The European Securities and Markets Authority (ESMA) issued a supervisory briefing on algorithmic trading across the European Union today, February 26, 2026, aiming to harmonize oversight of automated trading systems. The briefing focuses on clarifying expectations surrounding governance, testing procedures, and the definition of algorithmic trading itself under the Markets in Financial Instruments Directive II (MiFID II).
According to ESMA, the briefing is intended as a nonbinding convergence tool to support National Competent Authorities (NCAs) in consistently supervising firms engaged in algorithmic trading. It addresses areas where supervisory practices have previously differed, including pre-trade controls, governance arrangements, and the outsourcing of algorithmic trading systems.
The move comes as algorithmic trading continues to dominate European markets, offering benefits in terms of liquidity and efficiency, but also introducing risks such as erroneous orders, system malfunctions, and potential market volatility. The briefing does not introduce latest rules, but rather seeks to ensure a consistent interpretation and enforcement of existing regulations across the EU’s 27 member states.
A key element of the briefing clarifies the definition of algorithmic trading. ESMA emphasizes that even if a human trader ultimately approves an order, the involvement of an algorithm in determining any parameter beyond simple routing or post-trade processing qualifies the activity as algorithmic trading, triggering a more stringent regulatory framework.
The briefing also addresses the increasing use of artificial intelligence in algorithmic trading, outlining considerations for supervisors to assess new risks and ensure firms adopt robust and responsible approaches when deploying advanced technologies. This includes assessing the implementation of pre-trade controls (PTCs), credit and risk limits, governance frameworks, and the monitoring of PTCs when trading in third countries is outsourced.
ESMA will share the supervisory briefing with NCAs to support day-to-day supervision and will continue to monitor market and technological developments, potentially updating the briefing or developing further convergence tools as needed. The briefing builds on insights from a previous Common Supervisory Action on pre-trade controls and ongoing discussions with Member State competent authorities.
