Principal Trading Firms: Impending FCA Review of Algorithmic Trading - Are You Ready?

The EU’s MiCA regulation was published in June 2023, with level 2 consultations underway and the UK Government having recently confirmed its final proposals for regulating crypto-assets. Firms in the UK using algorithmic trading for Spot FX also need to ensure they are compliant.

When MiFID II went live on 3^rd January 2018, it included new rules in the area of algorithmic trading. Its regulations – designed to enhance market integrity and ensure system resilience – imposed three main requirements:

1.    Transparency: Firms must disclose their trading strategies to ensure transparency

2.    Risk Controls: Firms are obligated to demonstrate and adhere to robust risk controls

3.    Supervision: Ongoing supervision and periodic assessments of their systems became mandatory

Shortly afterwards, the FCA conducted a review of how successfully firms had implemented these changes and the PRA issued a Supervisory statement- SS5/18 'Algorithmic trading' - Supervisory Statement.

On 4^th August the FCA released a Dear CEO letter to Principal Trading firms. These letters serve to reinforce firms’ awareness of their legal obligations and outline regulatory priorities for the upcoming months. The letter addressed five main topics that would be the focus of their PTF supervisory strategy. These were: algorithmic trading controls; financial resilience; avoidance of market disruption caused by commodity market volatility; operational resilience; and Brexit impacts. It gave CEOs a deadline of the end of September 2023 to agree actions and next steps with Senior Managers and the Board for all of these topics.

Regarding Algorithmic Trading specifically, the letter asked firms to strengthen their governance frameworks, controls and oversight functions. Notably, the FCA announced an impending multi-firm review of RTS 6 [organisational requirements of investment firms engaged in algorithmic trading, providing direct electronic access and acting as general clearing members] and RTS 7 [organisational requirements of regulated markets, MTF and OTFs enabling or allowing algorithmic trading through their systems].

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This article was co-authored by George Petropoulos, Claire Suttie, Nick Wilcock, and Ivor McGrigor.