Futures Group Looks To Tackle Esma’s Automated Trading Flaws
With the new automated trading rules written by the European Securities and Markets Authority (Esma) forcing many European market participants to change their practices to comply with the regulator’s tough new rules, one derivatives trade body has issued guidance to better manage the risks involved with electronic trading.
Esma has written detailed reforms to better monitor algorithmic trading practices such as high-frequency trading and these rules are now beginning to be applied across the whole of the European Union.
The Futures and Options Association (FOA), which is principally concerned with financial and commodity exchange-traded derivatives markets and represents over 160 European-based firms, wants to mitigate the risks involved in an electronic trading environment, such as putting systems in place to prevent out-of-control algorithms running amok.
Regulators want to see an end to trading glitches such as the U.S. ‘flash crash’ in May 2010 when the Dow Jones Industrial Average index plunged 1,000 points, almost 9%, only to recover within minutes and last month’s Knight Capital trading debacle where erratic trading activity left the U.S. market maker with billions of dollars of unwanted securities.
The FOA believes that its hands-on guidance will assist clients, direct electronic access providers, venues and service providers comply with the Esma guidelines in European listed derivative markets.
Three of Europe’s leading derivatives exchanges—NYSE Liffe, CME Group and the IntercontinentalExchange—are thought to have agreed to use the FOA’s new standards. Esma wants exchanges, as well as brokers, to take the lead in policing electronic markets and high-frequency trading.
“This industry is fluid, dynamic and innovative,” said Paul Marks, EMEA head of electronic execution, listed derivatives products, at investment bank Citi and also chair of the FOA’s e-trading/risk working group.
“Our intention has been to deal with the concerns within the industry, among regulators and politicians, and the general public in a way which protects market integrity without stifling a successful and beneficial industry.”
The FOA guidance is designed to iron out troubles within the Esma rules such as technical and functional conformance and stress testing, the definition of ‘naked access’, pre‐trade risk controls and live‐market access restrictions such as ‘kill switches’.
Esma is currently in the process of conducting supervisory reviews to gauge the market’s response to, and implementation of, its automated trading guidelines.
“The FOA has taken meaningful action to help the industry to implement a key objective of regulators, which is to secure the safety and resilience of European electronic market environments,” said Blake Stephenson, regulation manager at the FOA.
“We’ve been talking with legislators and member state regulators about these issues and look forward to using this guidance as a basis for continuing this constructive dialogue. FOA members are keen to ensure that risks posed to markets are adequately addressed, and we’re committed to helping them achieve this.”
US regulators have given a six-month reprieve from new margin rules.
Regulations have cut the number of derivatives clearing firms.
Firms will not be able to trade if documentation is not completed.
Market fragmentation is a key challenge, writes Brian Dunton of Eagle Investment Systems.
Uncleared margin rules are driving derivatives into central clearing.