FCA, PRA address algorithmic trading, as its use seen to grow

The UK’s Financial Conduct Authority and the Prudential Regulatory Authority today published a report and a consultation, respectively, on the supervision of algorithmic trading, as industry experts point to growing use of this type of trading by financial services entities around the world.

The timing of the regulators’ latest initiatives will be seen as significant as they are coming after a week of extreme volatility on world stock markets, since computer-driven and assisted trading is often cited as a potential factor in market volatility.

In an explanatory document accompanying its 28-page report,  as well as the PRA’s document, the FCA acknowledges that automated technology “can amplify certain risks” for the markets, in addition to offering “significant benefits to investors, including increased execution speed and reduced costs”.

“This report summarises our key areas of focus, and highlights examples of good and poor practice,” the FCA adds, noting that it is based on a number of “cross-firm reviews on themes related to alorithmic trading”.

It urges companies regulated only by the FCA to consult its own publication, while instructing those regulated by both the PRA and FCA to “refer to both publications”.

Megan Butler, FCA director of supervision – investment, wholesale and specialist, said companies currently developing and using algorithmic trading strategies in wholesale markets “should consider and act on [the FCA report’s] content in the context of good practice for their business”.

As for the PRA’s consultation paper, it is described as setting out the regulator’s “proposed expectations regarding firms’ governance and risk management of algorithmic trading”, and is aimed at companies “that engage in algorithmic trading and are subject to the rules in the ‘Algorithmic Trading’ part of the PRA Rulebook and Commission Delegated Regulation (EU) 2017/589″, the PRA says in a statement accompanying the 20-page consultation document.

The PRA says it is proposing to introduce its proposed “supervisory statement” governing algorithmic trading from 30 June, a date that it notes “aligns with the implementation of [European Banking Authority] revised guidelines on internal governance under Directive 2013/36/EU, and joint European Securities and Markets Authority and EBA guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU”.

The PRA is inviting feedback on the proposals set out in its consultation until 7 May, at the following email address: CP5_18@bankofengland.co.uk.

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