RegTech Intelligence 
By Sam Tyfield, Vedder Price.
Algo flagging is currently only the concern of direct members of German venues. But it’s going to have a much broader application under MiFID / MiFIR and become of concern to the buy-side too.
Yesterday, the good Doctor Voigt of Fidessa published a blog about algo flagging. It is well worth reading, as are his other posts.
He’s right, of course – the algo flagging/ID rules in Germany, effective 1 April, will be adapted and expanded for a whole host of other uses under MiFID / MiFIR and will apply, not just to members but to all of the buy-side.
I have made the same point myself previously, particularly in my email overviews of the agreed texts of MiFID and MiFIR, and it bears repeating.
Christian mentions Art 23(3) of MiFIR : “Investment firms which execute transactions in financial instruments shall report complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day…” which reports shall include “a designation to identify the clients on whose behalf the investment firm has executed that transaction, a designation to identify the persons and the computer algorithms within the investment firm responsible for the investment decision and the execution of the transaction”.
In other words, this looks like it means that a member of a venue with a client which is also an investment firm must report to its competent authority its own and its investment firm clients’ algo orders.
Christian mentions also Article 51(6) of MiFID 2: “Member States shall require a regulated market to be able to identify, by means of flagging from members or participants, orders generated by algorithmic trading, the different algorithms used for the creation of orders and the relevant persons initiating these orders. This information shall be available to competent authorities upon request.”
This is slightly different, in my view, to the current position in Germany, where it is only members’ algos which need to be flagged; through whichever route an order reaches a venue, if there is an algo in the chain, it must be flagged – and this applies even if the firm generating the algo is not an investment firm.
Both 51(6) and 23(3) will impact investment firms’ relationships, connectivity and order-command-chain management with their clients (whether those clients are investment firms or not).
MiFIR is clear that double-reporting of the same information “should be avoided”, but EMIR is going to need to be amended to achieve that. As Christian also points out, it is not currently clear that the MiFIR and MiFID flags are the same, and ESMA only has a mandate to harmonise the former.
We do have the advantage of having seen the difficulties – from a technological and procedural point of view – of implementing the German algo flagging rules and we have some time. We should use that time wisely, including responding to ESMA consultations on draft standards. Let’s hope (as Christian himself does) that there will be sufficient unique IDs for all at every venue. And that’s a lot of IDs!