If an investment firm acts as DEA provider the clients’ activities could potentially be algorithmic trading, and thus need to be monitored in the same way.
In DMA setups, orders should either be directed to the right venue by the customer, or a SOR should be used for non-directed orders to automate venue selection in line with the best execution policy.
DEA trades will be part of the statistics used to build the yearly top five trading venues reports. The reports should summarise a full year’s trading grouped per client categorisation and asset class category. It should also show when customer have provided explicit direction on which venue to send an order to, and when the best execution policies have been used.
DEA providers need to apply the same pre- and post-trade controls as for their own algorithmic trading. The onboarding process for DEA clients should include a thorough assessment of risk and complexity of their trading activities, since the DEA clients may use the setup to engage in algorithmic trading.
In DMA scenarios, if customers send non-directed orders affected by the best execution policy, the only way to properly manage a multi-venue environment is to utilise the automation provided by a SOR for the same reasons as general agency trading.
Although common sense to many, the regulation clarifies that giving naked access to a venue though a firm’s membership should not be done. Pre-trade limits are an efficient way to allow customers to trade while controlling exposure in real time.
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