The manager of Norway’s sovereign wealth fund has put forward the idea that the main stock exchanges around the world should be required to have emergency facilities where trading can continue if they suffer a major technological failure or cyberattack.
In its response to the European Securities and Markets Authority’s (ESMA) consultation on the MiFID II/MiFIR review report on algorithmic trading, Norges Bank Investment Management (NBIM) wrote: “The instances of trading discontinuity due to the various technological and cybersecurity incidents that occurred during 2020 did accentuate the risks associated with such disruptions.
“We suggest that ESMA considers if primary exchanges should be required to establish ‘continuity venues’ and particularly for the closing auction,” Emil Framnes, NBIM’s global head of equity trading and transition, and Vegard Vik, special adviser at the organisation wrote in the letter.
Such a solution might potentially be a cost-efficient approach to secure necessary contingencies, they said.
NBIM, which manages the NOK11trn (€1.1trn) Government Pension Fund Global, said the consolidation among primary exchanges in Europe had led to a limited number of physically-distinct matching engines – the core technological component of a stock exchange.
“Multilateral trading facilities and other trading venues should in principle be able to facilitate continuous trading in the instance of disruption at the primary exchange,” the pair wrote, adding, however: “This did not happen in practice in 2020.”
Closing auctions were becoming increasingly important, and involved more and more shares, NBIM wrote, but said there was no fallback mechanism should there be an outage at the primary exchange for this key feature of the trading session.
“The current alternative approaches to determining closing prices impose a potentially high cost and risk on institutional investors,” Framnes and Vik wrote.
The existence of independent trading technology platforms across Europe could provide the opportunity for operational risk diversification as well as increased overall system resilience, they wrote.
In the consultation exercise, which ran from 18 December 2020 to 12 March 2021, ESMA said the aim of its paper was to make the current regulatory framework around algorithmic trading operate more efficiently.
NBIM also said in its feedback to ESMA that when it compared the execution of trades in European equity markets to similar trades in the North American markets, it was generally more expensive – or took more time – to execute big orders in Europe.
“While differences in investor and market structure across these markets contribute to the spread in market liquidity, we believe it should also be a subject of consideration when assessing the regulatory framework for algorithmic trading,” Framnes and Vik said.