Demystifying Direct Electronic Access

Traders Magazine Online News, June 29, 2017

With less than 200 days to go until the implementation of MiFID II, the uncertainty surrounding direct electronic access (DEA) shows little sign of resolution. I recently attended a panel discussion on the topic at the IDX conference in London, at which a number of important issues were raised.

The concept of DEA, whereby a market participant directly accesses a trading venue by using the trading code of a member firm, is simple enough. But there is still confusion over which market access models should be subject to DEA requirements.

Crucially, the European Commission’s delegated regulation specified in 2016 that if a market participant cannot exercise discretion regarding the exact fraction of a second of order entry, then it is not capable of DEA. That led some institutions, including Germany’s Deutsche Börse, to assume that direct access to exchanges would not be classified as DEA if the user had no such discretion.

However, the European Securities and Markets Authority (ESMA) clarified in a Q&A in April 2017 that if the user has discretion over the exact fraction of a second an order is sent to the market, it still constitutes DEA, even if subsequent control filters delay the order reaching the matching engine. This distinction is critical, because it brings more market access models back into the scope of DEA.

Meanwhile it is generally agreed that algorithmic execution would not typically constitute DEA because most strategies involve intervening with an order and executing it according to certain parameters, rather than sending it directly to the trading venue using a member firm’s code.

But point-and-click trading remains a grey area, with varying views on whether it constitutes DEA. One participant on the IDX panel suggested that if a client uses a broker or vendor platform to trade directly and has complete control over the order, then it could be in-scope. But another countered that unless a black box is used, the user does not have control over the fraction of a second at which the order is submitted, and most point-and-click trades should not therefore be considered DEA.  

The specific requirements for DEA providers are set out in ESMA’s regulatory technical standards (RTS). They must establish policies and procedures to ensure clients comply with the trading venue’s rules, and put in place substantial pre- and post-trade controls, in addition to monitoring and managing the DEA orders on an ongoing basis. Minimum due diligence is also required on prospective DEA clients, as well as an annual risk-based assessment of their systems and controls.

For more information on related topics, visit the following channels:

• Regulations
• Insights/Viewpoints