EU Moves Further Towards the Regulation of Finance AI and High Frequency Trading

The European Securities and Markets Authority (ESMA) has produced a series of recommendations on a proposed EU Regulation on the use of algorithmic trading, including high-frequency trading (HFT).

Following a consultation period launched last December and which closed in March, the authority has proposed a number of rules in a report that will now be considered by the European Commission in developing new legislation.

Among the proposals is introducing a mandatory reporting requirement on trading venues that use trading speedbumps — short delays some exchanges use in the processing of some orders — that would require them to evaluate and monitor the impact their speedbumps have on the quality of the liquidity available on platforms and take into account, among other things, the risk of non-tradable liquidity.

Other proposals include requiring third-country high frequency trading firms that access EU trading venues to be authorised as investment firms (without having to ask for separate firm authorisations); developing a specific equivalence framework at EU level to work with other countries’ regulatory regimes; requiring proper due-diligence self-assessment which should be made every second year; and providing “guidance” to trading venues on what is expected from them in respect to communication with regulators when there are market outages.

The proposals deal with other topics, including general algorithmic trading requirements, the required timing of notifications to competent EU regulatory authorities, and the testing of algorithms. It has also developed a template for notifications to EU regulatory authorities, the draft template for which can be found towards the end of the report. The recommendations will be considered by the Commission in preparing its proposed Regulation. 

Coinciding with the release of the report, the European Banking Federation impressed the need in a statement for a consistent playing field across the EU, saying the EU would be at a disadvantage if there were supervisory expectations and practices among different national competent authorities.

A Commission Communication on its overall EU Coordinated Plan on Artificial Intelligence 2021 can be found here. 

The draft EU Proposal can be found here.