Automated technology brings significant benefits to investors, including increased execution speed and reduced costs. However, it can also amplify certain risks. It is essential that key oversight functions, including compliance and risk management, keep pace with technological advancements. 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. As a result, algorithmic trading continues to be an area of focus for the FCA and other regulators across the globe.
In general, we are encouraged that firms have taken steps to reduce risks inherent to algorithmic trading. However, further improvement is needed in a number of areas. For example, some firms lacked a suitable process to identify algorithmic trading across their business and did not have appropriate documentation in place to demonstrate suitable development and testing procedures are maintained. In these cases, firms also lacked a robust and comprehensive governance framework.
Additionally, firms need to do more work to identify and reduce potential conduct risks created by their algorithmic trading strategies. This includes delivering suitable market abuse training for staff involved in the development and implementation processes. Firms also need to consider the potential impact their algorithmic trading activity (including the combined impact of multiple algorithmic strategies) may have on the fair and effective operation of financial markets.
We will continue to assess whether firms have taken sufficient steps to reduce risks arising from algorithmic trading.