13 Feb 2018
The Financial Conduct Authority has published a report summarising the key areas of algorithmic trading oversight, including areas of good and bad practice it has observed.
Automated technology has “significant benefits” to investors, such as increased execution and reduced costs, however it can also amplify some risks,” the FCA said.
“It is therefore essential that key oversight functions, including compliance and risk management, keep pace with technological advancements.”
Key areas of focus within algorithmic trading compliance in wholesale markets include the development and testing process, risk controls, governance oversight and market conduct, the FCA explained.
Highlighted in the report are examples of good practice. This includes having ‘checkpoints’ throughout the development and testing process, such as after due-diligence was completed and during testing too.
It is also useful to have an independent committee to check all the relevant documentation, and active representatives on the committee from risk, compliance, legal and business operations.
Poor practice, however, includes firms that use a simplistic sigh-off process, involving a few individuals and no independent representation. “As such, the process does not give the decision maker sufficient documented evidence and independent verification to confirm that the required checks have been completed,” the report explained.
Regarding risk control, the regulator outlined a number of expectations, including the need for firms to maintain post-trade controls to monitor their trading activity, and it also discussed the ‘kill functionality,’ stating that firms should “maintain kill functionality to disable trading activity to protect the integrity of the market.
“Compliance staff must also maintain contact with the individual at the firm who is able to cancel immediately any or all of the firm’s unexecuted orders.”
Megan Butler, Director of Supervision – Investment, Wholesale and Specialist at the FCA, said: “This report is relevant for all firms developing and using algorithmic trading strategies in wholesale markets. Firms should consider and act on its content in the context of good practice for their business.”
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