FCA Algorithmic Trading Review
The FCA has recently published a report on the supervision of algorithmic trading in wholesale markets. The report summarises the key areas of focus for algorithmic trading and highlights areas of good and bad practice observed within previous FCA cross-firm reviews. This report can be found here.
Automated technology brings significant benefits to investors, including increased execution speed and reduced costs. However, it can also amplify certain risks. It is therefore essential that key oversight functions, including compliance and risk management, keep pace with technological advancements.
The report focuses on five key areas within algorithmic trading compliance in wholesale markets:
- Defining Algorithmic Trading
- Development and Testing Process
- Risk Controls
- Governance and Oversight
- Market Conduct
In general, the FCA is encouraged that firms have taken steps to reduce risks inherent to algorithmic trading. However, further, improvement is needed in a number of areas. For example, some firms reviewed lacked a suitable process to identify algorithmic trading across their business and did not have appropriate documentation in place to demonstrate suitable development and testing procedures are maintained. In these cases, firms also lacked a robust and comprehensive governance framework.
Additionally, firms need to do more work to identify and reduce potential conduct risks created by their algorithmic trading strategies. This includes delivering suitable market abuse training for staff involved in the development and implementation processes.
Firms also need to consider the potential impact their algorithmic trading activity (including the combined impact of multiple algorithmic strategies) may have on the fair and effective operation of financial markets.
Firms should reference a number of pieces of legislation when developing algorithmic trading practices and procedures. Most notably, MiFID II, which was implemented on 3 January 2018, introduced a number of requirements for firms engaged in algorithmic trading. Details of these requirements can be found here.