 of

Regulation UE 596/2014 (MAR);

b. entering into a transaction, placing an order to trade or any other activity or

behaviour which affects or is likely to affect the price of one or several financial

instruments, a related spot commodity contract or an auctioned product based

on emission allowances, which employs a fictitious device or any other form of

deception or contrivance;

c. disseminating information through the media, including the internet, or by any

other means, which gives, or is likely to give, false or misleading signals as to the

supply of, demand for, or price of, a financial instrument, a related spot

commodity contract or an auctioned product based on emission allowances or

secures, or is likely to secure, the price of one or several financial instruments, a

related spot commodity contract or an auctioned product based on emission

allowances at an abnormal or artificial level, including the dissemination of

rumours, where the person who made the dissemination knew, or ought to have

known, that the information was false or misleading;

d. transmitting false or misleading information or providing false or misleading

inputs in relation to a benchmark where the person who made the transmission

or provided the input knew or ought to have known that it was false or


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

26

www.qbitia.com

misleading, or any other behaviour which manipulates the calculation of a

benchmark.

2. The following behaviour shall, inter alia, be considered as market manipulation:

a) the conduct by a person, or persons acting in collaboration, to secure a

dominant position over the supply of or demand for a financial instrument,

related spot commodity contracts or auctioned products based on emission

allowances which has, or is likely to have, the effect of fixing, directly or

indirectly, purchase or sale prices or creates, or is likely to create, other unfair

trading conditions;

b) the buying or selling of financial instruments, at the opening or closing of the

market, which has or is likely to have the effect of misleading investors acting on

the basis of the prices displayed, including the opening or closing prices;

c) the placing of orders to a trading venue, including any cancellation or

modification thereof, by any available means of trading, including by electronic

means, such as algorithmic and high-frequency trading strategies, and which has

one of the effects referred to in paragraph 1(a) or (b), by:

i. disrupting or delaying the functioning of the trading system of the

trading venue or being likely to do so;

ii. making it more difficult for other persons to identify genuine orders on

the trading system of the trading venue or being likely to do so, including

by entering orders which result in the overloading or destabilisation of

the order book; or

iii. creating or being likely to create a false or misleading signal about the

supply of, or demand for, or price of, a financial instrument, in particular

by entering orders to initiate or exacerbate a trend;


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

27

www.qbitia.com

d) the taking advantage of occasional or regular access to the traditional or

electronic media by voicing an opinion about a financial instrument, related spot

commodity contract or an auctioned product based on emission allowances (or

indirectly about its issuer) while having previously taken positions on that

financial instrument, a related spot commodity contract or an auctioned product

based on emission allowances and profiting subsequently from the impact of the

opinions voiced on the price of that instrument, related spot commodity contract

or an auctioned product based on emission allowances, without having

simultaneously disclosed that conflict of interest to the public in a proper and

effective way;

e) the buying or selling on the secondary market of emission allowances or

related derivatives prior to the auction held pursuant to Regulation (EU) No

1031/2010 with the effect of fixing the auction clearing price for the auctioned

products at an abnormal or artificial level or misleading bidders bidding in the

auctions.

3. For the purposes of applying paragraph 1(a) and (b), and without prejudice to the

forms of behaviour set out in paragraph 2, Annex I of Regulation UE 596/2014 defines

non-exhaustive indicators relating to the employment of a fictitious device or any other

form of deception or contrivance, and non-exhaustive indicators related to false or

misleading signals and to price securing. [The aforementioned annex is included below

for greater clarity]

(ANNEX I. Regulation UE 596/2014 )

A. Indicators of manipulative behaviour relating to false or misleading signals and to

price securing

For the purposes of applying point (a) of Article 12(1) of this Regulation, and without

prejudice to the forms of behaviour set out in paragraph 2 of that Article, the following

non-exhaustive indicators, which shall not necessarily be deemed, in themselves, to


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

28

www.qbitia.com

constitute market manipulation, shall be taken into account when transactions or orders

to trade are examined by market participants and competent authorities:

a) the extent to which orders to trade given or transactions undertaken

represent a significant proportion of the daily volume of transactions in the

relevant financial instrument, related spot commodity contract, or auctioned

product based on emission allowances, in particular when those activities lead

to a significant change in their prices;

b) the extent to which orders to trade given or transactions undertaken by

persons with a significant buying or selling position in a financial instrument, a

related spot commodity contract, or an auctioned product based on emission

allowances, lead to significant changes in the price of that financial instrument,

related spot commodity contract, or auctioned product based on emission

allowances;

c) whether transactions undertaken lead to no change in beneficial ownership of

a financial instrument, a related spot commodity contract, or an auctioned

product based on emission allowances;

d) the extent to which orders to trade given or transactions undertaken or orders

cancelled include position reversals in a short period and represent a significant

proportion of the daily volume of transactions in the relevant financial

instrument, a related spot commodity contract, or an auctioned product based

on emission allowances, and might be associated with significant changes in the

price of a financial instrument, a related spot commodity contract, or an

auctioned product based on emission allowances;

e) the extent to which orders to trade given or transactions undertaken are

concentrated within a short time span in the trading session and lead to a price

change which is subsequently reversed;


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

29

www.qbitia.com

f) the extent to which orders to trade given change the representation of the

best bid or offer prices in a financial instrument, a related spot commodity

contract, or an auctioned product based on emission allowances, or more

generally the representation of the order book available to market participants,

and are removed before they are executed; and

g) the extent to which orders to trade are given or transactions are undertaken

at or around a specific time when reference prices, settlement prices and

valuations are calculated and lead to price changes which have an effect on such

prices and valuations.

B. Indicators of manipulative behaviour relating to the employment of a fictitious device

or any other form of deception or contrivance

For the purposes of applying point (b) of Article 12(1) of this Regulation, and without

prejudice to the forms of behaviour set out in paragraph 2 of that Article thereof, the

following non-exhaustive indicators, which shall not necessarily be deemed, in

themselves, to constitute market manipulation, shall be taken into account where

transactions or orders to trade are examined by market participants and competent

authorities:

a) whether orders to trade given or transactions undertaken by persons are

preceded or followed by dissemination of false or misleading information by the

same persons or by persons linked to them; and

b) whether orders to trade are given or transactions are undertaken by persons

before or after the same persons or persons linked to them produce or

disseminate investment recommendations which are erroneous, biased, or

demonstrably influenced by material interest.

4. Where the person referred to in this Article is a legal person, this Article shall also

apply, in accordance with national law, to the natural persons who participate in the

decision to carry out activities for the account of the legal person concerned.


[email protected]

Phone: +34886213038


T.3741 F.185 H.PO-51991

30

www.qbitia.com

i http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1507542412991&uri=CELEX:32014L0065 ii http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.173.01.0084.01.ENG&toc=OJ:L:2014:173:TOC iii http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.173.01.0001.01.ENG&toc=OJ:L:2014:173:TOC iv http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2016.173.01.0034.01.ENG&toc=OJ:L:2016:173:TOC v http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2016.088.01.0001.01.ENG&toc=OJ:L:2016:088:TOC vi http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.087.01.0001.01.ENG&toc=OJ:L:2017:087:TOC vii http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1507716715859&uri=CELEX:32017R0580 viii http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.087.01.0417.01.ENG&toc=OJ:L:2017:087:TOC ix http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.087.01.0449.01.ENG&toc=OJ:L:2017:087:TOC

regulatory requirements. MiFID II -...

Documents

Transcript of regulatory requirements. MiFID II -...