British watchdog tells computer traders to tighten controls

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LONDON (Reuters) – Some firms using computers to trade at ultra-fast speeds are not applying safeguards required to avert market meltdowns, Britain’s Financial Conduct Authority said on Monday.

Algorithmic or high-frequency trading uses computers to automatically place an order in financial markets, without human intervention, and represents sizeable volume on stock markets.

The FCA reviewed algo trading, which some critics have blamed for sharp price moves, at about a dozen firms and found that some were failing to apply mandatory safeguards properly.

Sterling’s “flash crash” in Asian trading in October 2016 was blamed by some on algo trading, but a central bank report later concluded there was no single perpetrator.

“Firms should consider and act on its content in the context of good practice for their business,” Megan Butler, the FCA’s director of wholesale supervision, said.

Some firms were unable to show that their systems are tested and operating properly, a requirement since January under the European Union’s new “MiFID II” securities law.

“Additionally, firms need to do more work to identify and reduce potential conduct risks created by their algorithmic trading strategies,” the FCA said in a report.

The FCA did not propose new rules but will “proactively” supervise and monitor algo trading, adding that firms need to consider the combined impact multiple strategies may have on “the fair and effective operation of financial markets”.

AIMA, a trade body for hedge funds, said it needed to study the FCA report before commenting. FIA European Principal Traders Association said it could not comment immediately.

In a related move on Monday, the Bank of England published a consultation paper on what it expects from firms it authorises regarding the management of risks from algorithmic trading.

“It applies to all algorithmic trading activities of a firm, including in respect of unregulated financial instruments such as spot foreign exchange,” the BoE’s Prudential Regulation Authority said in a statement.

All firms should name a senior person who is responsible for algorithmic trading, and branches of foreign banks in Britain will have to show they are managing risks properly.

The PRA guidance will come into effect in June, and the regulator will publish a discussion paper on operational resilience in algorithmic trading later this year.

(This version of the story removes extraneous characters at the beginning of first paragraph.)

Additional reporting by Maiya Keidan; editing by Alexander Smith