How do regulated markets admit instruments and members, and control algorithmic trading?

A regulated market needs clear and transparent rules for admitting instruments, so that trading in them can be fair, orderly and efficient. Transferable securities must be freely negotiable, and derivatives must be designed so that they can be priced in an orderly way and settled effectively. The market checks that issuers of securities it admits meet their initial, ongoing and ad hoc disclosure duties, helps its members get access to that information, and regularly verifies that admitted instruments still meet its requirements.

A transferable security already admitted to one regulated market may be admitted to others even without the issuer's consent, subject to the prospectus rules. The market only has to inform the issuer, who then has no duty to provide information directly to that market. A market that suspends or removes an instrument, and related derivatives where needed, publishes its decision and tells CySEC. Where the reason is suspected market abuse, a takeover bid or undisclosed inside information, CySEC requires the other venues it supervises to follow suit, unless that would do serious harm to investors or to the orderly working of the market, and informs ESMA and the other Member States.

Access to membership must rest on transparent, non-discriminatory rules based on objective criteria, which set out members' obligations on the running of the market, its trading rules, the professional standards of their staff and clearing and settlement. Members may be investment firms, credit institutions and other persons who are fit and proper, competent to trade, suitably organised and adequately resourced. Members from other Member States may participate remotely; the market tells CySEC before offering such access in another Member State, and it reports its full list of members to CySEC regularly; on request, CySEC tells another Member State's authority which of the members are established in that state.

The market watches its members' orders, cancellations included, and their completed trades, to identify breaches of its rules, disorderly trading, possible market abuse and system disruptions. It tells CySEC immediately about significant infringements, disorderly trading, possible abuse and system disruptions, and gives CySEC full help in investigating abuse on its systems. CySEC passes the information to ESMA and other authorities, in the case of suspected abuse once it is satisfied that the conduct is happening or has happened.

Direct electronic access lets a member's client send orders straight into the market's trading system. A market that allows it must ensure that only members that are authorised investment firms or credit institutions provide it (the exam material mentions investment firms only), that suitability criteria are set for the clients given access, and that the member stays responsible for the orders and trades. It must set risk controls and trading thresholds, be able to identify and if necessary stop the orders of a person using direct access separately from the member's other orders, and be able to suspend or end access for non-compliance.

For algorithmic trading, the market must require members to test their algorithms and provide a testing environment, so that algorithms cannot create or add to disorderly trading. To manage disorder that does arise, it can limit the ratio of unexecuted orders to transactions a member may enter, slow down the flow of orders when capacity is at risk, and enforce a minimum tick size. It must be able to identify, through flagging by members, orders generated by algorithms, the algorithms used and the people who initiated them, and give this to CySEC on request. Its fee structure must be transparent and non-discriminatory, and it may charge more for orders later cancelled, for high cancellation ratios and for high-frequency techniques.