The European Securities and Markets Authority (ESMA) has published the findings of its peer review on the Guidelines on systems and controls in an automated trading environment for trading platforms (the Guidelines).

In its peer review, which examined 30 Member State national competent authorities (NCAs), ESMA found that all NCAs have incorporated the Guidelines in their legal framework and all except three in their supervisory framework.

During the course of the review, ESMA identified the following main challenges for NCAs:

  • market complexity. Algorithmic trading, handling of large data bases in a fragmented market environment and IT-complexity in market infrastructures require NCAs supervising trading platforms to have ready access to IT-expertise in those particular areas;
  • IT-knowledge. IT-knowledge is crucial for the boards of the trading platforms yet it can be challenging to get trading platforms to recognise the importance of having board members with appropriate IT-expertise;
  • probing on-site inspections. NCAs need to have an appropriate level of engagement with trading platforms and ensure that trading platforms are sufficiently challenged;
  • matching finite resources with the demands of an effective supervisory engagement model is also a challenge for NCAs;
  • testing of trading halts. NCAs and trading platforms should not only rely on trading halts when addressing the risks connected to algorithmic trading but should also test trading algorithms against stressed trading environments; and
  • cyber crime. There are very few domestic programs for setting up a proper ring defence against cyber-attacks and also a lack of coordination with other NCAs which supervise trading platforms that are using outsourced trading systems.

View Automated Trading Guidelines: ESMA peer review among National Competent Authorities, 18 March 2015