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MiFID II: What Are the Testing Implications for Algorithmic Trading?
Traders Magazine Online News, December 13, 2017
This is the third in a series of blog posts on MiFID II (Markets in Financial Instruments Directive II). If you missed the earlier posts, see MiFID II: How Did We Get Here and What Does it Mean? and MiFID II and Algorithmic Trading: What You Need to Know Now.
Our latest software-as-a-service (SaaS) solution, the TT® platform, allows customers to benefit from the lowest latency order messaging rates publicly available via an off-the-shelf trading platform. Reducing the number of instructions required to be machine-code translated by compilers and processed by the CPU radically improves time-critical efficiencies. The TT platform achieves much of this high-speed performance via their highly optimized code base and by leveraging proven techniques such as network stack kernel bypass. This combination is applied throughout the critical trading path, from market data ingestions to analytics and trade decision logic and on through to market order access.
MIFID II: BLASTING THROUGH THE DIRECTIVE’S ALGORITHMIC DRAG
To the well-read MiFID II aficionado or equally concerned investment firm participant, RTS 6 provides systems and process requirements for investment firms engaged in algorithmic trading. The directive’s underlying concern is weighted towards the prevention, detection and containment of an algorithm from behaving in an unintended manner that could create disorderly trading conditions.
Unlike, for example, the equation for maximum dynamic pressure, the regulatory texts describing “disorderly trading conditions” do not lend themselves as succinctly or as clearly defined from an engineering perspective. At Trading Technologies, we’re well-accustomed to encoding technical requirements into binary actions. As a software leader, we adhere to self-inflicted stringent testing of our products beyond the current MiFID II requirements. Nevertheless, that leaves no room for complacency, however vague the regulatory definition.
We conducted extensive consultations with customers, financial trade bodies and technical fora. This collation included FIX Trading Community’s attempt to bring clarity to the regulation. From these findings, we defined our own MiFID II test scripts into a series of suites
WHAT ARE THESE COMBINED TESTS AND HOW ARE THEY APPLIED?
These multiple tests are categorized in five new MiFID II testing suites and will be applied to our automated trading functionality, including Autospreader® Strategy Engine, Synthetic Strategy Engine and Algo Strategy Engine in X_TRADER®, and Autospreader and our synthetic order types in TT.
In my previous MiFID II blog post, MiFID II and Algorithmic Trading: What You Need to Know Now, we announced the formation of our Algorithm Oversight Council (AOC) to focus on our algorithm design, testing, documentation and customer support. These test suites will be core to the AOCs deliverables internally and the results made transparent to our customers for their own regulatory satisfaction. They also include MiFID II’s stress testing for running high messaging and trade volumes respectively.
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