AI in action · Regulation
Europe's Markets Watchdog Wants Trading Firms to Account for AI in Their Algorithms
ESMA's February 2026 briefing on algorithmic trading doesn't create new AI rules. It tells firms to identify AI in their trading systems, test it before and after changes, and calibrate their risk controls for models that don't behave predictably.
Most trading on European exchanges is already done by algorithms. What is changing is what sits inside them: models trained on data, rather than rules written line by line. On 26 February 2026 the European Securities and Markets Authority (ESMA) published a supervisory briefing on algorithmic trading that addresses this directly, according to analyses by the law firms Macfarlanes and Hogan Lovells.
The briefing does not add new rules. Neither MiFID II nor RTS 6, the technical standard that governs algorithmic trading, mentions AI. Instead, ESMA expects firms to "consider the influence of AI on their trading algorithms" in the annual self-assessment they already have to carry out, and encourages national supervisors to check that they do.
Three expectations stand out. Firms should identify where AI is used in their trading systems, and compliance staff should understand how it affects the algorithms' decisions. Pre-trade controls — the automatic blocks and alerts that stop an order going out — should be calibrated with non-deterministic models in mind, naming reinforcement learning, deep learning, neural networks and generative AI. And testing is required before deployment and after any "material change", which ESMA defines as any modification that may alter an algorithm's behaviour, risk profile or compliance posture, including several small changes that add up.
Responsibility also stays put. A firm remains responsible for its algorithms even when they are built or run by a third party. Trading systems that qualify as "AI systems" also have to meet the EU AI Act, including its transparency obligations where they apply; trading is not currently classed as a high-risk use under that law, but the classification is reviewed every year.
For anyone outside the industry, the briefing is a useful reminder of why markets have circuit breakers, order limits and kill switches at all: the faster and less predictable the systems placing orders, the more those safeguards matter.
Sources: Macfarlanes — Algorithmic trading and artificial intelligence: ESMA supervisory briefing (Apr 15, 2026); Hogan Lovells — ESMA supervisory briefing on algorithmic trading in the EU