MAR 5A.5 Systems and controls for algorithmic trading

Systems and controls

MAR 5A.5.1RRP

1A firm must ensure that the systems and controls, including procedures and arrangements, used in the performance of its activities are adequate, effective and appropriate for the scale and nature of its business.

MAR 5A.5.2RRP

MAR 5A.5.1R applies in particular to systems and controls concerning:

  1. (1)

    the resilience of the firm’s trading systems;

  2. (2)

    its capacity to deal with peak order and message volumes;

  3. (3)

    the ability to ensure orderly trading under conditions of severe market stress;

  4. (4)

    the effectiveness of business continuity arrangements to ensure the continuity of the OTF’s services if there is any failure of its trading systems, including the testing of the OTF’s systems and controls;

  5. (5)

    the ability to reject orders that exceed predetermined volume and price thresholds or which are clearly erroneous;

  6. (6)

    the ability to ensure that algorithmic trading systems cannot create or contribute to disorderly trading conditions on the trading venue;

  7. (7)

    the ability to ensure that any disorderly trading conditions which do arise from the use of algorithmic trading systems are capable of being managed, including systems to limit the ratio of unexecuted orders to transactions that may be entered into the OTF’s trading system by a member or participant;

  8. (8)

    the ability to ensure that the flow of orders is capable of being slowed down if there is a risk of system capacity being reached;

  9. (9)

    the ability to limit and enforce the minimum tick size which may be executed on the OTF; and

  10. (10)

    the requirement for members and participants to carry out appropriate testing of algorithms, including providing environments to facilitate that testing.

[Note: article 48(1), (4) and (6) of MiFID, MiFID RTS 7, MiFID RTS 9, and MiFID RTS 11]

Market making agreements

MAR 5A.5.3RRP

A firm must:

  1. (1)

    have written agreements with all investment firms pursuing a market making strategy on trading venues operated by it (market making agreements);

  2. (2)

    have schemes, appropriate to the nature and scale of a trading venue, to ensure that a sufficient number of investment firms enter into market making agreements which require them to post firm quotes at competitive prices with the result of providing liquidity to the market on a regular and predictable basis;

  3. (3)

    monitor and enforce compliance with the market making agreements;

  4. (4)

    inform the FCA of the content of its market making agreements; and

  5. (5)

    provide the FCA with any information it requests which the FCA reasonably requires to be satisfied that the market making agreements comply with this rule.

[Note: article 48(2) and (3) of MiFID and MiFID RTS 8]

MAR 5A.5.4RRP

A market making agreement in MAR 5A.5.3R(1) must specify:

  1. (1)

    the obligations of the investment firm in relation to the provision of liquidity;

  2. (2)

    where applicable, any obligations arising, or rights accruing, from the participation in a liquidity scheme mentioned in MAR 5A.5.3R(2); and

  3. (3)

    any incentives in terms of rebates or otherwise offered by the firm to the investment firm in order for it to provide liquidity to the OTF on a regular and predictable basis and, where applicable, any other rights accruing to the investment firm as a result of participation in the liquidity scheme.

[Note: article 48(3) of MiFID and MiFID RTS 8]

Measures to prevent disorderly markets

MAR 5A.5.5RRP

A firm must have the ability to:

  1. (1)

    temporarily halt or constrain trading on the OTF if there is a significant price movement in a financial instrument on the OTF or a related trading venue during a short period; and

  2. (2)

    in exceptional cases, cancel, vary, or correct, any transaction.

[Note: article 48(5) of MiFID]

MAR 5A.5.6RRP

For the purposes of MAR 5A.5.5R, and to avoid significant disruptions to the orderliness of trading, a firm must calibrate the parameters for halting trading in a way which takes into account the following:

  1. (1)

    the liquidity of different asset classes and subclasses;

  2. (2)

    the nature of the trading venue market model; and

  3. (3)

    the types of users.

[Note: article 48(5) of MiFID]

MAR 5A.5.7RRP

The firm must report the parameters mentioned in MAR 5A.5.6R to the FCA in writing, by electronic mail to an address for the usual supervisory contact of the firm at the FCA, and obtain an electronic confirmation of receipt.

[Note: article 48(5) of MiFID]

MAR 5A.5.8RRP

A firm must have systems and procedures to notify the FCA if:

  1. (1)

    an OTF operated by it is material in terms of the liquidity of the trading of a financial instrument in the EEA; and

  2. (2)

    trading is halted in that instrument.

