News | Regulation FOA issues guidelines
Against the backdrop of stricter regulation, trading scandals and exchange glitches, the Futures and Options Association unveiled new guidelines to mitigate risks from electronic trading.
The move comes amid uncertainty in the industry over how to comply with broad principles laid down in guidelines introduced in May by the European Securities and Markets Authority (ESMA), the region’s market regulator. It wanted exchanges and brokers to take the lead in policing electronic markets and high- frequency trading. The guidelines of the trade body which represents over 100 participants in the derivatives industry has four objectives – to establish a standard for members to judge
how appropriate their control environments are in relation to ESMA guidelines and to clarify market participants’ obligations to one another, to regulators and to the market. It also aims to establish examples of documentation required between industry participants to ensure markets operate safely and efficiently and to explain how the industry is implementing the ESMA guidelines to ensure control environments are appropriate for minimising risk from electronic trading. The guidelines have received
backing from a working group of brokers, Citi, electronic market makers, proprietary traders and software providers like Fidessa. NYSE Liffe and IntercontinentalExchange, two of the region’s largest derivatives trading exchanges,
have agreed to make available data for the performance testing of algorithms in a simulated environment. CME Group has also agreed to the proposals, assuming it wins approval for its application to run a London- based derivatives market from next year.
Regulators around the world have become particularly concerned by risks to market stability posed by the growing use of automated trading and the use of computers to trade in and out of positions in fractions of a second. Incidents such as the flash crash of 2010 and the trades made by Knight Capital on the New York Stock Exchange in August have only served to heighten the concerns. The FOA is not alone. Earlier
this year, the UK’s Financial Services Authority undertook a review of pre-trade risk controls used by high-frequency trading firms, and is expected to produce a high-level paper into the ESMA guidelines in late September. In addition, a study by the Federal Reserve Board of Chicago, a regional US bank, warned that many high- speed trading firms were taking shortcuts in their risk controls, and recommended kill switches to stop trading and more stringent position and profit-and- loss limits. ■
12 Best Execution | Autumn 2012
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