|
Key observations
|
Examples of good practice
|
Examples of weak practice
|
|
Governance
|
|
Self-assessment and validation – The FCA identified that improvements had been made in the quality of self-assessment documents and processes, with more understanding of applicable requirements, and more maturity of governance frameworks. The FCA also identified that the level of information and detail in self-assessments continues to vary significantly between firms, and identified areas for improvement.
|
The firm has its self-assessments reviewed by external auditors, with recommendations being tracked to completion.
|
The firm’s self-assessment lacks detail in certain areas, with identified deficiencies needing to be addressed more efficiently. E.g. out of date policies and unclear processes and documentation, and a lack of linkage between key policy documentation and self-assessment commentary.
|
|
Role of the compliance function – Firms are required to ensure compliance staff have at least a general understanding of how the firm’s algorithms operate. The FCA identified that levels of understanding, and levels of oversight and challenge provided by compliance teams, varied significantly between firms and identified areas for improvement.
|
The firm’s compliance staff have strong technical knowledge and provide strong challenge to algorithmic trading processes.
The firm maintains a formalised compliance monitoring programme that specifically addresses RTS 6 compliance.
|
The firm’s compliance staff have weaker technical knowledge, leading to limited challenge of algorithmic trading behaviours.
There is less involvement from compliance teams in relation to key algorithmic trading processes.
|
|
Algorithmic inventories – Firms should maintain a comprehensive inventory of algorithmic trading strategies and systems. The FCA identified that most firms capture appropriate details centrally, and apply local control and approval requirements to their algorithmic trading activities.
|
The firm maintains a detailed inventory with a qualitative description of each algorithm’s intended behaviour, a clear indication of ownership and approved users for each algorithm, and the markets in which each algorithm is used.
The firm include additional information in its inventory where appropriate – e.g. risk parameters per algorithm.
|
The firm has failed to specify individuals who are approved to operate each algorithm.
|
|
Deployment of algorithms (including material changes) – Firms should have clear, formalised procedures for deploying trading algorithms and for managing material changes to them.
|
The firm has implemented and maintains robust governance procedures for deploying algorithms. These procedures include, among other things, approval from a wide range of relevant business stakeholders before an algorithm can be deployed.
Procedures require a deeper review where an algorithm is being deployed to a market for the first time.
The firm has detailed communication procedures relating to algorithm deployment, ensuring all relevant stakeholders are aware.
Compliance teams are closely involved in the algorithm deployment process, and provide effective challenge on the functionality of the algorithm and its likely market behaviours.
The firm has clearly documented the definition of a material change to an algorithm and has a process for identifying changes consistently. Material changes require approval by appropriate senior managers.
The firm provides continuous training to staff on its material changes policy.
|
The firm has failed to keep policies and procedures up to date.
The firm has failed to implement clear procedures for testing and deployment of algorithms.
The firm has failed to document its definition of “material change”.
The firm has failed to provide, or failure to provide appropriate, management information to the board and to relevant senior stakeholders.
Personnel exhibit a lack of technical understanding of how third party provided algorithms were developed.
|
|
Development and testing
|
|
Conformance testing – Testing is an important element of algorithmic development and approval, and firms are required to test the conformance of their algorithms with the systems of the trading venue or direct market access provider.
|
The firm’s policies and procedures clearly define the conditions in which conformance testing is required.
The firm maintains an inventory of upcoming / planned algorithm changes, including identifying changes that require testing.
The firm’s internal testing procedures are baselined against trading venue conformance testing requirements as a minimum standard.
|
The firm has poorly defined testing procedures, resulting in poor record-keeping.
|
|
Simulation testing – Firms must maintain testing processes to identify potential issues before deployment, ensuring that the algorithm behaves as intended, does not contribute to disorderly trading, and behaves effectively in stressed market conditions.
|
Simulation testing forms a critical component of the firm’s operations, and testing activities are resourced accordingly.
The firm applies a wide variety of stressed market scenarios within its testing.
The firm does not limit simulation testing to the deployment new algorithms, or to material changes, but undertakes testing more broadly.
Testing data includes historical market data relating to periods of higher market stress levels. Testing data is updated on a regular basis to reflect the most up to date examples of stressed market conditions.
|
The firm limits testing to a narrow range of market scenarios.
The firm lacks documented testing policies and procedures (even where testing is undertaken).
The firm fails to consider both operational effectiveness and conduct risks during testing, limiting the assessment of conduct risks to post-deployment surveillance activities.
The firm fails to review testing procedures to ensure that they remain robust / comprehensive in light of market and technological developments.
|
|
Controlled deployment of algorithms – Firms must have adequate processes to ensure algorithms are deployed in an appropriate and controlled manner.
|
The firm submits small “pilot trades” (or test trades) into live environments to test functionality. Pilot trades are closely monitored.
Each stage of the deployment process is clearly documented within procedures, with clear evidence of relevant senior manager approvals being obtained.
|
The firm lacks formal documented procedures.
There is unclear ownership of key elements of the deployment process.
|
|
Risk controls
|
|
Pre- and post-trade controls – Firms must have adequate pre- and post-trade controls to identify and reduce trading risks and control trading activity.
|
The firm has a clearly identified suite of pre-trade controls that apply to its algorithmic trading.
The firm’s controls are calibrated according to the type of algorithm and the asset class being traded.
The firm operates controls to stop orders leaving the firm’s internal system (and reaching the trading venue) if a control is breached.
|
Ownership of controls is poorly defined and/or not documented.
Compliance staff have a lack of oversight of pre-trade and post-trade controls, resulting in a lack of understanding as to how controls function.
Controls are not reviewed on an ongoing basis to ensure that they remain appropriate.
|
|
Market abuse surveillance
|
|
Surveillance systems and governance and oversight – Firms must consider the potential impact of their algorithmic trading on market integrity, monitor for potential conduct issues and reduce market abuse risks.
|
The firm has customised its surveillance systems to the type of trading undertaken, including at an asset class and trading venue level.
Market abuse alerts are appropriately calibrated, and subject to appropriate governance (e.g. internal committee review).
The firm has efficient and effective procedures for dealing with market abuse alerts, including clear escalation and investigation policies and procedures.
The firm randomly samples closed alerts for additional review and challenge.
|
Market surveillance systems are not sufficiently sophisticated, or have not been updated to reflect the nature, scale and complexity of the firm’s trading activities.
There is a lack of formalised procedures or governance structures around market abuse alert investigation, resulting in alerts taking longer to be investigated and closed.
The firm has insufficient resource for investigating alerts.
|
