ESMA announces intention to publish guidance on algorithmic pre-trade controls under MiFID II

The European Securities and Markets Authority (ESMA) has published a press release sharing its view that the pre-trade controls that investment firms have implemented warrant further convergence. The EU Markets in Financial Instruments Directive (MiFID II) requires investment firms engaging in algorithmic trading to have effective systems and risk controls to ensure that its trading systems are resilient, have sufficient capacity, are subject to appropriate trading thresholds and limits, and prevent incorrect orders being sent. Those systems must also ensure that the trading systems cannot be used for market abuse or insider trading or other purposes contrary to the EU Market Abuse Regulation. Commission Delegated Regulation (EU) 2017/589 further specifies the pre-trade controls that an investment firm must have in place to meet these MiFID II requirements.

ESMA's announcement follows a common supervisory action (CSA) conducted with national competent authorities which assessed how investment firms are using the pre-trade controls in their trading activity and risk management framework. The results of the CSA highlighted that most investment firms have implemented pre-trade controls. However, implementation and governance of those controls diverge and could be strengthened. ESMA intends to publish guidance, including clarifications and best practices, to assist in further convergence in the approach across the EU.

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