By Martina Rejsjo, Director of Regulatory Affairs, Eventus
A recent article published by Independent Commodity Intelligence Services (ICIS) has highlighted the ongoing debate around algorithmic trading (algo trading) and increased market volatility in the Energy market. Natural gas and electricity markets are physical markets and volatility is typically driven by market-relevant news. However, more recently, these markets have experienced periods where prices have moved with extreme volatility throughout the day without any relevant news. As an example, the rate of volatility in August natural gas contracts increased 157% month-on-month with price swings of $5/MWh in very short intervals. Some market participants argue that the price swings are not natural and are linked to the increased presence of algo trading in the market. This has led to a discussion around the role of algorithmic trading and how the algos are deployed.
The usage of algorithms as part of trading is not debated, and the increased presence of algo trading is acknowledged as part of markets maturing and becoming more liquid and accessible. In question though is how well the algorithms are tested before being deployed into the market and how the algo is being monitored throughout the trading day. The concerns include both poorly-configured algorithms that exaggerate market movements, and seemingly unrelated algorithms inadvertently interacting with each other in a manner that creates a feedback loop thus causing market disruptions. Additionally there are concerns of algorithms programmed to manipulate markets or send false and misleading signals.
These scenarios are of concern for most regulators globally. Market volatility driven by algo trading, even if not intentional, could be considered market manipulation. A scenario where a poorly-configured algo created market volatility could expose the firm and programmers to scrutiny for supervisory and market disruption-related rule violations.
The European Union Agency for the Cooperation of Energy Regulators (ACER) issued a guidance document describing how algorithmic trading needs to be used and reviewed:
“Persons using algorithms are thus responsible for the behavior of their algorithm on the market and can be held held liable for market manipulation in case the algorithm is likely to give/gives false or misleading signals or secures the market price at an artificial level, even in situations where this results from a poor design of the algorithm. In a similar way, the legal or natural person(s) that participate(s) in the conception or design of the algorithm can also be held liable for attempted market manipulation if the mere conception and design of the algorithm reveals a manipulative intent.”
ViP: Eventus’ Validus Algo Monitoring solution provides real-time insight into the state and behavior of a firm’s algorithmic trading and client DMA flows to manage and reduce risk, limit market and/or client impact and ensure compliance with regulations including the Market Abuse Regulation (MAR) and MiFID II’s Regulatory Technical Standard 6 (RTS 6).
The Validus Algo Monitoring solution includes procedures that focus on the first line of defense monitoring requirements. The algo behavior and performance is monitored in real time and aggregated into a single system and view. Customizable parameters cover potential disruptive behavior including average daily volume, excessive messaging, rejects, price moves, order/fill/cancel rates and more. The actionable alerts are triggered within five seconds of configured parameter breach and are easily reviewed through a set of investigative tools and visualizations.
Eventus 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, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.