LUXEMBOURG Law and Practice Contributed by: Andreas Heinzmann, Valerio Scollo and Angela Permunian, GSK Stockmann
clarified by guidance issued by ESMA, payments for order flows between brokers and market makers are generally not permitted. Fees, commissions or non-monetary benefits from a third party may only be accepted if such benefit is designed to enhance the quality of the relevant ser - vice to the client and does not impair the service pro - vider’s duty to act honestly, fairly and professionally in accordance with the best interest of its clients. In addition, the benefits received must be clearly dis - closed to the client before providing the relevant ser - vice. 6.8 Market Integrity Principles The basic legal framework to preserve market integrity is laid out in Regulation (EU) No 596/2014 on market abuse (MAR), which is directly applicable in Luxem - bourg. MAR, together with the delegated and implement - ing acts, imposes rules regarding disclosure, recom - mending/inducing prohibitions on persons in posses - sion of inside information, ongoing issuer disclosure obligations and prohibition on market manipulation. The CSSF is the competent authority in Luxembourg for the purposes of MAR and has the supervisory and investigatory powers. Non-compliance may lead to administrative sanctions or criminal liability. 7. High-Frequency and Algorithmic Trading 7.1 Creation and Usage Regulations The rules applicable in Luxembourg for the creation and usage of high-frequency and algorithmic trading have been implemented in the Law of 30 May 2018 on markets in financial instruments, transposing MiFID II. These rules apply to trading of all financial instru - ments, and no differentiation is made between differ - ent asset classes within the scope of MiFID II. Investment firms, credit institutions and certain other entities incorporated in Luxembourg that engage in algorithmic trading must have effective systems and risk controls in place that ensure, among others, that the trading systems:
• are resilient and have sufficient capacity; • are subject to appropriate trading thresholds and limits; • prevent the sending of erroneous orders; and • cannot be used for purposes that are contrary to MAR. In addition, such systems need to be fully tested and properly monitored, and effective business continuity arrangements need to be in place to deal with any fail - ure of the systems. Engagement in algorithmic trading needs to be notified to the CSSF. Specific requirements apply in accordance with the MiFID II legal framework if the entity engaging in algo - rithmic trading is pursuing a market-making strategy. An entity is considered to pursue a market-making strategy when dealing on its own account, as a mem - ber or participant of a trading venue, where its strategy involves posting firm, simultaneous two-way quotes of comparable size and at competitive prices relating to one or more financial instruments on a single trad - ing venue or across different trading venues, with the result of providing liquidity on a regular and frequent basis to the overall market. In contrast to MiFID II, MiCA covers the term “market participant”. Market participants include, but are not limited to, CASPs, which are subject to authorisation and rules of transparency and consumer protection. In addition, all digital issuers, who may also be con - sidered market participants, should adhere to strict disclosure requirements. Therefore, market makers may fall under the scope of MiCA if they align with the role of CASPs – namely the buying and selling of financial instruments. 7.3 Regulatory Distinction Between Funds and Dealers The applicable regulations do not distinguish between funds and dealers engaged in high-frequency or algo - rithmic trading. 7.2 Requirement To Be Licensed or Registered as a Market Maker When Functioning in a Principal Capacity
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