In its May 2021 edition of Market Watch, the FCA described actions it took to address the impact which a firm's trading algorithm was having in the market. Its concerns had been raised after the Regulator's own internal surveillance algorithm had flagged the activity. Following the FCA's intervention, adjustments were made to the trading algorithm and its control framework, in order to avoid "undue influence on the market".
Very little detail about either the nature or significance of the potential 'undue influence' is provided. However, the note provides a reminder of the challenges of increasingly complex algorithmic trading and AI systems. Irrespective of how a trading system has been set up, firms will be expected to monitor its output, to assess whether its activity may have the characteristics of potentially abusive market conduct.
Firms are reminded of the recommendations of good practice in the FCA's 2018 report, 'Algorithmic Trading Compliance in Wholesale Markets', and the PRA's Supervisory statement on algorithmic trading.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.