MiFID II: ESMA issues supervisory briefing on algorithmic trading

The European Securities and Markets Authority (ESMA) has published a supervisory briefing providing guidance to investment firms and national regulators on the supervision of algorithmic trading under MiFID II. The briefing aims to clarify expectations in areas where evidence of divergence in supervisory practices has emerged, with a focus on pre-trade controls, governance arrangements, stress testing frameworks, outsourcing and AI.

ESMA encourages investment firms to use the briefing to verify their compliance with the requirements on algorithmic trading and to help them support the development of internal checklists and training materials for supervisory staff.

Areas covered include:

• Definitions and scope: To achieve consistent supervision and limit risks, the guidance clarifies the scope of what constitutes an algorithm and algorithmic trading. It includes a list of examples of activities which, if automated, would qualify as algorithmic trading. The guidance explains that the risks involved in algorithmic trading originate from the risks of one or more parameters of an order, as determined by a computer algorithm, which may endanger market integrity or orderly trading. ESMA states that all these risks need to be properly managed, which is the aim of the regulations on algorithmic trading.

• Algorithmic trading strategies: Whilst MiFID II and RTS 6 refer to strategies in the context of reporting, testing, documentation and market abuse surveillance, they do not detail what constitutes a distinct strategy, which can lead to inconsistent interpretations. Firms are required to test and validate each strategy before deployment and after any material change. The guidance clarifies that this is a set of decision logic, implemented through one or more algorithms, that autonomously pursues a defined trading objective. It must result in observable trading behaviour and each strategy must be testable, distinguishable, and subject to supervisory scrutiny to ensure compliance and market integrity.

• How and when testing of algorithms should occur: ESMA acknowledges that the scope, frequency and intensity of testing will vary across the industry depending on the nature, scale and complexity of the business. The guidance suggests that firms specifically engaged in highly complex algorithmic trading may need to implement more extensive testing practices than those firms engaged in less complex algorithmic trading. Firms will also need to ensure that testing methodologies, procedures and internal authorisations to deploy algorithmic trading are well-documented and are updated. A non-exhaustive list of aspects of ‘material changes’ is provided which the guidance suggests would be good practice for firms to consider re-testing when they occur.

• Conduct of stress testing: The guidance considers how firms should conduct stress testing, particularly the stress testing of trading (i.e. the full cycle of order generation to post trade processing) which ESMA recognises is more complex. The guidance suggests firms should test their systems to evidence a reasonable level of assurance that their systems can process twice the volume of the highest volume of trading reached by the firm during the previous six months, as required by RTS 6.

• Outsourcing: The guidance considers who is responsible for compliance with algorithmic trading requirements in case of outsourcing, use of third-party algorithms or in a chain of entities and in the case of Direct Electronic Access (DEA). It also looks at how outsourcing arrangements should be structured which includes ensuring that the roles, operational responsibilities and obligations of each party are clearly defined.

• AI and algorithmic trading: Given the extended use of artificial intelligence in algorithmic trading, the guidance provides helpful clarity around their interaction:

  • Whilst neither MiFID II nor RTS 6 specifically address AI, firms should recognise the use and impact of AI in algorithmic trading. When an algorithmic trading system meets the EU AI Act the definition of an AI system it will need to comply with the requirements in the EU AI Act and integrate these into RTS 6 compliance.

  • AI-based algorithmic trading is not a high-risk use case but may still be a limited risk use case if it is ‘intended to interact directly with natural persons’, which could trigger AI Act transparency requirements.

  • Firms should manage the risk that a series of small changes could accumulate over time into a material change in the model output without it being tested.

  • RTS 6 includes two provisions which firms can use to demonstrate their control of AI in algorithmic trading: (i) regulators should assess how firms are considering AI use as part of their self-assessment and validation under Article 9; and (ii) under Article 2 compliance staff should at least have a general understanding of how algorithmic trading systems operate and firms should be able to explain how AI impacts their algorithms’ decision-making.

• Pre-trade controls (PTCs): Pre-trade controls are intended to prevent the sending of erroneous orders and the malfunctioning of a firm’s system which could trigger disorderly markets conditions. In this section ESMA reflects on the lessons learned from its Common Supervisory Action undertaken in 2024 following the 2022 flash crash in Nordic stock markets. It also provides targeted guidance looking at the scope of the requirement to establish PTCs, outsourcing arrangements, hard blocks and soft blocks, and governance practices.

ESMA says it will continue to monitor market and technological developments and may update the supervisory briefing or develop further convergence tools as needed.

The supervisory briefing, which was published on 26 February 2026, is available here.