The Bank of England's Prudential Regulation Authority and the Financial Conduct Authority tells banks they should have robust risk management in place for algorithmic trading.
The PRA outlined its expectations for banks using algorithmic trading that is now ubiquitous throughout the equity markets and increasingly in forex and corporate bonds.
A computer automatically determines order initiation, generation and routing without human intervention. The PRA highlighted that the speed at which the trading occurs could amplify existing risks under poor risk management controls.
The regulators outlined in a consultation paper the controls it expects to see in place by firms using algorithmic trading.
These include governance with an identified senior management function responsible for the function. A robust algorithm approval process with a minimum set of risk controls.
Testing and deployment where all relevant risk and control functions are carried out at a set frequency at a level equal to the risks the firm is exposed to. Banks and other firms are also expected to maintain algorithm and risk control inventories.