The Financial Conduct Authority (FCA) is now weighing in on all things regarding algorithmic trading.
On its website, the European regulator has published a new report that summarizes its viewpoint on electronic trading – specifically:
- Defining algorithmic trading
- Development and testing
- Risk controls
- Governance and oversight
- Market conduct
The preamble to the report begins, Firms operating in wholesale markets increasingly use algorithms in their trading activities. The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have been reviewing firms algorithmic trading activity and have issued supervisory publications.
The PRA publication (link is external) is a formal consultation on a supervisory statement which sets out expectations for the prudential aspects of risk management and governance of algorithmic trading at PRA regulated firms. This is an area of continuing collaboration and we will continue to work with the PRA to ensure we are coordinated in our approaches going forward.
Automated technology brings significant benefits to investors, including increased execution speed and reduced costs, the reports authors began. However, it can also amplify certain risks. It is essential that key oversight functions, including compliance and risk management, keep pace with technological advancements. In the absence of appropriate systems and controls, the increased speed and complexity of financial markets can turn otherwise manageable errors into extreme events with potentially wide-spread implications. As a result, algorithmic trading continues to be an area of focus for the FCA and other regulators across the globe.
The FCA further said it will continue to proactively supervise algorithmic trading activity and conduct research on algorithmic trading. The report summarizes key areas of focus for algorithmic trading compliance in wholesale markets, including references to relevant legislation. It also highlights examples of good and poor practice observed during our reviews ahead of the implementation of MiFID II.
It also cautioned that good and poor practices used in this report are not exhaustive. The examples of good practice present ways, but not the only ways, in which firms might comply with applicable rules and requirements. The poor practices in this report highlight areas where firms would now need to do further work to comply with the applicable requirements.
While this report highlights key requirements in MiFID II, it will also be of interest to all firms that develop and/or use algorithmic trading strategies. Depending on the nature of a firms algorithmic trading activity, certain areas of the report may be more relevant than others.
The regulator said its approach to supervising the market is done on both a firm specific and cross-firm basis, in line with our wider supervisory approach. As algorithmic trading has risen in importance, FCA said it has undertaken an increasing amount of work on this topic, covering firms such as principal traders, investment banks and investment managers.