On 29 September 2021, the European Securities and Markets Authority (ESMA), published the MiFID II/MiFIR review report on algorithmic trading (ESMAAlgo Trading Review Report). More specifically, both MiFID II and MiFIR provide for a number of review reports requiring the European Commission, after consulting ESMA, to report to the European Parliament and the Council on various provisions. This particular report covers the review provision under Article 90(1)(c) of MiFID II which requires the European Commission after consultation with ESMA to present a report to the European Parliament on the impact of requirements regarding algorithmic trading including high-frequency algorithmic trading.

Many provisions and requirements of MiFID II relate either directly or indirectly (eg direct electronic access (DEA) or tick sizes) to algorithmic trading. The ESMA Algo Trading Review Report states in this respect that it adopts a holistic approach to algorithmic trading and reviews all provisions related directly and indirectly to algorithmic trading with the aim of both simplifying the regime and making it more efficient.

The ESMA Algo Trading Review Report, among others, identifies issues which will be followed up by ESMA via amendments to ESMA technical standards or additional guidance on a number of topics. Such topics include:

• The concepts of “algorithmic trading” and “Direct Electronic Access”, as well as more generally cross-cutting topics regarding algorithmic trading and high frequency trading.
• The authorisation regime for EU and non-EU algorithmic trading firms (including HFT firms) deploying their strategies on EU trading venues.
• The organisational requirements for investment firms, including the notification and testing requirements of algorithmic traders to competent authorities; and, the self-assessment exercises to be performed by investment firms.
• Organisational requirements for trading venues, including the self-assessment exercises to be performed by trading venues, circuit breakers, the fee structures, order to trade ratios; and market outages.
• A review of MiFID II provisions which are indirectly relating to algorithmic trading activities (eg tick size and market making).

The report also addresses recent market developments by including topics such as speedbumps and the sequencing between public vs private transaction confirmation feed by trading venues.

ESMA’s report concludes that no fundamental issues have emerged with respect to the MiFID II algorithmic trading regime which has overall delivered on its objectives. ESMA nevertheless makes some recommendations which aim at both simplifying the regime and making it more efficient.

The ESMA Algo Trading Review Report will be submitted to the European Commission and is expected to be taken into consideration for further legislative proposals on the MiFID II regime.

ESMA’s press release can be found here.

ESMA’s review report can be found here.