Firms that may not think they are involved in algorithmic trading or engage in direct electronic access (DEA) have been caught up in the scope of Mifid II’s real-time surveillance rules.
“Most of the big firms and clearing banks are hot on monitoring market abuse and market manipulation behaviours, but the one key things they often overlook is the regulatory technical standards (RTS 6) obligation relating to market disruption, which is more complex to detect,” Damon Batten, managing consultant and head of markets at regulatory consultancy firm Bovill, explained.
The unexpectedly broad definition of what constitutes algorithmic trading and DEA encompasses the activities of customers as well as the firm itself. This, coupled with the difficulties of monitoring in real-time, has left firms at risk of non-compliance at a time when the UK’s Financial Conduct Authority has already said it will step up its supervision of algorithmic trading.
According to Batten, “many market abuse surveillance tools are not cut out to detect disruptive types of behaviour and order flow associated with algorithmic trading in real-time, such as the amount, timing and types of messages hitting the order book.”
Born Technology has however launched a solution, called CrossCheck, which enables firms to comply with the European regulation’s stringent surveillance requirements.
Tackling the difficulties:
Embedded in RTS 6, the European regulator said that algorithmic trading and DEA must be monitored in real-time to identify signs of “disorderly trading” across most markets, asset classes and products.
“With tens of millions of transactions executed daily, this requires an ultra-high performance system which is able to plug into multiple venues,” Derek Haworth, chief executive officer of Born Technology, explained.
CrossCheck uses a scalable, private cloud with direct connectivity to venues to monitor transactions across all major exchanges and independent software vendors in real-time. It uses plug-and-play application programming interfaces (APIs), as opposed to batch files, which allows users to connect and access the vast amount of information from their web browser.
“Given that the data is coming from several different sources in different formats, CrossCheck also aggregates the messages, standardises formats, and de-duplicates information where necessary,” Haworth said.
Under Mifid II, alerts must be generated as “instantaneously as technically possible” following real-time monitoring, and no later than five seconds after the relevant event.
CrossCheck is able to present the alert visually, allowing the user to specify which order flow metrics they want to see. These can be filtered by exchange, session, trader, algo ID, and order type, among other things.
The user is also able to define the timeframe within which to receive the alerts. This can range from milliseconds, to one, or five seconds. The alerts are then sent to the user via messaging systems such as Symphony and Slack.
According to Haworth, “the option to create custom market abuse alerts enables the risk and compliance monitoring teams to automatically watch for disorderly market conditions so that they can analyse and take action at the speed the regulators want.”
Who exactly is impacted?:
RTS 6 encompasses any firm that engages in automated trading activity, or whose customers do so. DEA providers must also ensure prospective clients are compliant.
Automated activity includes not only algorithms but also auto-spreader, volume weighted average price, time weighted average price, and excel sheets which trade.
Auto-hedging and auto-quoting for a number of asset classes including equities, futures, fixed income and FX, fall under the scope, as does the use of auto-trading platforms such as Trading Technologies, Stellar, CQG and Fidessa.
This has therefore peripherally impacted a large number of prop, buy- and sell-side firms from January this year.
As European regulations steer towards monitoring and reporting market activity in real-time, it is vital that technology continues to offer firms the necessary speed, flexibility and assurance that they will be compliant.
G.H. Financials was one of the first to implement CrossCheck for Mifid compliance at the end of last year.
According to Alastair Moffatt, the firms’ chief risk officer, CrossCheck’s “real-time processing power, automatic aggregation, and its custom visualisation components,” set it above its peers in the marketplace for real-time surveillance solutions.