EU likely to ease MiFID II reporting requirements for algo traders, says FOA
The Futures and Options Association (FOA), the industry body representing businesses engaged in listed derivatives trading, is optimistic the EU will ease some of the reporting requirements aimed at algorithmic traders in MiFID II, adding the current rules present a “moral hazard” for national regulators.
MiFID II requires financial institutions, including hedge funds, which use algorithms to disclose annually details of their algorithmic trading strategies, trading parameters and risk controls to national regulators.
“We are fairly hopeful the EU will require algorithmic trading firms to supply data on an ad hoc basis, whereby national regulators ask for the data, as opposed to having to disclose the information on an annual basis. This would be a pragmatic development. Some managers will routinely change their algorithms throughout the year while some change algorithms intra-day - meaning regulators could, under the Commission’s proposals, receive out-of-date information,” said Blake Stephenson, a regulatory expert at the FOA in London.
Under the existing proposals, regulators would be swamped with data. “Regulators are going to struggle to digest all of this data, which could open them up to criticism if they missed a fraud or major issue. It potentially opens them up to serious moral hazard if they fail to spot a problem at an algorithmic trader,” he added.
MiFID II, originally designed to clamp down on market abuse by high-frequency traders (HFTs), fails to distinguish between HFTs and algorithmic traders. Algorithmic traders, unlike HFTs, might sometimes just execute several trades per day, for example.
A recent report by PricewaterhouseCoopers (PwC) argued MiFID II’s provisions could force some asset managers to rethink their investment strategies. Others fear disclosure to regulators could result in proprietary information leakage – “this is also a concern,” commented Stephenson.
The same PwC report said asset managers were lagging behind broker dealers, retail banks and private banks in their preparations for MiFID II, which is expected to be implemented from 2015.
“There are regulations which have far more pressing deadlines, namely EMIR. Furthermore MiFID II still has many outstanding issues which need to be agreed by policy makers, namely OTF and venue categorisation, access to exchanges and pre-trade transparency. These are big political issues which are still unresolved. A lot of firms therefore do not want to spend money upgrading technology and systems when there is still much uncertainty,” he added.
MiFID II also forces HFTs and algorithmic traders to continually post liquidity throughout the day, although the FOA believed the EU might also be more flexible on this. “TheCommission’s proposal requires algorithmic traders to post liquidity throughout the day irrespective of market conditions, which would increase systemic risk. However, we believe and hope that in the end, the EU will make exceptions to posting liquidity continuously during extreme market events, for example,” said Stephenson.