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SFC conducted a thematic review of Algo trading


SFC conducted a thematic review of Algo trading

09 Jan 2017

In late 2016, the SFC conducted a thematic review of algo trading in Hong Kong to assess whether firms are complying with the Code of Conduct. The SFC also issued relevant FAQs in the Appendix to the Circular announcing the results of this review. Although the review was specific to algo trading many of the findings relate generally to electronic trading and are therefore of much broader applicability.

The following key areas required improvement:

  • Insufficient representatives from management and control functions providing input to algo governance
  • Insufficient pre-trade controls to prevent the generation of algo orders which might adversely affect market integrity
  • Inadequate due diligence on algo trading systems provided by third party service providers
  • Lack of written contingency plans to cope with potential emergencies specific to algo trading systems
  • No policies and procedures concerning testing requirements for algo trading systems

Management and Supervision

Most firms now have formal governance committees or meetings but the following key problems were found:

  • Larger firms with more than one business line with unique algo strategies only had representatives from some core business lines in the key governance committees for algo trading. However the representatives could not adequately represent the other business lines as they did not know enough about the controls and operations of the algo strategies specifically designed for those business lines
  • Control functions such as compliance and risk were not sufficiently involved providing input into the overall governance of algo trading activities nor in change management, risk management, the design and implementation of controls, and testing of algo trading systems and trading algos
  • Firms did not maintain proper minutes of governance committee meetings recording issues identified and approvals granted for major implementations of systems to show the required level of management and supervision of their algo trading activities

Recommended Improvements

  • Establish governance committees with a clear mandate and involve at least one RO from each core business lines
  • Representation from each business line using algos to enhance the coverage of views and challenges gathered at the business level throughout the governance process
  • Have the control functions work with staff responsible for the development of algo trading system strategies
  • Ensure strong involvement and the ability to challenge from compliance and risk functions during change management, risk assessment, control design and monitoring, and in the processes for setting pre-trade and post-trade control thresholds

For more information about the Algo and Electronic Trading, please read our full alert here.


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