Regulatory Algebra

Regulatory Algebra

Christian Voigt

Senior Regulatory Adviser at Fidessa

Views 296

Regulatory Algebra

13.06.2016 08:15 am

Algorithmic trading and market access are under increased pressure from regulators everywhere, adding new layers of complexity in the quest for a single, global, normalised trading experience. Buy-sides often use Sponsored Access (SA), Direct Market Access (DMA) or Direct Electronic Access (DEA) via brokers across different regions. With MiFID II andRegAT each defining those terms, differences in meaning can quickly escalate from a simple semantic annoyance to a more serious compliance and business issue.

MiFID uses DEA as an umbrella term to capture both SA and DMA (eq. 1). However, under RegAT, DEA looks more like SA under MiFID II (eq. 2). Finally, DMA under MiFID II effectively corresponds to US FCMs’ low touch flow without their DEA activity (eq. 3).

Reg algebra 1

So it appears that legislators in the EU and the US both intended to exclude order flow generated by humans. Under RegAT only algorithmic orders are in scope. Under MiFID II, however, to be in scope the DEA user must have the capability to determine the fraction of a second of order entry and the lifetime of orders within that time frame. Since MiFID II doesn’t stipulate which fraction of a second is needed, the interpretation is still open. If we assume that only algorithms are able to work in fractions of seconds (eq. 4), then the respective EU and US regulatory definitions could become comparable.

Reg algebra 1

That said, with a human’s average reaction time of 0.25 seconds and an algorithmic trade’s in the realms of milli or microseconds, maybe only a quant can estimate how to achieve true global equivalence.

Latest blogs

Nish Kotecha and Noslen Suárez PhD Finboot

How blockchain can help us have trust in the food we eat

Today’s food supply chains are global, connected and generally efficient, but the COVID-19 pandemic has shone a spotlight on areas of weakness. The urgent need for robust and resilient systems and processes has been brought sharply into focus, and Read more »

Chris Miller RSA Security

Back to Normality: Five Steps to Stay Resilient After Disruption

The financial services sector has lived through many global disruptions, but the nature of recent events has put an unprecedented strain on operational resilience; from needing to ensure critical functions could continue with skeleton staff and Read more »

TYRON JONES n/a

How Technology Has Disrupted the Used Car Buying Experience

We’ve seen many fields change rapidly as a result of the integration of modern technological advancements over the last couple of decades. And it looks like more is coming on the horizon as well, judging by current trends. One of the markets that Read more »

Shuvo G. Roy Mphasis

Reboot 1.0: How financial services technology can enable the supply chain to support a post-lockdown boom

Ground control and Captain Tom When veteran Captain Tom Moore decided to walk one hundred laps of his garden before his 100th birthday to raise funds to support NHS heroes battling Covid-19 from the frontline, he never imagined that he would Read more »

Lisa Gutu Salt Edge

Building a PSD2 compliant channel: challenges and opportunities for financial institutions

PSD2 obliges ASPSPs including banks, e-wallets, prepaid cards and other companies that offer payment accounts to provide at least one channel for secure communication with third party providers (TPP). Even neobanks or e-money institutions, including Read more »

Magazine
ALL
Free Newsletter Sign-up
+44 (0) 208 819 32 53 +44 (0) 173 261 71 47
Download Our Mobile App
Financial It Youtube channel