FCA Finds Shortcomings Persist in Algorithmic Trading Oversight

The UK Financial Conduct Authority (FCA) has warned that many algorithmic trading firms continue to fall short of regulatory expectations, despite making progress since the regulator's last review in 2018. The findings came from a multi-firm review of 10 principal trading firms of varying sizes, assessing compliance with MiFID's Regulatory Technical Standards (RTS) 6.

The review examined governance frameworks, algorithm testing, deployment procedures, and surveillance systems. While larger firms tended to produce more complete self-assessments, smaller and mid-sized firms often left documentation gaps or lacked formal policies. This, the FCA noted, weakens the ability of firms to demonstrate compliance with the regulatory requirements.

One area of concern was compliance oversight. In certain firms, compliance staff possessed technical expertise that allowed them to challenge algorithmic behavior effectively. However, in others, a lack of technical knowledge constrained oversight and created potential blind spots in risk monitoring.

Testing procedures also showed uneven practices. While most firms carried out conformance testing, simulation testing was frequently basic. Some firms relied heavily on vendor-provided testing or narrow market scenarios, raising questions about whether algorithms could withstand stressed conditions or unusual market events.

Deployment practices were typically cautious, with phased rollouts and pilot trades. Yet the FCA noted that some firms lacked formal documentation of deployment steps and failed to define clearly what constituted a "material change" in an algorithm - an important governance requirement.

Risk controls, such as pre-trade and post-trade mechanisms, were present across all firms, but the allocation of responsibility was not always well documented. In several cases, compliance teams had limited involvement in monitoring how these controls operated, leaving accountability unclear.

Surveillance systems varied widely. While some firms maintained tailored in-house platforms, others had not updated their systems, leading to backlogs of alerts and straining compliance resources. The FCA said this risked reducing firms' ability to detect potential market abuse effectively.

The regulator stressed that its review does not create new requirements but highlights areas where firms must meet existing obligations. It confirmed that each firm has received individual feedback and that ongoing supervisory work will continue to monitor algorithmic trading controls and governance.