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12 Top Tips for Monitoring Algo Trading

12 Top Tips for Monitoring Algo Trading

In August 2012, the capital markets witnessed a trading catastrophe of monumental proportions as a new market-making algorithm deployed by Knight Capital Group (KCG) managed to elude the firm’s core monitoring systems and amass a multi-billion dollar position which ultimately resulted in over a $440 million loss. KCG was left hobbled and needed to sell to Getco in order to survive. After a fairly short period of time, the issue of monitoring algo trading seemingly vanished from the press and market structure landscape. In reality, however, nothing could be further from the truth. While the likelihood of another KCG-scale meltdown is unlikely (but not impossible, see Tether), the stakes around monitoring algo trading have continued to rise due to increased usage of algos from all industry participants and a heightened interest from regulators. 

12 Key Strategies

Clearly, the issue of monitoring algo trading is critically important to trading and clearing firms as well as exchanges. Here are 12 key strategies to consider when addressing the need for the monitoring of algo trading:

Reconciling core data streams

You can’t monitor what you don’t know.  Employ a real-time reconciliation engine that can match multiple streams of data so if one system isn’t picking up something, the recon process will generate an alert.

Breaking down the functional silos

Algo monitoring is not just analyzing order and cancel rates, it requires a comprehensive view of trading, surveillance and compliance in a single platform. This is critical to get a complete and accurate picture of activity.

Meeting the minimum is not enough

Most regulators require annual testing and attestation, but meeting the minimum would be foolhardy at best. Even a program that relies on semi-annual or quarterly testing would be courting trouble. Just like the markets, your algo monitoring needs to be a living, breathing process.

Going old school to handle the new school

New technologies like AI and ML are fast and comprehensive, and they bring all new levels of capabilities, but their inner workings are often a black box; it’s not immediately apparent what they’re doing and why. For this reason, it is all the more important that “old school” functions like manual clearance of alerts and inspection of outputs be an active part of a surveillance regime.

Minding your WSPs

Written supervisory procedures (WSPs) are the foundation for an effective algo monitoring regime. Care should be taken to involve all functional areas of the business including IT, operations, legal and compliance in crafting WSPs with a particular emphasis on ensuring that all relevant regulatory requirements are being met.

Backing them up with SCPs

WSPs aren’t worth the paper they are printed on if they are not backed up with robust Supervisory Control Procedures (SCPs) that are actively employed.

Needing to be real-time

Algos can put a lot of information into the market quickly. If you are not monitoring in real-time, you have the potential for losses in real-time.

Looking back

At the same time, a system must be able to replay and review past activity. In many, if not most, cases there are warning signs of adverse activity from algos prior to a meltdown or big event, and keeping a keen eye on day-to-day activity can prevent a small problem from becoming a big one.

Monitoring must be comprehensive

Records must be thorough and complete, taking care to include all order types and special instructions that may have an impact on investigations.

Integrating the whole ecosystem

It’s important to have a view of the full lifecycle of activity from internal systems, ISVs, EMSs, exchanges and other execution venues. Important metrics to monitor include excessive order entry, aberrant quote patterns, trading outside of normal hours, and crossed or self-matched trading, 

Finding data when you need it

In all cases, regulation requires that data be held for an appreciable amount of time, sometimes years. In any case, the data needs to be in a format that allows for fast and flexible retrieval and analysis.

Reporting functionality

The system should have a fulsome repository of standard reports as well as the capability to custom-craft reports both quickly and efficiently.

The need for monitoring algo trading

As the recent example with Tether as well as continuing regulatory actions demonstrate, the need for active and rigorous monitoring algo trading is very much alive. The specifics surrounding algo monitoring are getting more complex as usage increases and regulators continue to add to the obligations and rules that market participants must follow. The issues and challenges are complex, but a partnership with an experienced software provider can pay incalculable benefits in both peace of mind and protecting your bottom line. 


Eventus Systems, Inc. offers one of the leading global trade surveillance and market risk platforms, including algo monitoring.  Available as a cloud-based or real-time enterprise on-premise solution, the Validus platform provides sophisticated market surveillance and financial risk capabilities, enabling clients to solve some of the most pressing regulatory challenges. Eventus won Market Surveillance Product of the Year in the global Risk Technology Awards 2019. For more information, contact us at info@eventussytems.com