MiFID I, MiFID II, and MiFIR

MiFID I laid the groundwork for subsequent regulations, MiFID II and MiFIR, which have significant effects on electronic and systematic trading practices.

MiFID II introduced stricter transparency requirements for systematic internalizers (SIs), including obligations for pre- and post-trade transparency to ensure fair pricing and market access. Firms engaged in electronic trading must implement robust risk controls, which include real-time monitoring, automated checks, and limits to prevent erroneous trades and market disruptions.

Additionally, MiFID II mandates the implementation of circuit breakers to automatically halt trading during periods of extreme volatility, thus reducing the risk of market instability. Firms using algorithmic trading strategies are required to maintain effective oversight, testing, and controls, including kill switches to halt trading in emergencies.

The regulations also enhance reporting obligations for market data, necessitating detailed records of transactions, orders, and quotes for regulatory scrutiny. MiFID II imposes a duty on firms to take all necessary steps to ensure the best execution of client orders, which influences the strategies and venues employed in systematic trading.

Firms engaged in high-frequency trading (HFT) face specific requirements, including registration with regulators, detailed reporting, and compliance with stricter risk controls and order-to-trade ratios. A harmonized tick size regime was also introduced to standardize minimum price movements for securities, affecting execution and profitability.

Furthermore, MiFIR enforces stricter transparency obligations for systematic internalizers and trading venues, increasing visibility of trading activities and prices. Firms involved in electronic and systematic trading must report detailed information on all trades, including the identification of algorithms used, to regulators in near real-time. MiFIR also requires the publication of trading data, including quotes and execution prices, to promote transparency and enable market participants to make informed decisions.

Certain standardized derivatives are required to be traded on regulated platforms, impacting the venues and methods available for systematic trading strategies. MiFIR mandates the public disclosure of detailed post-trade data within specified time frames, enhancing transparency regarding execution and liquidity. It also introduces position limits for commodity derivatives to prevent market manipulation and excessive speculation, affecting strategies in electronic trading of these instruments. Trading venues and clearinghouses must offer non-discriminatory access to market data and infrastructure, ensuring fair competition and broader access for systematic traders.

Since many exchanges, trading venue operators, and broker-dealers that comply with MiFID I, MiFID II, and MiFIR also operate globally, these regulations have far-reaching effects, extending their requirements beyond the EU.