1 added, 1 removed. Audit A to A.
---
name: algorithmic-trading-firm-licensing-thresholds
description: >-
Use when auditing whether a proprietary trading firm has crossed a quantitative
registration trigger: the 17 CFR 240.15b9-1 conditions for FINRA membership exemption,
the MiFID II Article 19 message-rate test, and the SEBI limbs.
license: Apache-2.0
metadata:
domain: algorithmic-trading
subdomain: regulatory-compliance-global
tags: compliance, sec, finra, mifid-ii, hft, sebi, registration-thresholds
brokers_frameworks: "17 CFR 240.15b9-1 as amended (88 FR 61893, Sept. 7, 2023); Securities Exchange Act section 15(b)(8); MiFID II Article 4(1)(40) and Article 2(1)(d)(iii); Commission Delegated Regulation (EU) 2017/565 Article 19; SEBI/HO/MIRSD/MIRSD-PoD/P/CIR/2025/0000013 with NSE/INVG/67858; Python Dataclasses"
version: "2.0.0"
author: algo-trading-skills-contributors
---
## When to Use
Use this skill when auditing a proprietary trading firm, hedge fund or trading
member to check whether its activity has crossed a *quantitative* registration
trigger in the US, the EU or India — the numeric limbs of three specific
regimes, screened against the numbers the regulator or the exchange actually
publishes.
Start here by correcting the misconception this skill exists to prevent.
**There is no single "algo trading firm licence" and no global message-rate
threshold that triggers one.** The three regimes look superficially alike and
are not:
- **US.** Rule 15b9-1 is an exemption from the Exchange Act **section 15(b)(8)
requirement to join FINRA**, not from broker-dealer registration under
section 15(a), and *nothing in it turns on order or message rates*. It turns
on three conditions: exchange membership, carrying no customer accounts, and
executing solely on an exchange of which the firm is a member.
- **EU.** The MiFID II HFT designation is a **message-rate** test — but on an
*average*, at 2 and 4 messages per second, not on a peak and not at any
round number in the dozens. Meeting it removes the own-account dealing
exemption and forces investment firm authorisation.
- **India.** The SEBI Threshold Orders Per Second registers an **algorithm
with an exchange**, for a *retail investor's* API-routed flow. It is not
entity licensing and it does not govern a trading member's own flow.
The output is an auditable `LicensingComplianceReport` with three outcomes,
not two: a crossed threshold (`requires_registration`), an undetermined
question (`manual_review_required`), and neither. Any report that is not
`is_clear` goes to the Chief Compliance Officer and qualified regulatory
counsel before the desk continues operating.
## When NOT to Use
- **As a licensing determination.** The engine screens numeric limbs. Whether
a firm is a "dealer" or is "engaged in the business" at all, whether an EU
activity is an investment service, and every qualitative fact besides, sit
outside it. A clear report is not a legal opinion.
- **As evidence a registration exists.** The engine reads flags the caller
supplies. It cannot confirm a firm is a FINRA member, holds a MiFID
authorisation, or has an algorithm registered with an exchange.
- **For an Indian trading member's own algorithms.** TOPS governs retail
API-routed flow. The exchange algo-approval regime that governs a member's
own algorithms is not modelled; the `IN` branch says so rather than
returning a clean report — see `india-sebi-algo-trading-tagging-requirements`.
- **For a US message-rate trigger.** There isn't one in Rule 15b9-1. If you
need a US order-rate control, that is a pre-trade risk obligation — see
`sec-rule-15c3-5-risk-controls-us`.
- **Outside US/EU/IN.** Unknown jurisdictions fail closed to manual review.
Do not carry the 2/4 messages-per-second figures or the 10 OPS TOPS into
another jurisdiction; see `mas-singapore-algo-trading-guidelines` for a
worked example of how differently the same-sounding obligations are built.
## Prerequisites
- - Python 3.9+ (standard library only).
+ - Python 3.10+ (standard library only).
- A `FirmTradingActivity` snapshot over a documented evaluation window:
- `jurisdiction`, `is_exchange_member`, `has_customers`.
- `off_exchange_volume_usd` and `exempt_off_exchange_volume_usd` — the
latter being the portion falling solely within the Rule 15b9-1(c)
exceptions, and evidenced, not assumed.
- `peak_orders_per_second` — the highest order count in any single
**calendar clock second, per exchange**, which is the basis NSE specifies
for TOPS. Not a rolling window.
- For the EU: `avg_messages_per_second_per_instrument` and
`avg_messages_per_second_all_instruments`, computed per Article 19(1) and
restricted to liquid instruments per Article 19(2). Leave them `None` if
unmeasured — `None` and `0.0` mean different things here.
- `is_retail_api_algo_flow` for the `IN` branch.
The module computes none of these from raw order data; aggregation discipline
(windowing, exchange-versus-ATS classification, Article 19(2) message
exclusions) is a prerequisite, not a feature.
