ACM checks market participants’ risk management in algorithmic trading on the energy wholesale markets

The Netherlands Authority for Consumers and Markets (ACM) checks the risk-management measures of energy wholesale market participants that use trading algorithms. The purpose of this check is to see whether traders have effective systems and risk controls in place. Algorithmic trading plays an increasingly large role on the markets for natural gas and electricity, as revealed by an ACM market study last year. In the revised REMIT regulation, which came into force in May 2024, new obligations have been laid down for market participants that use algorithmic trading. For example, they need to have suitable, effective systems and risk controls in place for preventing undesirable market practices involving algorithmic trading. ACM will use the insights gleaned from this check for further developing its REMIT oversight. ACM plans to publish the key findings still in 2025.

What is the focus of this check?

ACM requests information about systems and risk controls from a group of market participants that apply algorithmic trading. This information concerns, among other topics:

• The different types of pre-trade controls and limits that market participants apply for managing trading risks.
• The governance and responsibility structures within organizations for determining, managing, and approving pre-trade controls and limits.
• The procedures for regularly testing the effectiveness and suitability of these controls and limits.

ACM additionally requests market participants to share their insights into the most important market risks that they observe in algorithmic trading, and what kinds of questions exist surrounding these REMIT obligations.

Fair prices through algorithmic trading with integrity

Markets that function well and that have integrity lead to fair prices for consumers. The use of algorithmic trading is rising. This can help markets function well, but it also carries new risks to the integrity of energy trading, for example the risk of algorithmic collusion or illegal trading in the form of market manipulation, or the risk that algorithms have an amplifying effect on existing market fluctuations or volatility. These outcomes eventually also affect end-users, through the price-formation process of natural gas and electricity. It is important that traders safeguard that their trading algorithms operate in accordance with existing trading rules.

REMIT oversight

The European rules regarding integrity and transparency on wholesale electricity and natural-gas markets were tightened on May 7, 2024. ACM has the power to periodically or incidentally request information about algorithmic trading from companies that use such algorithms in order to monitor compliance with existing obligations. With regard to algorithmic trading, ACM also has a broader collaboration with the Dutch Authority for the Financial Markets (AFM), which conducts oversight over the integrity and transparency on the markets for financial instruments, including energy derivatives.

See also

• REMIT obligations for wholesale in energy | ACM (in Dutch)