Response to ESMA Consultation Paper on Algorithmic Trading

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FESE Members play an important role in supporting the stability of the financial system and are taking several measures to build up their resilience to protect their systems. Trading venues’ systems are reliable, monitored in real-time, dimensioned and scalable to the order flow’s needs.

We welcome ESMA’s efforts to ensure a consistent level of protection across trading venues. However, we see many pitfalls in an approach where a one-size-fits-all regime is set for Order to Transaction Ratio (OTR) per asset class and therefore we do not agree with ESMA’s proposal. We believe that the maximum allowed OTR should be based on an assessment related to trading venue and member’s system capacity, latency problems, excessive market data flows etc. to safeguard orderly and sound trading activity.

To level the playing field, we believe that the definition of algorithmic trading should apply to Systematic Internalisers (SIs) and trading venues irrespectively. Given the role that SIs play in today’s equity markets, we consider it necessary to address the risks attached to OTC algorithmic trading at the SI level, especially from an investor protection point of view. In addition, FESE agrees with ESMA’s proposal to remove the obligation for Direct electronic access (DEA) clients that are dealing on own account to be authorised as investment firms because it would ensure equal treatment of EU and non-EU firms.

FESE agrees with ESMA’s analysis that the MiFID II/MiFIR market-making regime has contributed to clarity and a more stringent framework. However, we believe that because of adverse selection no incentives will outweigh the risk in stressed markets. Therefore, incentives might have an insignificant impact on market-making behaviour during stressed market conditions. Market conditions rather than incentives drive market-making behaviour.

We also consider that, although speedbumps can work for derivatives and options markets, equity markets have not benefitted in the same way. Nevertheless, FESE does not support the suggestion that such arrangements shall be prohibited for equity markets without evidence of any detrimental effect of speedbumps on European equity markets. The current legal framework ensures a well-calibrated balance between allowing for innovation and the imperatives of market integrity and investor protection.

FESE looks forward to continuing its cooperation with ESMA on this matter.