UK Watchdog Puts Algo Trading Firms’ Risk Controls Under the Microscope
The Financial Conduct Authority (FCA) has warned that many algorithmic trading firms still fall short of meeting regulatory expectations, despite showing progress in governance and oversight since its last review in 2018.
The watchdog said shortcomings remain in compliance expertise, testing, deployment, and market abuse surveillance. The latest multi-firm review assessed 10 principal trading firms of different sizes to measure compliance with MiFID’s Regulatory Technical Standards (RTS) 6.
Review Scope
The FCA examined governance frameworks, algorithm testing, deployment procedures, and surveillance systems, stressing that the findings highlight existing requirements rather than introduce new ones.
The regulator found that larger firms generally submitted more complete self-assessments, while smaller and mid-sized firms often left gaps in documentation and policies.
Compliance teams' oversight varied significantly. In some firms, compliance staff had technical expertise and played a strong role in monitoring algorithms. However, in others, the lack of technical knowledge limited the ability to challenge trading behaviour.
“There are inherent risks in algorithmic trading. It is essential that firms’ controls and key oversight functions, including compliance and risk management, keep pace with the ever-increasing complexity and speed of financial markets and technological advancements,” the regulator said.
“It is also critical that firms consider the market conduct implications of their algorithmic trading activity and its impact on market integrity.”
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Most firms carried out conformance testing, but simulation testing often lacked sophistication. Some firms relied on vendor testing or limited market scenarios, raising concerns over whether algorithms could withstand stressed trading conditions.
Deployment practices were typically conservative, with phased rollouts and pilot trades. However, the FCA said some firms lacked formal documentation of procedures and clear definitions of what qualifies as a material change to an algorithm.
Risk Controls
All firms operated pre-trade and post-trade controls, but governance around these safeguards was not always clearly assigned. In some firms, compliance staff had only limited oversight of how controls functioned, reducing accountability. The FCA said firms must ensure responsibilities are clearly documented and regularly reviewed.
Surveillance systems also showed variation. Many firms used in-house platforms adapted to their trading activity, but others had not invested in updates. In some cases, this led to alert backlogs and stretched compliance resources.
The watchdog said most firms understood their obligations under RTS 6, though levels of compliance differed widely. Each firm received individual feedback, and the FCA confirmed it will continue monitoring algorithmic trading controls as part of its supervisory work.