## Workflow
1. **Aggregate, then construct.** Build `FirmTradingActivity`. The constructor
rejects unsupported jurisdictions, non-finite and negative metrics, `bool`
masquerading as a numeric quantity, and an exempt off-exchange figure
larger than the total — a claim that would otherwise net to a negative
non-exempt volume and hide a condition (c) breach.
2. **Configure only to tighten.** `LicensingThresholdEvaluator` defaults to
the published figures. Override `sebi_tops_orders_per_second`,
`mifid_ii_msgs_per_sec_single_instrument`,
`mifid_ii_msgs_per_sec_all_instruments` or `sec_off_exchange_floor_usd`
only to screen *more* strictly. Loosening one past the published figure
puts the firm outside the rule it is screening for. `0` is a valid,
stricter override and is honoured as such.
3. **Evaluate.** `evaluator.evaluate(activity)` runs every check; nothing
short-circuits. The customer-account check runs first and dominates
`rule_id`, but never suppresses the jurisdiction's own violations.
4. **Triage on three outcomes, not two.**
- `requires_registration` — a modelled threshold was crossed. Throttle,
disable the offending routing, or stop, and escalate.
- `manual_review_required` — the evaluator could not conclude. Escalate to
counsel. **Do not record this as compliant, and do not act on it as
though a breach were confirmed either.** The distinction matters: an EU
firm whose Article 19 averages were never computed is an open question,
not a proven HFT.
- `is_clear` — neither fired. Still not a legal opinion.
5. **Audit.** Persist the report (`evaluated_at`, `schema_version`,
`rule_id`, `violations`, `manual_review_items`) alongside the input
snapshot. Re-run on a documented cadence; ESMA expects a firm to
self-assess its Article 19 position **at least monthly**.
## Common Pitfalls
- **Reading Rule 15b9-1 as a registration exemption.** It exempts a
broker-dealer from *joining FINRA* under section 15(b)(8). A firm that
concludes it need not register as a broker-dealer because it fits 15b9-1 has
read the wrong statute.
- **Screening EU exposure on an order rate.** Article 19 is measured on an
*average*, and it counts *messages* — modifications and cancellations
included. One order per second, cancel-replaced five times, is already above
the 2 messages/second limb. So `peak_orders_per_second` is not an EU input in
either direction: a low order rate does not earn a clean report, and a high
one does not prove a breach. Without both averages the engine returns "cannot
determine" — where the earlier 50-peak-OPS benchmark returned "compliant" for
firms comfortably inside the HFT definition.
- **Treating a missing measurement as a zero.** `None` for an Article 19
average means unmeasured. Passing `0.0` asserts you measured zero traffic,
and will produce a clean report you cannot defend.
- **Flagging all off-exchange volume.** Rule 15b9-1(c) still permits
exchange-routed Rule 611 / Options OPP flow and the stock leg of a
stock-option order. Netting those out is what
`exempt_off_exchange_volume_usd` is for — but (c)(2) requires written
policies and procedures preserved for three years, so the engine raises a
review item whenever the exception is claimed rather than accepting it.
- **Assuming a de minimis allowance survives.** It does not. The 2023
amendments removed it; the default screening floor is therefore 0.00 USD.
A higher floor is a firm's own triage threshold and reflects no regulatory
carve-out.
- **Applying TOPS to a proprietary desk.** It governs a retail investor's
API-routed algorithm, and requires registering the *algorithm* with each
exchange through the broker — not licensing the firm.
- **Missing the TOPS boundary.** NSE sets it at "not exceeding 10 orders per
second per exchange", so registration bites **above** 10, not at 10.
- **Logging user-provided fields verbatim.** Build downstream logging on
`report` attributes with `%s` placeholders, never on raw call-site strings,
to avoid log injection through free-form fields.
## Verification
Run `python -m unittest discover -s skills/algorithmic-trading-firm-licensing-thresholds/scripts` (58
tests). The suite asserts each jurisdiction's threshold at and around its
boundary, that the Article 19 limbs fire independently at 2.0 and 4.0
messages/second, that neither a low nor a high order rate can decide the EU
question, that a `0` threshold override is honoured rather than silently
replaced by the class default, that `bool` is rejected wherever a numeric
quantity is expected, that exempt off-exchange volume is netted out — without a
sub-cent floating-point residue reading as a breach — and its evidencing
obligation surfaced, that violations preserve evaluation order
rather than sorted order, and that an unrecognised jurisdiction fails closed to
manual review. Verify the outcome against `assets/checklist.md`.
## Related Skills
- `finra-algo-trading-registration-requirements`
- `sec-rule-15c3-5-risk-controls-us`
- `mifid-ii-algo-trading-compliance-eu`
- `india-sebi-algo-trading-tagging-requirements`
- `mas-singapore-algo-trading-guidelines`