The UK Financial Conduct Authority (FCA) has recently published the findings of its latest multi-firm review (the Review), assessing ten proprietary trading firms’ (PTFs) compliance with MiFID requirements on algorithmic trading control as set out in Commission Delegated Regulation (EU) 2017/589 (RTS 6). 

Background 

The Review follows the FCA’s previous multi-firm assessment in February 2018, which identified the need for further improvements in documentation, conduct risk consideration and the identification of algorithmic trading activities (the 2018 Assessment). The Review also follows the publication of a formal communication from the FCA to chief executive officers of firms categorised as PTFs, dated August 2023 (the Dear CEO Letter), which highlighted algorithmic controls as a supervisory priority and foreshadowed the Review. 

Key Findings 

The FCA explains that the Review is intended to help PTFs comply with existing requirements and does not create any new obligations. Key findings of the Review are as follows:

Governance 

• Self-Assessment and Validation: The quality of self-assessment processes has improved since 2018, with larger firms providing more comprehensive documentation. Good practice includes having such self-assessments reviewed by external auditors. However, the FCA noted that several firms still lack detail, have outdated policies, or fail to address all RTS 6 elements or link conclusions to supporting evidence.
• Role of the Compliance Function: While some firms’ compliance staff demonstrate strong technical knowledge and provide effective challenge, the FCA noted that others lack sufficient expertise or involvement in algorithmic trading processes, which limits their oversight capabilities. 
• Algorithmic Inventories: Most firms maintain detailed inventories of algorithms, including objectives, ownership, and risk parameters. However, the FCA commented that some inventories lack clarity regarding operator approval. 
• Deployment of Algorithms: Most firms have formalised deployment procedures and clear definitions of material changes, with robust approval processes and communication. However, the FCA commented that some have outdated or unclear policies, particularly regarding third-party algorithms. 

Development and Testing

• Conformance Testing: Most firms comply with Article 6 of RTS 6, with some exceeding venue requirements. However, some firms have poorly defined procedures and inadequate record-keeping. 
• Simulation Testing: Approaches vary, with some firms employing sophisticated, frequent simulation testing using both theoretical and historical stress scenarios. Others lack comprehensive testing policies or fail to consider a wide range of market conditions. 
• Controlled Deployment: Firms generally adopt conservative, phased deployment with senior approval and pilot trades. However, some lack formal documentation and clear ownership of deployment processes. 

Risk Controls

• Pre and Post-Trade Controls: All firms have adequate pre-trade controls, often calibrated by algorithm type and asset class. Good practice includes internal server-level controls and clear assignment of responsibilities. However, some firms lack defined ownership and compliance oversight of these controls. 

Market Abuse Surveillance

• Surveillance Systems and Governance: Many firms use in-house surveillance systems tailored to their trading activities, with regular reviews and effective alert management. However, some firms have not sufficiently updated their systems or formalised governance, leading to delays and resource pressures in alert investigation. 

Next Steps 

The FCA has provided individual feedback to all firms involved and, where appropriate, has used attestations to ensure firms’ future progress. The FCA further encourages all PTFs engaged in algorithmic trading to consider which elements of the Review may help them improve their algorithmic control frameworks. 

The FCA has stated that it will continue to assess algorithmic trading controls as part of its ongoing supervisory activities.

The 2018 Assessment, the Dear CEO Letter and the Review can be found here, here and here, respectively.