The FOA has issued guidance on Systems and Controls for Electronic Trading Environments.
The purpose of financial markets is to serve as a means of raising capital, facilitating savings and investment and enabling corporates and investment firms to manage their various business risks. Since financial and commodity markets first emerged, three key ingredients have enabled market participants to achieve these objectives with maximum efficiency - fast access to information and market data, proximity to the market, and speed of execution. As the rate of technological development increased and markets converted from open outcry to electronic, so market participants became increasingly more dependent on electronic systems with fast and versatile trading engines to optimise their services.
This new technology has reduced transaction times, created more efficient electronic audit trails, improved risk controls and enhanced market monitoring. It has also seen the emergence of algorithmic trading (where orders are generated according to pre-set programmes) and a low latency variant of algorithmic trading known as “High-Frequency Trading” (HFT).
HFT has grown rapidly in recent years but because of its broad scope and wide number of differentiated strategies, it is difficult to define in any meaningful way. HFT does have a number of common features however, such as the use of sophisticated technology, extensive use of algorithms and a high turnover. In addition, positions are typically held for
short periods of time.
The FOA recognises the widespread concerns associated with these activities, and supports the desire of regulators around the world to find ways to minimise risks posed by them. It is against this background that the Futures and Options Association (FOA), with considerable input from its E-trading / Risk Working Group and Sam Tyfield, Partner of Katten Muchin Rosenman UK LLP, has developed this Guidance.
This document supports and seeks to provide more detailed guidance on the implementation of, amongst other things, the ‘Guidelines on systems and controls in an automated trading environment’ (ESMA Guidelines). In recognition that European derivative markets are largely electronic, the Guidance addresses systems and controls as they relate to electronic trading. The FOA considers this broad approach necessary to ensure that controls across markets are sufficiently robust.
The purpose of this document is to:
- Establish a standard for members to judge the appropriateness of their own control environments in relation to the ESMA Guidelines;
- Clarify the obligations and responsibilities that market participants have to one another, to their respective regulators and to the market as a whole;
- Establish example documentation and information required to be provided between industry participants to assist in the efficient but safe operation of the markets; and
- Explain how the industry is implementing the ESMA Guidelines in practice to ensure there is an appropriate control environment to minimise the risks posed by electronic trading.
The FOA will review this Guidance periodically to take account of future market or regulatory developments.
