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Financial watchdogs intensify crackdown on algorithmic trading malpractice

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Algorithmic trading is set to come under more intense scrutiny, as UK financial authorities have today demanded that institutions increase awareness and safety controls surrounding the electronic trading mechanisms.

The Financial Conduct Authority (FCA) and the Bank of England's Prudential Regulation Authority (PRA) have joined in calling for a senior role to be created at every institution to be responsible for how algorithms are used.

Algorithmic trading, where a computer automatically makes either investment or execution decisions without human intervention, has been a feature of equities markets for a relatively long time – but is becoming increasingly widespread in areas such as corporate bond trading and foreign exchange.

Read more: The Vix volatility index has now passed last night's high amid turbulent trading in the US

Although this offers obvious efficiency benefits, the PRA is worried that trading "can occur at rapid speeds, which means that existing risks could be amplified if risk management and other controls are not effective".

Both watchdogs want firms to set out comprehensively how algorithms are used in their business, and publish a methodology as to how they are developed and tested.

A senior manager, who understands how the algorithm works, should be charged with overseeing this. Such a requirement works hand in hand with the Senior Managers and Certification Regime (SMCR), a piece of regulation designed to increase accountability across the financial services industry which makes sure that, in the event of an incident or malpractice, the buck stops at one responsible person.

Read more: More than 70,000 City managers could be held personally responsible for misconduct under the FCA's new accountability rules

Firms must also have a "kill" functionality included in their algorithm, which would force it to stop trading immediately.

Though several of these requirements were made law through the second Markets in Financial Instruments Directive (Mifid II), the FCA and PRA's guidance will come as a welcome clarification of the more specific details the bodies are expecting.

Read more: What the City needs to know about Mifid II: The landmark legislation coming into force next year

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