Communication regarding the notification requirements for firms engaging in algorithmic trading or providing direct electronic access to a trading venue

The CSSF reminds firms engaging in algorithmic trading of their obligation to notify this to both the competent authority of their home member state and, when different, the competent authority(ies) of the trading venue(s) where the algorithmic trading takes place.

The CSSF further reminds firms that when providing direct electronic access to trading venues, they shall notify this to both the competent authority of their home member state and, when different, the competent authority(ies) of the trading venue(s) to which they provide direct electronic access.

“Algorithmic trading” means trading in financial instruments where a computer algorithm automatically determines one or more individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention.

An automated order routing system is not considered an algorithmic trading system if it only determines the trading venue or trading venues to which the order is to be sent, without changing any other parameter of the order. However, a “smart order routing system” which, additionally to routing orders to trading venues, offers automated management of the order is considered an algorithmic trading system.

A computer algorithm which only draws human traders’ attention to trading opportunities or only generates investment advice does not qualify as an algorithmic trading system.

“Direct electronic access” means an arrangement where a member, participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue.

It includes arrangements which involve the use by a person of the infrastructure of the member, participant or client, or any connecting system provided by the member or participant or client, to transmit the orders (direct market access) and arrangements where such an infrastructure is not used by a person (sponsored access).

The definition of direct electronic access does not encompass any other activity beyond the provision of direct market access and sponsored access. Therefore, arrangements where client orders are intermediated through electronic means by members or participants of a trading venue such as online brokerage do not qualify as “direct electronic access”.

For a complete understanding of the definition of algorithmic trading and the associated notification requirement, the CSSF refers to the applicable regulation, including but not limited to:

• Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFID II) and in particular article 4(1)(39) and (41), and article 17 (article 1(1) and (54), and 60 of the law of 30 May 2018 on markets in financial instruments);
• Commission Delegated Regulation (EU) 2017/565 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive and in particular recitals (20) to (27) and articles 18 and 20;
• ESMA “Questions and answers” (https://www.esma.europa.eu/…/questions-answers), topic “Direct Electronic Access and algorithmic trading”, and in particular question IDs 1490, 1599, 1603, 1604 and 1607 (version published on the ESMA website as of the date of this press release);
• CSSF “MiFID II/MiFIR – Questions and answers” (https://www.cssf.lu/en/Document/cssf-faq-mifid-ii-mifir/), topic “5.1. Questions regarding algorithmic and direct electronic access”, and in particular questions 5.1.1. and 5.1.2.

Luxembourg firms engaging in algorithmic trading and other EU firms engaging in algorithmic trading at a Luxembourg trading venue shall notify the CSSF by e-mail to mifid2@cssf.lu, using the table as presented in the CSSF MiFID II/MiFIR Q&A.

The same procedure is to be applied for Luxembourg firms providing direct electronic access to a trading venue and other EU firms providing direct electronic access to a Luxembourg trading venue.

Should firms have any questions regarding these notification requirements, they can address them to the CSSF using the e-mail address mentioned above.