Regulation 8 Schedule 3 to the Regulated Activities Order

Schedule 3 to the Regulated Activities Order (exemptions from the definition of “investment firm”)^f1 is amended as follows.

In paragraph 3, for “paragraph 1(p)” substitute “paragraph 1(o)”.

After paragraph 6 insert—

“Part 3

Direct electronic access and high-frequency algorithmic trading technique

“Direct electronic access”

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(1)

This paragraph applies for the purposes of the exemption in paragraph 1(e).

(2)

“Direct electronic access” means an arrangement where a member or participant or client of a trading venue permits a person to use its trading code so the person can electronically transmit orders relating to a financial instrument directly to the trading venue, including—

(a)

arrangements which involve the use by a person of the infrastructure of the member or participant or client, or any connecting system provided by the member or participant or client, to transmit the orders (direct market access), and

(b)

arrangements where such an infrastructure is not used by a person (sponsored access).

(3)

A person is to be considered not capable of electronically transmitting orders relating to a financial instrument directly to a trading venue where either or both of the following apply—

(a)

that person cannot exercise discretion regarding—

(i)

the exact fraction of a second of order entry, and

(ii)

the lifetime of the order within that timeframe;

(b)

the electronic transmission of orders takes place through arrangements for optimisation of order execution processes that determine the parameters of the order other than the trading venue where the order should be submitted, unless these arrangements are embedded into that person’s systems and not into those of—

(i)

the member or participant of a regulated market or of an multilateral trading facility, or

(ii)

a client of an organised trading facility.

“High-frequency algorithmic trading”

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(1)

This paragraph applies for the purposes of the exemptions in paragraph 1(e), (f) and (k).

(2)

“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.

(3)

A system is to be considered as having limited or no human intervention where, for any order or quote generation process or any process to optimise order-execution, an automated system makes decisions at any of the stages of initiating, generating, routing or executing orders or quotes according to pre-determined parameters.

(4)

A “high-frequency algorithmic trading technique” is an algorithmic trading technique characterised by—

(a)

infrastructure intended to minimise network and other types of latencies, including at least one of the following facilities for algorithmic order entry—

(i)

co-location,

(ii)

proximity hosting, or

(iii)

high-speed direct electronic access,

(b)

system-determination of order initiation, generation, routing or execution without human intervention for individual trades or orders, and

(c)

high message intraday rates which constitute orders, quotes or cancellations.

High message intraday rate

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(1)

For the purposes of paragraph 8(4)(c), a high message intraday rate consists of the submission on average of either of the following—

(a)

at least 2 messages per second with respect to any single financial instrument traded on a trading venue;

(b)

at least 4 messages per second with respect to all financial instruments traded on a trading venue.

(2)

Sub-paragraphs (3) to (7) have effect for the purposes of the calculation in sub-paragraph (1).

(3)

The following are to be included in the calculation—

(a)

messages concerning financial instruments for which there is a liquid market in accordance with Article 2(1)(17) of the markets in financial instruments regulation;

(b)

messages introduced for the purpose of a market-making strategy that satisfies the criteria in sub-paragraph (4).

(4)

A market-making strategy satisfies the criteria in this sub-paragraph where the strategy—

(a)

is pursued by an investment firm as a member or participant in one or more trading venues when dealing on own account, and

(b)

involves posting firm, simultaneous two-way quotes of comparable size and at competitive prices relating to one or more financial instruments on a single trading venue or across different trading venues, with the result of providing liquidity on a regular and frequent basis to the overall market.

(5)

Messages introduced for the purpose of dealing on own account are to be included in the calculation.

(6)

Messages introduced through trading techniques other than those relying on dealing on own account are to be included in the calculation where the firm’s execution technique is structured in such a way as to avoid the execution taking place on own account.

(7)

For the calculation of a high message intraday rate in relation to direct electronic access providers, messages submitted by their clients with direct electronic access (as defined in paragraph 7) are to be excluded from the calculations.

Interpretation

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Any expression used in this Part of this Schedule which is used in the markets in financial instruments regulation has the same meaning as in the regulation.”.