ESMA publishes Supervisory Briefing on algorithmic trading under MiFID II: What firms need to know

Background

On 26 February 2026, the European Securities and Markets Authority (ESMA) published a new Supervisory Briefing on Algorithmic Trading in the EU. The briefing draws heavily on insights from ESMA’s 2022 Common Supervisory Action (CSA) on pre‑trade controls, as well as ESMA’s supervisory experience and engagement with national competent authorities (NCAs) across EU member states. Its publication was prompted by continued divergence in supervisory approaches across the EU, in particular around governance arrangements, stress-testing frameworks, outsourcing, pre-trade controls, and on the use of AI within algorithmic trading workflows.

The guidance is primarily aimed at NCAs, providing them with a practical “convergence tool” to support more consistent supervision under MiFID II. ESMA emphasises that the supervisory briefing is non‑binding (i.e. it is not subject to a “comply or explain” approach), and is intended to promote alignment in supervisory practices rather than impose new regulatory requirements.

However, ESMA has also flagged that the briefing is also relevant for investment firms that engage in algorithmic trading, including firms that are not formally authorised under MiFID II, that employ algo trading approaches. ESMA explicitly states that it expects the briefing to help firms verify their own compliance with applicable MiFID II requirements concerning algo trading, as a result of which firms will need to consider its impact in relation to their trading activities. Firms may also find that their NCAs formally adopt the briefing as supervisory guidance, or introduce their own rules and/or guidance to reflect the briefing.

Key topics addressed by the briefing

• Alignment of key definitions

To help drive consistency of approach across member states, and to ensure that the risks posed by algorithmic trading are properly identified and addressed through the MiFID framework, the briefing clarifies the terms “algorithmic trading” and “algorithmic trading strategy”. It does this by providing examples of each, building on existing ESMA guidance relating to these terms, rather than replacing existing definitions and examples.

Algorithmic trading – examples:

The briefing provides examples of automated activities that qualify as algorithmic trading, underscoring ESMA’s view that the definition of algo trading should be broadly construed. In particular, the briefing provides examples of automated activities that are likely to qualify as “determining trading parameters”, thereby falling within the algo trading definition. The following examples of automated processes would, in ESMA’s view, constitute algo trading:

(a) Order generation logic: generating orders or quotes based on market signals, portfolio strategies or risk thresholds.

(b) Execution selection strategy: choosing between execution strategies (e.g. aggressive vs passive).

(c) Risk management adjustments: adjusting trading behaviour based on risk metrics such as exposure limits and stop-loss triggers.

(d) Cross-asset or cross-venue optimisation: determining which asset or venue to trade on, based on cost, latency or execution quality (beyond simple order routing).

The briefing also provides a list of examples of activities which, if automated, would also qualify as algo trading – e.g.:

(a) Slicing orders prior to execution: breaking large orders into smaller parts to optimise execution.

(b) Dynamic order modification based on market data: Adjusting price or quantity in real time based on market movements.

Algorithmic trading strategy – examples:

MiFID II and regulatory technical standard 6 (“RTS 6”) reference the term “algorithmic trading strategy” in the context of reporting, testing, documentation and market abuse surveillance, but do not explicitly define what constitutes a distinct “strategy”, resulting in an inconsistent interpretation of this term. ESMA stresses that given the central role that the “algorithmic trading strategy” term plays in relation to these important regulatory obligations, it is key that NCAs and investment firms have a consistent understanding of the term.

ESMA’s briefing aims to address this, explaining that a strategy is a set of decision logic, implemented through one or more algorithms, that autonomously pursues a defined trading objective, resulting in observable trading behaviour. ESMA also clarifies that an algorithmic trading strategy must be distinguishable, testable, and identifiable so that it can be scrutinised in order to ensure that it complies with applicable MiFID II requirements.

• Testing frameworks

ESMA is also clear that each strategy must be tested before deployment, and after any material change. However, ESMA does acknowledge that testing requirements will vary depending on the nature, scale and complexity of the relevant business, noting that firms that use more complex algorithms and algorithmic strategies are expected to establish more extensive testing programmes. Helpfully, the briefing provides guidance on how and when testing should occur, as well as providing examples of what might constitute a “material change” or “substantial update”. Firms should review their existing testing frameworks to ensure that their internal definitions of “material change” or “substantial update” take account of briefing examples.

The briefing also sets out guidance in relation to the stress testing of algorithms and strategies. Among other things, the briefing clarifies that stress testing should be undertaken across the full trading cycle, from order generation to post-trade processing.

• Pre trade controls (PTCs)

Pre trade controls were a major focus of the 2022 CSA and remain a focus area for ESMA. The briefing includes guidance that is informed by lessons learned from 2022 flash crash in Nordic stock markets, providing guidance relating to:

(a) the circumstances in which the requirement to establish PTCs applies, and the types of PTC that are expected to be in place;

(b) how PTCs should be set, and who is expected to set and approve them (including where a firm outsources any aspects of its algorithmic trading arrangements);

(c) how PTCs should be applied to client orders where an investment firm is offering direct electronic access; and

(d) the calibration, testing and revision of PTCs.

• Outsourcing arrangements

ESMA’s briefing encourages NCAs to scrutinise arrangements involving the outsourcing in connection with algorithmic trading, or using third party algorithms. Specifically, the briefing focuses on responsibility for compliance with algo trading regulatory requirements in these circumstances. Among other things, the briefing considers how outsourcing arrangements are expected to be structured, including ensuring that the parties’ roles and operational responsibility are clearly allocated and documented.

• Supervisory considerations for AI and algorithmic trading

Recognising the increasing integration of AI into algorithmic trading workflows, the briefing aims to clarify the interaction between algorithmic trading-related regulatory requirements, and requirements under the EU AI Act. Among other things, the briefing advises NCAs to take into account (among other things):

(a) highlights ESMA’s expectation that firms should assess the impact of AI when assessing the compliance of their algorithmic trading activities with applicable regulatory requirements;

(b) flags that the concept of “material change” should include a series of small changes that accumulate over time, including small cumulative changes to the AI component of any algorithmic trading approach;

(c) highlights that firms should use the self-assessment requirement under RTS 6 (Article 9) to help demonstrate their control of AI in algo trading; and

(d) flags the importance of compliance personnel having at least a general understanding of how AI impacts the decision-making of the firm’s algorithms, as part of the firm’s broader compliance with the requirement under Article 2 of RTS 6 to ensure that compliance staff have a general understanding of how algo trading systems operate.

Next steps

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

Practical implications for investment firms

Although formally addressed to regulators, investment firms engaged in algorithmic trading are encouraged to review the briefing and to undertake a gap assessment of their existing algo trading compliance frameworks against the briefing guidance, with a view to enhancing their existing arrangements where gaps are identified.

Firms should also monitor relevant NCAs’ communications for any statements regarding the ESMA supervisory briefing, as NCAs may look to formally adopt the briefing as a supervisory tool, or introduce their own rules or guidance embedding the ESMA briefing.

How Hogan Lovells can help you?

Our global financial services regulatory team is experienced in providing regulatory legal and compliance consulting support to firms across the full lifecycle of algorithmic trading. We can support you by:

• undertaking gap analyses of your existing algo trading arrangements against the briefing guidance;
• enhancing relevant policies, procedures and processes; and
• project managing compliance enhancement projects.

Please get in touch with your usual Hogan Lovells contact with any questions.

Authored by Keti Tano.