FCA Releases Algo-Trading Report - The Industry Spread

Karthik Subramanian

Karthik Subramanian has been a professional trader and fund manager over the last 18 years. He is basically a software developer who made the transition to financial domain around 18 years back as the attractiveness of the financial markets proved too much for him. He lives in Chennai in India along with his wife and son. He began his career as a software developer in 1999 and then gradually moved into the financial industry as he began trading stocks in his pastime. He then moved into the financial markets full time and then shifted his focus to the FX markets due to the liquid nature of these markets. Since then, he has been trading FX diligently and his favourite pair are the EURUSD and EURJPY. Over the last couple of years, he has found blockchain to be of high interest and considering his background in software and finance, he has since assembled a team of highly talented developers who have since worked on a variety of projects like crypto exchanges and blockchain architecturing. Now, he balances his time between trading and commenting on both the FX and crypto markets. He has worked with many publications including FX Street and Finance Magnates, which has helped him gain experience and also recognition across the industry. He loves to write and this passion has helped him to reach out across the FX and crypto industry. Right now, he works on his pet projects in the FX and crypto industry and spends his time writing and managing his blockchain team and helping it to reach higher.

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FCA Releases Algo-Trading Report

February 13, 2018

The UK’s financial market regulator, the Financial Conduct Authority (FCA),  yesterday released a detailed report on the supervision of algorithmic trading including new requirements under the MiFID II guidelines. The report touches on the key issues of emphasis and good and bad practices observed within cross-firm reviews.

New MiFID II RequirementsThe introduction of automated trading technology has brought significant benefits to investors, with increased execution speed and lower costs. However, it has also introduced a certain degree of risk in terms of compliance and  management. It is therefore essential to have oversight functions in place to keep pace with the technological advancement in algo-trading –  a double-edged sword in the trading world. The absence of any such systems and controls can turn a manageable error into an extreme event, possibly affecting millions of other investors.

Consequently, the FCA has initiated a detailed report to explore this area – an area that has gained prominence with the advancement of trading technologies within the industry. Megan Butler, Director of Supervision, Investment, Wholesale at the FCA, said in the report:

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.

The report focuses on the five key areas within algorithmic trading compliance in the wholesale markets: Defining Algorithmic Trading, the Development and Testing Process, Risk Controls, Governance and Oversight, and Market Conduct. The report also includes a detailed assessment of procedures used by firms involved in algorithmic trading, their front line staff, including traders, research analysts, and software developers.

Overall, the report  presents a positive attitude from those within the industry towards the need for measures to reduce the potential risks in algorithmic trading. The report also suggests that staff involved in the development and implementation processes should undergo “market-abuse training” as a means of reducing potential conduct risks.

The FCA also highlights a number of key requirements firms need to be particularly aware of in order to comply with the MiFID II guidelines. These includes emergency “kill functionality” to cancel all unexecuted orders with immediate effect, a robust trading system to prevent incorrect orders contributing to a disorderly market, and business continuity arrangements to deal with system failures.

The  Prudential Regulation Authority (PRA) has also released a consultation paper on the subject, covering the governance and risk management of algorithmic trading. The FCA and PRA will continue to work closely together going forward.

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