[Note: article 48(5) of MiFID]

Direct electronic access

MAR 5A.5.9RRP

A firm which permits direct electronic access to an OTF it operates must:

  1. (1)

    not permit members or participants of the OTF to provide such services unless they are:

    1. (a)

      investment firms authorised under MiFID; or

    2. (b)

      CRD credit institutions; or

    3. (c)

      third country firms providing the direct electronic access in the course of exercising rights under article 46.1 of MiFIR; or

    4. (d)

      third country firms providing the direct electronic access in the course of exercising rights under article 47.3 of MiFIR; or

    5. (e)

      third country firms providing the direct electronic access in accordance with the exclusion in article 72 of the RAO; or

    6. (f)

      third country firms which do not come within MAR 5A.5.9R(1)(d) to (f) but are otherwise permitted to provide the direct electronic access under the Act; or

    7. (g)

      firms that come within article 2.1(a), (e), (i), or (j) of MiFID and have a Part 4A permission relating to investment services or activities;

  2. (2)

    set and apply criteria for the suitability of persons to whom direct electronic access services may be provided;

  3. (3)

    ensure that the member or participant of the OTF retains responsibility for adherence to the requirements of MiFID in respect of orders and trades executed using the direct electronic access service;

  4. (4)

    set standards for risk controls and thresholds on trading through direct electronic access;

  5. (5)

    be able to distinguish and if necessary stop orders or trading on that trading venue by a person using direct electronic access separately from:

    1. (a)

      other orders; and

    2. (b)

      trading by the member or participant providing the direct electronic access; and

  6. (6)

    have arrangements to suspend or terminate the provision of direct electronic access on that market by a member or participant in the case of any non-compliance with this rule.

[Note: article 48(7) of MiFID]

Co-location

MAR 5A.5.10RRP

Where a firm permits co-location in relation to the OTF, its rules on co-location services must be transparent, fair and non-discriminatory.

[Note: article 48(8) of MiFID and MiFID RTS 10]

Fee structures

MAR 5A.5.11RRP

A firm’s fee structure, for all fees it charges and rebates it grants in relation to the OTF, must:

  1. (1)

    be transparent, fair and non-discriminatory;

  2. (2)

    not create incentives to place, modify or cancel orders, or execute transactions, in a way which contributes to disorderly trading or market abuse; and

  3. (3)

    impose market making obligations in individual financial instruments or suitable baskets of financial instruments for any rebates that are granted.

[Note: article 48(9) of MiFID and MiFID RTS 10]

MAR 5A.5.12GRP

Nothing in MAR 5A.5.11R prevents a firm:

  1. (1)

    adjusting its fees for cancelled orders according to the length of time for which the order was maintained;

  2. (2)

    calibrating its fees to each financial instrument to which they apply;

  3. (3)

    imposing a higher fee:

    1. (a)

      for placing an order which is cancelled than an order which is executed;

    2. (b)

      on participants placing a high ratio of cancelled orders to executed orders; and

    3. (c)

      on a person operating a high-frequency algorithmic trading technique2,

    in order to reflect the additional burden on system capacity.

[Note: article 48(9) of MiFID]

Flagging orders, tick sizes and clock synchronization

MAR 5A.5.13RRP

A firm must require members and participants of an OTF operated by it to flag orders generated by algorithmic trading in order for the firm to be able to identify the following:

  1. (1)

    different algorithms used for the creation of orders; and

  2. (2)

    the persons initiating those orders.

[Note: article 48(10) of MiFID]

MAR 5A.5.14RRP

The firm must adopt tick size regimes for financial instruments as required by a regulatory technical standard made under article 49.3 or 49.4 of MiFID.

[Note: article 49 of MiFID and MiFID RTS 11]

MAR 5A.5.15RRP

The tick size regime referred to in MAR 5A.5.14R must:

  1. (1)

    be calibrated to reflect the liquidity profile of the financial instrument in different markets and the average bid-ask spread, taking into account the desirability of enabling reasonably stable prices without unduly constraining further narrowing of spreads; and

  2. (2)

    adapt the tick size for each financial instrument appropriately.

[Note: article 49 of MiFID and MiFID RTS 11]

MAR 5A.5.16GRP

Nothing in MAR 5A.5.14R or MAR 5A.5.15R requires a firm to act inconsistently with any regulatory technical standards made under article 49.3 or 49.4 of MiFID.

[Note: article 49 of MiFID]

MAR 5A.5.17RRP

The firm must synchronise the business clocks it uses to record the date and time of any reportable event.

[Note: article 50 of MiFID and MiFID RTS 25]

MAR 5A.5.18GRP

For the purpose of MAR 5A.5.17R, the regulatory technical standards made under article 50 of MiFID provide further requirements.