Benefits of HFAT
Many firms, including Goldman Sachs, have expanded their own algorithmic trading programmes to take advantage of the numerous benefits.
- Creating greater liquidity
- Increased volumes,
- Reduced short-term volatility
- Narrower spreads
- Lower costs for investors
- Better price formation
- Faster execution of orders
But there are also considerable risks that can potentially cause widespread and significant market distortion and create a disorderly market.
Algorithmic trading will continue to face more scrutiny as new obligations appear like within MiFID II. This isn't anything new - Germany's High-Frequency Trading Act was introduced in 2013 - but critics are sceptical about whether the measures will do anything to combat market abuse and question whether the time invested in data collection could be better spent.
Five essential HFAT controls
1. Check the HFAT definition
Until recently, there was no clear definition of HFAT, and still, there's some dispute about whether the MiFID II definition is too broad.
Check whether you fall under the definition of HFT:
"trading in financial instruments where a computer algorithm automatically determines individual parameters of orders, such as whether to initiate the order, the timing, price or quantity of the order, or how to manage the order after its submission, with limited or no human intervention."
Firms engaging in HFT must be formally registered and meet Regulatory Technical Standard 6 (RTS 6) requirements, demonstrating where software is purchased from, how it is developed, audited and stress-tested, how trades are monitored, and the mechanisms for triggering alerts.
3. Clarify terminology
Get broad consensus across the firm about what constitutes an algorithm, algo-trader and algo-trading. For example, would you class a simulated stop order as algorithmic trading? This will ensure consistent application of the rules.
4. Clock synchronisation
(RTS 25) - is this technically possible? How can you overcome practical challenges? What management oversight is there over the time distribution chain? Are there systems in place to ensure a rapid response if problems are experienced? What checks can be carried out to ensure that everything is set up correctly? What sorts of events might cause time lags - e.g. maintenance or failed network switches - and how can you mitigate this? How can errors be detected? How can you ensure accuracy between data centres and servers running trading platforms?
5. Check capability for record-keeping
Are you currently able to keep detailed time-sequenced records of all algorithms? What capability will you need in future?
Want to learn more about FCA Compliance?
If you'd like to stay up to date with FCA best practices, industry insights and key trends across regulatory compliance, digital learning, EdTech and RegTech news, subscribe to the Skillcast Compliance Bulletin.
To help you navigate the compliance landscape, we have collated searchable glossaries of key terms and definitions across complex topics, including Equality, Financial Crime, GDPR and SMCR. We also regularly report key learnings from recent FCA fines.
You can follow our ongoing YouGov research into compliance issues, attitudes and risk perceptions in the UK workplace through our Compliance Insights blogs.
And if you're looking for a compliance training solution, why not visit our FCA Compliance Course Library?.
Last but not least, we have 70+ free compliance training aids, including assessments, best practice guides, checklists, desk-aids, eBooks, games, handouts, posters, training presentations and even e-learning modules!
If you've any questions or concerns about compliance or e-learning, please get in touch.
We are happy to help!