Algorithmic trading has reshaped financial markets, driving speed, efficiency and innovation to unprecedented levels. However, with such power comes increased responsibility. The Financial Conduct Authority’s (FCA) latest multi-firm review of algorithmic trading controls casts a spotlight on how firms are balancing fast-paced execution with the need for robust governance.
Drawing on assessments of Principal Trading Firms (PTFs) across all sizes, the FCA outlines areas of strong progress as well as critical shortcomings. For firms aiming not only to comply but to lead, this review offers a clear roadmap to enhanced governance, stronger controls and improved market confidence.
What is Algorithmic Trading?
Algorithmic trading, commonly known as “algo trading”, involves the use of computer programmes and mathematical models to automatically execute trades based on pre-defined criteria such as price, timing, quantity and market conditions.
This automation allows firms to react instantly to market changes, seize opportunities in milliseconds and reduce human error. While the benefits include greater efficiency and liquidity, algorithmic trading introduces specific risks, such as system failures, coding errors and potential market abuse. As a result, the FCA requires firms to maintain strong governance, testing procedures and control frameworks to ensure fair and orderly markets.
Why This Review Matters
The FCA’s review focuses on compliance with MiFID II RTS 6 (Regulatory Technical Standard 6), which sets out organisational requirements for firms engaged in algorithmic trading. Importantly:
- Real-World Firm Assessment: The FCA evaluated ten PTFs, spanning large, medium and small participants, based on their RTS 6 self-assessments, validation reports and supporting documentation.
- Progress Since 2018: Governance frameworks have improved markedly since the FCA’s baseline review in 2018, particularly among larger firms.
- No New Rules but Actionable Guidance: The review does not impose new rules. Rather, it highlights industry best practices and areas requiring improvement.
Key Take-Aways: What is Working and What is Not
- Governance
Strengths:
- Most firms, especially larger ones, submitted more structured and comprehensive RTS 6 self-assessments.
- Some engaged third-party auditors to strengthen accountability.
Weaknesses:
- Some firms had outdated policies, disconnected documentation and unclear ownership of key responsibilities.
- Areas such as IT outsourcing and compliance training were inconsistently addressed.
- Development and Testing
Strengths:
- Most firms conducted conformance testing as required under RTS 6.6–6.8, with some going further by testing under adverse and stress scenarios.
Weaknesses:
- Gaps in formal documentation were noted.
- The sophistication of simulation testing varied, and some firms addressed conduct risks only after deployment rather than during algorithm development.
- Risk Controls (Pre- and Post-Trade)
Strengths:
- Many firms adopted layered control frameworks and embedded pre-trade controls at internal gateways, preventing erroneous orders from reaching the market.
Weaknesses:
- A lack of clear documentation and accountability for control ownership was evident, limiting oversight and responsiveness.
- Market Abuse Surveillance
Strengths:
- Surveillance systems were often tailored to firm-specific trading patterns.
- Alerts based on Market Abuse Regulation (MAR) principles (including Market Abuse Risk Assessment logic) were appropriately escalated.
Weaknesses:
- Some firms underinvested in surveillance technology.
- Resource constraints, particularly in smaller firms, led to slow response times when managing high alert volumes.
Next Steps: FCA Supervision and Expectations
The FCA commended firms for increasing awareness of RTS 6 obligations. However, the regulator also highlighted significant variance in the quality of controls across firms. Tailored feedback has been issued, and in some cases, attestations were required to prompt corrective actions.
Looking forward, the FCA will continue supervisory monitoring to ensure that firms:
- Embed structured governance arrangements;
- Document and deepen testing regimes;
- Maintain robust control frameworks; and
- Invest adequately in surveillance technology and personnel.
How can Complyport Help
Complyport supports firms in meeting their algorithmic trading obligations under MiFID II, RTS 6 and other relevant FCA rules. We can assist with:
- Conducting independent reviews of algorithmic trading governance frameworks;
- Enhancing RTS 6 self-assessment processes;
- Advising on control design and ownership mapping;
- Supporting the development of robust testing and validation protocols;
Whether you’re a large-scale trading firm or a smaller participant, our team of regulatory experts can guide you through the complexities of algorithmic trading compliance and help future-proof your operational resilience.
Contact Complyport today to schedule a meeting with one of our Subject Matter Experts.
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