Identification of Algorithmic Order Flow is a topic covered by both Swiss and European regulation and will lead to changes on multiple interfaces to SIX Swiss Exchange.
Two pieces of regulation will drive our solution:
- MiFID II - exchanges are expected to record both the execution and decision making algorithms/persons for all order flow.
- FMIA - there is a requirement to identify any orders/quotes generated by algorithmic trading as well as the algorithms involved in the creation of any order or quote to the market.
Our goal is to implement a solution fully compliant with Swiss law that provides participants with a consistant implementation for Algorithm Flagging across the EU and Switzerland. We are also aware of the existing German regulation, and are aware of the implementations currently supporting this solution.
The goal is to create a new 8-byte integer identifier for algorithmic trading that will uniquely identify the algorithms involved in the creation and submission of the order or quote to the market. This identifier would be unique to the participant, who would then be required, if asked, to identify the algorithms involved in the submission of the individual order or quote in question.
This approach will make the exchange compliant with both FMIA and MiFID II.
Implementation with SMR7 (2017)
Art. 30: Guarantee of orderly trading
Art. 31: Algorithmic trading and high-frequency trading
Q: What is an algorithm?
A: This is not defined in the Swiss regulations, so our current intention is to use the MiFID II definition of an algorithm to aid members in a consistant implementation where they also trade within the European Union.
Article 4(1)(39) of Directive 2014/65/EU:
‘algorithmic trading’ means trading in financial instruments where a computer algorithm automatically determines 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, and does not include any system that is only used for the purpose of routing orders to one or more trading venues or for the processing of orders involving no determination of any trading parameters or for the confirmation of orders or the post-trade processing of executed transactions;'
Q: How large an integer will be used to identify the algorithm?
A: We are planning on using an 8-byte integer to stay consistant with the already existing German algorithm flagging logic implemented by many of our members.
Q: Will it be mandatory to send the new field from SMR7 release, or from Jan 3rd 2018?
A: The Algo-Flagging requirement is defined in Swiss and EU-law. As both will come into effect on 1 January 2018 this field will be optional in 2017.
What Qualifies As An Algorithm
Q: Would a simple order decision qualify as an algorithm (examples could be GTD orders over OTI or Stop Loss orders)?
A: Yes, the algorithm is triggering the actual sending of an order to the market. All order from these types of strategies should be flagged as algorithmic.
Q: What if the algorithm is notifying a human trader, and not actually sending the order?
A: Where an algorithm informs a human of a trading opportunity, but the human actually enters the order, it would not qualify as an algorithm.
Q: If an Algo-X creates a stop-loss order, should it be flagged as Algo-X, or Algo-Stop-Loss?
A: In this situation "Algo-X" fulfills the requirement as long as the ID can be referenced back to the specific details of that algorithm.
Q: Is there an expectation that members must flag orders sent from their clients' algorithms?
A: This is not required on orders sent to SIX Swiss Exchange. FINMA has reserved the right to review this in future.
Q: How unique must the Algo ID be?
A: It must be unique across a member of the Swiss exchange. They must be consistant across sessions, but there is not expectation of globally unique IDs.