MAR is half man, half machine

On 11 and 15 July, ESMA published two Consultation Papers on the Market Abuse Regulation (MAR). Both papers represent a follow-up of the Discussion Paper dated 14 November 2013 on policy orientations, which contained an extensive list of 113 exploratory questions.

The Consultation Paper of 11 July focuses on technical advice that ESMA proposes to give to the European Commission on a number of delegated acts. It contains 19 questions and 5 sections:

• Specification of the indicators of market manipulation
• Minimum threshold for the purpose of the exemption for certain participants in the emission allowance market from the requirement to publicly disclose inside information
• Determination of the competent authority for notification of delays in public disclosure of insider information
• Managers’ transactions
• Reporting of infringements

The extensive list of indicators related to market manipulation prefigures the level of sophistication required from the monitoring software.  Nonetheless, the approach reveals an important blind spot for cross-venue and cross-product market manipulation. Each trading venue possesses only a partial view of the market and may conduct an analysis limited to the available information.

The Consultation Paper of 15 July focuses on the draft RTS related to the MAR. The paper covers every RTS that ESMA is required to produce under this regulation, in a window of 35 questions.

The Consultation Paper discusses the following topics:

• Buy Back Programme
• Stabilisation Measures
• Market Soundings
• Prevention and Detection of Market Abuse
• Disclosure of Inside Information and Delay of Inside Information
• Insider Lists
• Managers’ Transactions
• Investment Recommendations

Certain obligations in MAR can only realistically be undertaken by machines. RMs, MTFs and OTFs need to establish systems in order to detect suspicious orders and transactions. Indeed, ESMA recognises that it will be very difficult to meet this requirement without an automated system.

The massive need for technology investment by the trading venues is a must, but it goes hand in hand with a similar need for investment by the regulators. Last week, Commissioner Scott O’Malia  drew attention to the pressing need for investment in technology by the CFTC.

An open hearing on both Consultation Papers will be held in Paris on 8 October 2014. Comments should be submitted by 15 October 2014.

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