Steffen Gemuenden, CEO, RTS Realtime Systems
"It's important to define what DEA actually encompasses and the different players involved."
The EU regulator is looking to harmonise the definition of direct electronic access, which includes direct market access and sponsored access within its scope.
Broadly, DEA is defined as "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".
However, there are differing attitudes as to whether automated order routing presents a special case. AOR is the use of market members' infrastructure to transmit orders, where the order is then automatically transmitted for execution under the members ID.
Based on IOSCO (International Organisation of Securities Commissions) principles, it should be included. ESMA pointed out that AOR arrangements and DEA might pose the same risks to the markets.
It's important to define what DEA actually encompasses and the different players involved, said Steffen Gemuenden, chief executive of RTS Realtime Systems, a vendor which connects more than 150 exchanges on multi-asset class platforms.
In the futures market, it's quite common for orders to go straight through to an exchange member firm's electronic systems, triggering corresponding pre-trade risk controls.
In equities, however, the question is more about the capabilities of any firm having direct market access.
"People who are using an order entry screen should probably not be included (in ESMA's DEA definition)," he said. "But people who would access the system's broker via FIX or an API, I think they should be included. Algorithmic trading is not only low latency high frequency; there are other kind of algos."
Meanwhile, controls associated with providing market access are under scrutiny. In a case out of the US, the SEC charged Wedbush Securities with failing to maintain direct and exclusive control over settings in trading platforms. The Los Angeles-based market access provider consistently ranked as one of the five largest firms by trading volume on Nasdaq, the SEC noted.
In Europe, Gemuenden said, access to equity and futures markets is either through a brokerage firm, technology or software vendor and exchanges have strict limit controls. As a case in point, Eurex sets order and position limits for individual traders on the exchange matching engine. "It seems to me that European exchanges have a bit more sophisticated functionality in this area," he said.
All in all, he doesn't see the regulations changing too much in Europe as much as formalising standard practice. The challenges, he said, will be around proving transparency for best execution because it will require that firms collect large volumes of data in a dynamic market context.
In the bigger picture, he said that it's about time certain efforts are made. "Regulations and standards around exchange-imposed market data and colocation fees are really overdue."
As are rules around open access for regulated investment firms, which he points out the US is taking more notice of.
"If you look around some of the markets, like ICE's OTC markets, it is not really an open market - only a certain amount of vendors can access it, but not all."