On June 24th, the London-based FICC Markets Standards Board (FMSB) published a new Statement of Good Practice (SoGP) on Algorithmic Trading in FICC Markets and invited all interested parties to comment on the proposal by Friday, August 21st. The SoGP seeks to further enhance the integrity and effective functioning of FICC markets by promoting good conduct and governance practices for participants engaged in algorithmic trading across all FICC asset classes – fixed income, currencies and commodities – and markets, in particular those subject to less stringent regulatory requirements.
As a global provider of trade surveillance and market risk solutions covering all FICC asset classes, in addition to equities, options, futures, and digital assets, we support these efforts by the FMSB and other organizations, such as the Hong Kong Monetary Authority (HKMA), that have recently issued guidance on how to manage the risks associated with algorithmic trading. You can find our key takeaways from HKMA’s guidance here.
Below is a summary of the FMSB’s Good Practice Statements, including a recommendation that market participants establish processes to ensure appropriate ongoing oversight, surveillance and monitoring of all algorithmic trading activities. If you are responsible for trade surveillance or market risk activities at your firm and are considering a third-party technology solution as part of your overall governance structure, we encourage you to read our “12 Top Tips for Monitoring Algo Trading” that provides guidance on important algo trading monitoring strategies.
While great strides have been made since the high-profile catastrophe like the one that cost Knight Capital Group (KCG) $440 million in 2012, the use of algorithms to automatically execute trades still has the potential to adversely impact markets, firms and individual investors. With close to 80% of U.S. equity trading driven by algorithms, and the percentage increasing across all FICC asset classes globally, this activity should, and will, remain an area of focus for regulators and market participants well into the future.
FMSB Good Practice Statements (Summary)
- Overarching governance structure
Good Practice Statement 1: Market Participants and Venue Operators should have an appropriate governance framework to provide clear lines of responsibility for, and oversight of, their Algorithmic Trading or the Algorithmic Trading System of a Venue that they operate. This framework should include appropriate governance designed to provide for the proper management of risks associated with Algorithmic Trading, including conduct, market and operational risk. Furthermore, such a framework should allow for sufficient granularity of oversight of such risks.
Good Practice Statement 2: Market Participants should maintain a complete list (or lists) and description of the Algorithms which they use in the course of Algorithmic Trading.
- Risk management and controls
Good Practice Statement 3: Market Participants carrying on Algorithmic Trading, or Venue Operators operating a Venue which utilizes an Algorithmic Trading System, should have pre- and/or post-trade controls in operation which are appropriate to the activity and the risks posed. Firms shall have regard to the nature of the activity and the size and complexity of their firm when determining appropriateness.
Good Practice Statement 4: Market Participants should ensure they consider conduct, market, operational and other risks prior to deployment and as part of their periodic review of Algorithms. The second line of defense should provide oversight of this process and if they have specific risk concerns, should have authority to prevent an Algorithm from being used or deployed.
- Policies and procedures
Good Practice Statement 5: Market Participants and Venue Operators should define and require adherence to minimum standards applicable to Algorithmic Trading and Algorithmic Trading Systems and ensure that these are documented and implemented through written internal policies and procedures. Such documentation should be kept up to date.
Good Practice Statement 6: Market Participants providing client execution services using Algorithms should provide appropriate information to those Clients that takes account of the services being provided and consider reviewing Client materials relating to Algorithmic Trading periodically in order to ensure that they are clear, fair and not misleading.
- Software development and change process
Good Practice Statement 7: Market Participants engaged in Algorithmic Trading or Venue Operators operating a Venue which utilizes an Algorithmic Trading System should have appropriate software development and change management processes in place applicable to their development and deployment of new, or changes to existing, Algorithms used in Algorithmic Trading or their Algorithmic Trading System.
- Ongoing oversight, surveillance and monitoring
Good Practice Statement 8: Market Participants engaged in Algorithmic Trading or Venue Operators operating a Venue utilizing an Algorithmic Trading System should establish processes to ensure appropriate ongoing oversight, surveillance and monitoring of Algorithmic Trading or the Algorithmic Trading System (as applicable) as part of any governance structure.
- Record keeping
Good Practice Statement 9: Market Participants and Venue Operators (where applicable) should keep timely, consistent and accurate records of their Algorithmic Trading to facilitate appropriate levels of transparency and auditability.
- Training and education
Good Practice Statement 10: Market Participants and Venue Operators should ensure relevant personnel are appropriately trained to support Algorithmic Trading or to manage the Algorithmic Trading System they operate. Such training should be tailored to the activity and role performed.
To read the FMSB’s Statement of Good Practice for FICC Market Participants in its entirety, click here.
Eventus Systems is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, brokerages, futures commission merchants (FCMs), clearing firms, trading firms, market centers, buy-side institutions and corporates. The company’s rapidly growing client base of more than 60 firms relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com