This week ACER, the pan-EU energy regulator, published (click here) a six-page Open Letter clarifying market participants’ obligations under REMIT 2 to notify their national regulatory authorities (NRAs) and ACER when they use Algorithmic trading (“Algo trading”), and when they provide direct electronic access (DEA) services to customers. ACER recommends that this guidance be read in conjunction with this Open Letter published in April .
The contents of the Annex of the Open Letter are briefly summarised as follows:
1] Algorithmic trading
- The section deals with the following obligation under Article 5a (2) of REMIT 2:
"A market participant that engages in algorithmic trading in a Member State shall notify that engagement to the national regulatory authority of the Member State where it is registered pursuant to Article 9(1) and to the Agency.“
- ACER provides a non-exhaustive list of Algo trading approaches that either fall into or out of scope of the new notification obligation;
- In making this categorisation, ACER align to the revised REMIT definition of Algo trading and focus on the fact that an Algo is not dependent (or if so, only to a limited extent) on any human intervention and therefore can automatically set the parameters of orders based on historical and/or real-time data, initiate orders and execute transactions;
- In-scope of Article 5(a)(2):
- Internal (market participant’s) algorithms: In-house built, tested on an OMP, and deployed tool 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.
- External (OMPs’) “execution algorithms” without human intervention: Trading functionalities with the automated management of orders e.g. orders that are executed through functionalities which additionally to routing orders to OMPs offer automated managing of the order (e.g. automatically redirecting unexecuted portions of such orders to other venues or slicing orders prior to execution). Algo trading encompasses both the automatic generation of orders and the optimisation of order-execution processes (e.g. slicing of orders) by automated means.
- Stand-alone vendor algorithms by third parties: All types of Algos independent of their complexity (e.g. PowerBot).
- Out-of-scope of Article 5(a)(2):
- External order types offered as standard functionalities by exchanges/OMPs: A standard way to interact with the market and are made available on a wide range of exchanges that do not contain further own dynamics apart from predefined parameters (e.g. Iceberg orders where the portion of orders is pre-defined and the slice doesn’t react or change when market conditions change, stop-limit orders, delayed orders).
- Systems used for the confirmation of orders or post-trade processing executed transactions: These are not directly related to placing orders/executing transactions.
- Signal generators: Signal generators do not act in the market. It will still be a human trader who will have to check the information provided by the signal generator and, if the suggestion provided is agreeable, either place a manual trade or set up an algo to trade.
- Systems for pure order routing: Systems which do not process any external parameters or market variables when forwarding orders in an automated way.
2] Direct Electronic Access
- Under REMIT 2 DEA means an arrangement whereby a member, participant, or client of an organised marketplace (OMP) allows another person to use its trading code so the person can electronically transmit orders to trade relating to a wholesale energy product directly to the OMP;
- This includes arrangements which involve the use by a person of the IT infrastructure of the member, participant, or client, or any connecting system provided by the member, participant, or client, to transmit the orders to trade (i.e. direct market access or DMA) and arrangements whereby such an infrastructure is not used by a person (i.e. sponsored access).
- REMIT 2 introduces a legal obligation under Article 5a (3) effective from 7 May 2024 where:
"A market participant that provides direct electronic access to an OMP shall notify the national regulatory authority of the Member State where the market participant is registered pursuant to Article 9(1) and the Agency accordingly“
- ACER believes that the notification under this obligation should be provided by the DEA provider and not by the DEA client;
- In a final note, ACER considers that a market participant automatically submitting orders to an OMP via Software as a Service (SaaS) should notbe considered as providing DEA to that OMP;
- The definition of DEA under REMIT 2 requires that:
"..a member, participant or client of an organised marketplace allows another person to use its trading code so the person can electronically transmit orders to trade relating to a wholesale energy product directly to the organised marketplace..“
- Given the above definition, in such a scenario there is no other person involved apart from the market participant that submits its orders via SaaS hence ACER’s view.
As a reminder, market participants engaged in Algo trading should have notified both the NRA in the Member State where they are registered as well as ACER by 7 May 2024. Market participants that provide DEA services to an OMP should also have notified both the NRA in the Member State where they are registered as well as ACER by 7 May 2024. Market participants can fulfil their notification obligations via ACER's CEREMP tool. Market participants registered in Italy, Romania and Slovenia need to notify the NRA directly, and by doing so they will be considered to have also notified ACER.