FMSB Sets Guidelines For Good Practice On Algorithmic Trading

To reduce risk to markets and firm stability, the FICC Market Standards Board (FMSB) published a new set of guidelines to accommodate the growth in algorithmic (algo) trading. Its Statement of Good Practice on Algorithmic Trading in FICC Markets follows a recent report from FMSB, which emphasized the limitations in adopting underregulated algo trading in less liquid markets. The transparency draft outlines good conduct and governance for participants engaged in algorithmic trading across all FICC asset classes and markets. 

Algorithmic trading has been the subject of regulatory scrutiny due to the increased adoption of computer algorithms in FICC markets, which can adversely impact market stability and directly harm clients. The statement draws on years of work conducted by regulators and seeks to enhance the integrity and effective functioning of FICC markets. In particular, it outlines 10 points that all market participants and venue operators should adhere to when interacting with any algorithmic trading system. These “Good Practice Statements” cover the identification of conduct risks stemming from algo trading and determine how to best manage them. 

Overview of FMSB’s 10 Good Practice Statements:

  1. Overarching Governance Structure– Market Participants should have an appropriate governance framework to provide clear lines of oversight of the Algorithmic Trading System that they operate. 
  2. Inventories– Market Participants should maintain complete lists and descriptions of the Algorithms which they use in the course of Algorithmic Trading.
  3. Risk Management and Controls– Market Participants utilizing an Algorithmic Trading System should have pre and/or post-trade controls in operation which are appropriate to the activity and risks posed. 
  4. Risk Management and Controls– Market Participants should consider conduct, market, operational, and other risks prior to deployment and as part of their periodic review of Algorithms.
  5. Policies and Procedures– Market Participants should adhere to minimum standards applicable to Algorithmic Trading Systems and ensure their documentation through written internal policies. 
  6. Policies and Procedures– Market Participants should provide appropriate information to Clients that take account of the services being provided and are reviewed periodically to ensure that they are fair.
  7. Software Development and Change Process– Market Participants utilizing an Algorithmic Trading System should have appropriate software development and change management processes in place. 
  8. Ongoing Oversight, Surveillance, and Monitoring– Market Participants utilizing an Algorithmic Trading System should establish proper ongoing oversight, surveillance, and monitoring processes.
  9. Record-Keeping– Market Participants should keep timely, consistent, and accurate records of their Algorithmic Trading to facilitate appropriate levels of transparency and auditability.
  10. Training and Education–  Market Participants should ensure relevant personnel are appropriately trained to support Algorithmic Trading or to manage the Algorithmic Trading System they operate. 

Many feel that due to increased misconduct across FICC markets, “having robust governance structures in place to help manage the risks associated with this rise in algorithmic trading is critical,” explained Ciara Quinlan, Global Head of Principal Electronic Trading at UBS. These Statements of Good Practice “demonstrate the shared commitment of market participants to enhancing the integrity and functioning of FICC markets,” asserts Chris Dickens, Chief Operating Officer EMEA at HSBC. FMSB members and other interested parties are invited to comment on the proposed Statement of Good Practice, which will run until August 21, 2020.