ESTONIA Law and Practice Contributed by: Yuliya Barabash, Ivan Nevzorov, Daria Lysenko and Nikita Prokopenko, SBSB FinTech Lawyers
6.7 Rules of Payment for Order Flow Payment for order flow (PFOF) in Estonia is subject to EU-wide regulations, including MiFID II. The main problem with PFOF is the conflict of interest it creates and the potential deterioration in best execution, as orders are sent not to the platform offering the best solution, but to the one that pays for the orders. Platforms and brokerage services in Estonia must adapt their business models to avoid PFOF by high - lighting direct commissions or other revenue models that provide transparency and clarity for clients. 6.8 Market Integrity Principles The basic principles of market integrity and market abuse in Estonia are defined by applicable EU law, in particular the Market Abuse Regulation (MAR). The main principles are:
ing systems, comply with relevant trading thresholds and limits, and prevent the transmission of erroneous orders or the functioning of systems in a way that could create or contribute to market instability. For crypto-assets, the approach differs due to the application of different regulations (European MiCA), which focus more on trading transparency, stability and risk management, but without detailed regulation. Thus, high-frequency and algorithmic trading in tradi - tional markets are subject to more detailed and strin - gent rules than in the crypto sphere – but, in both cases, the main focus is on preventing manipulation and ensuring fair trading. Estonian participants who conduct high-frequency or algorithmic trading in a principal capacity may be subject to MiFID II regulations, which have been implemented into national legislation. If the business model involves trading in securities, the company must obtain an investment firm licence from Finant- sinspektsioon . This means that the company must comply with requirements regarding capital, risk management, algorithmic trading control systems and market abuse prevention. If the business model involves trading in cryptocurrencies in the meaning of MiCA, the company must obtain a CASP licence from Finantsinspektsioon . 7.3 Regulatory Distinction Between Funds and Dealers According to European regulations implemented in Estonian legislation, regulation of companies will differ depending on the business model. While investment firms are subject to MiFID II regulation, which clearly defines the rules for high-frequency and algorithmic trading and requires traders to disclose information to the regulator and the trading venue, in particular regarding strategies, risk management, etc, the legis - lation applicable to funds does not specifically regu - late such activities. Both models may use the same technologies but, depending on the business model, they will have different regulations and responsibilities. 7.2 Requirement To Be Licensed or Registered as a Market Maker When Functioning in a Principal Capacity
• the prohibition of insider disclosure; • the prohibition of insider trading; and • the prevention of market manipulation.
Participants are required to implement trading moni - toring systems, report suspicious transactions and maintain proper disclosure of information. As mentioned earlier, market participants are super - vised by the Estonian Finantsinspektsioon , which mon - itors compliance with the rules. It should be noted that similar rules are being introduced for crypto-assets through MiCA regulation in order to ensure transpar - ent trading, protect users and prevent manipulation. 7. High-Frequency and Algorithmic Trading 7.1 Creation and Usage Regulations High-frequency and algorithmic trading in Estonia is subject to general EU regulation as the country is inte - grated into the single financial market. For securities, the use of these approaches is regu - lated in accordance with MiFID II. Investment firms must have effective risk control systems and meas - ures in place that are appropriate to their activities to ensure the resilience and sufficient capacity of trad -
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