Algorithmic trading compliance

In the traded markets, participants apply algorithms to perform so-called ‘algorithmic trading’. A main concern with the application of algorithms concerns the possibility of misleading price signals or the possibility of disorderly trading.

In general, market abuse must be prevented. More particularly, market manipulation must be prevented. And when committed, it must be detected and sanctioned.

In the field of algorithmic trading, particular aspects should get specific attention. Amongst others, a market participant’s governance must be tailored to the application of algorithms.

For a regulator it is rather irrelevant whether market abuse has been committed by a human or by an algorithm. In any case, they will focus on the responsibility.Irrespective of whether market abuse is committed by a person or a machine, the basic rules apply, namely as follows:

Amongst others, ‘market manipulation’ means the entering into any transaction or issuing any order to trade in products which:

  • gives (or is likely to give) false or misleading signals as to the supply of, demand for, or price of products, and/or
  • secures (or attempts to secure) the price of one or several products at an artificial level.

Furthermore, the following behaviour shall be considered as market manipulation:

The placing of orders (including any cancellation or modification thereof), by any available means of trading, including by electronic means, such as algorithmic and high-frequency trading strategies, and which has one of the effects, by:

  1. disrupting or delaying the functioning of the trading system of the trading venue or being likely to do so;
  2. making it more difficult for other persons to identify genuine orders on the trading system of the trading venue (or being likely to do so), including by entering orders which result in the overloading or destabilisation of the order book.