The Financial Conduct Authority (FCA), the UK’s financial regulatory body, has published a report on the supervision of algorithmic trading in wholesale markets. The report summarises the key areas of focus for algorithmic trading and highlights areas of good and bad practice observed within previous cross-firm reviews ahead of the implementation of MiFID II. The report includes five sections, namely, defining algorithmic trading, development and testing process, risk controls, governance and oversight and market conduct. The report further signifies that regulators are becoming increasingly specific in their supervision of software development and testing. Section 3 of the report, ‘Development and testing’, outlines specific guidance to ensure firms maintain robust, consistent and well-understood development and testing processes to identify potential issues across trading algorithms prior to full deployment. The section covers maintaining a development and testing framework, demonstrating a comprehensive review and approval process before a new algorithm, strategy or system is deployed into the production environment, establishing a suitable procedure to ensure any new or updated algorithms are deployed into live environments in an appropriate and controlled manner, and producing adequate documentation and a comprehensive audit trail throughout the development and testing process. Megan Butler, Director of Supervision – Investment, Wholesale and Specialist at the FCA, said that the report is relevant for all firms developing and using algorithmic trading strategies in wholesale markets. She explained that firms should consider and act on its content in the context of good practice for their business. The Prudential Regulation Authority (PRA) has also published a consultation paper on proposed expectations regarding a firm’s governance and risk management of algorithmic trading. The FCA will continue to work with the PRA to ensure coordinated approaches going forward.
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