The Financial Conduct Authority (FCA) has warned that
many algorithmic trading firms still fall short of meeting regulatory
expectations, despite showing progress in governance and oversight since its
last review in 2018.
The watchdog said shortcomings remain in compliance
expertise, testing, deployment, and market abuse surveillance. The latest multi-firm review assessed 10 principal
trading firms of different sizes to measure compliance with MiFID’s Regulatory
Technical Standards (RTS) 6.
Review Scope
The FCA examined governance frameworks, algorithm
testing, deployment procedures, and surveillance systems, stressing that the
findings highlight existing requirements rather than introduce new ones.
The regulator found that larger firms generally
submitted more complete self-assessments, while smaller and mid-sized firms
often left gaps in documentation and policies.
Compliance teams’ oversight varied significantly. In
some firms, compliance staff had technical expertise and played a strong role
in monitoring algorithms. However, in others, the lack of technical knowledge
limited the ability to challenge trading behaviour.
“There are inherent risks in algorithmic trading. It
is essential that firms’ controls and key oversight functions, including
compliance and risk management, keep pace with the ever-increasing complexity
and speed of financial markets and technological advancements,” the regulator
said.
“It is also critical that firms consider the market
conduct implications of their algorithmic trading activity and its impact on
market integrity.”
Most firms carried out conformance testing, but
simulation testing often lacked sophistication. Some firms relied on vendor
testing or limited market scenarios, raising concerns over whether algorithms
could withstand stressed trading conditions.
Deployment practices were typically conservative, with
phased rollouts and pilot trades. However, the FCA said some firms lacked
formal documentation of procedures and clear definitions of what qualifies as a
material change to an algorithm.
Risk Controls
All firms operated pre-trade and post-trade controls,
but governance around these safeguards was not always clearly assigned. In some
firms, compliance staff had only limited oversight of how controls functioned,
reducing accountability. The FCA said firms must ensure responsibilities are
clearly documented and regularly reviewed.
Surveillance systems also showed variation. Many firms
used in-house platforms adapted to their trading activity, but others had not
invested in updates. In some cases, this led to alert backlogs and stretched
compliance resources.
The watchdog said most firms understood their obligations under RTS 6, though levels of compliance differed widely.
Each firm received individual feedback, and the FCA confirmed it will continue
monitoring algorithmic trading controls as part of its supervisory work.
The Financial Conduct Authority (FCA) has warned that
many algorithmic trading firms still fall short of meeting regulatory
expectations, despite showing progress in governance and oversight since its
last review in 2018.
The watchdog said shortcomings remain in compliance
expertise, testing, deployment, and market abuse surveillance. The latest multi-firm review assessed 10 principal
trading firms of different sizes to measure compliance with MiFID’s Regulatory
Technical Standards (RTS) 6.
Review Scope
The FCA examined governance frameworks, algorithm
testing, deployment procedures, and surveillance systems, stressing that the
findings highlight existing requirements rather than introduce new ones.
The regulator found that larger firms generally
submitted more complete self-assessments, while smaller and mid-sized firms
often left gaps in documentation and policies.
Compliance teams’ oversight varied significantly. In
some firms, compliance staff had technical expertise and played a strong role
in monitoring algorithms. However, in others, the lack of technical knowledge
limited the ability to challenge trading behaviour.
“There are inherent risks in algorithmic trading. It
is essential that firms’ controls and key oversight functions, including
compliance and risk management, keep pace with the ever-increasing complexity
and speed of financial markets and technological advancements,” the regulator
said.
“It is also critical that firms consider the market
conduct implications of their algorithmic trading activity and its impact on
market integrity.”
Most firms carried out conformance testing, but
simulation testing often lacked sophistication. Some firms relied on vendor
testing or limited market scenarios, raising concerns over whether algorithms
could withstand stressed trading conditions.
Deployment practices were typically conservative, with
phased rollouts and pilot trades. However, the FCA said some firms lacked
formal documentation of procedures and clear definitions of what qualifies as a
material change to an algorithm.
Risk Controls
All firms operated pre-trade and post-trade controls,
but governance around these safeguards was not always clearly assigned. In some
firms, compliance staff had only limited oversight of how controls functioned,
reducing accountability. The FCA said firms must ensure responsibilities are
clearly documented and regularly reviewed.
Surveillance systems also showed variation. Many firms
used in-house platforms adapted to their trading activity, but others had not
invested in updates. In some cases, this led to alert backlogs and stretched
compliance resources.
The watchdog said most firms understood their obligations under RTS 6, though levels of compliance differed widely.
Each firm received individual feedback, and the FCA confirmed it will continue
monitoring algorithmic trading controls as part of its supervisory work.
