The UK’s financial watchdogs are considering new guidelines for firms that operate algorithmic trading systems, having found that some are falling short in their oversight of these complex strategies.
The Financial Conduct Authority and the Prudential Regulation Authority — part of the Bank of England — have conducted a review of firms’ use of algo trading, which relies on computer programs rather than human decisions for buying and selling securities.
This type of trading has long been used by hedge funds but has become more popular among traditional investment firms in recent years. However, errors in the code that underpins the algorithms have the potential to exacerbate market falls and the strategy has been in the spotlight following the recent global market sell-off.
Algorithmic trading is already covered under the European Union’s revised Markets in Financial Instruments Directive, but the FCA and PRA today outlined their expectations of additional oversight that firms should adopt, particularly around having proper risk controls in place.
The FCA said: “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.”