On February 12, the UK Financial Conduct Authority (FCA) published a report on algorithmic trading compliance in wholesale markets. The report highlights key requirements in the revised Markets in Financial Instruments Directive (MiFID II) relating to algorithmic trading activity, and contains examples of good and bad practices observed during the FCA’s reviews of FCA regulated firms.

The report identifies five core areas of focus:

  • Defining algorithmic trading. Firms must establish an appropriate process to identify algorithmic trading, manage material changes and maintain a comprehensive inventory of algorithmic trading across the business.
  • Development and testing. Firms must maintain robust, consistent and well-understood development and testing processes that identify potential issues across trading algorithms before full deployment.
  • Risk controls. Firms must develop suitable and robust pre-trade and post-trade controls to monitor, identify and reduce potential trading risks across algorithmic trading activity.
  • Governance and oversight. Firms must maintain an appropriate governance and oversight framework that demonstrates effective challenge from senior management, risk management and compliance.
  • Market conduct. Firms must consider the potential impact of their algorithmic trading on market integrity, monitor for potential conduct issues and reduce market abuse risks.

The FCA states that it will continue to assess whether regulated firms have taken sufficient steps to reduce risks arising from algorithmic trading.

While the report comes after the effective date of MiFID II, the reviews undertaken by the FCA, which underlie the report, occurred before MiFID II implementation.

The fact that the report has been published now could indicate that, after the informal grace period offered to firms (see the Corporate & Financial Weekly Digest edition of September 22, 2017), the FCA will be stepping up its monitoring and enforcement in relation to MiFID II compliance.

The report is available here.