UK FCA multi-firm review findings of algorithmic trading controls under MiFID

The UK Financial Conduct Authority (FCA) has published the findings from its multi-firm review of principal trading firms' compliance with the detailed organisational requirements for algorithmic trading set out under the UK Markets in Financial Instruments Directive, specifically those outlined in the associated regulatory technical standards known as RTS 6. The review reveals progress in governance, notably in the quality of self-assessments and validation processes, but also exposes weaknesses such as outdated or incomplete policies, poor documentation, and inconsistent compliance oversight. While many firms demonstrated strong practices in maintaining algorithm inventories, such as detailed records outlining each algorithm's objective, ownership, market usage, and associated risk parameters, in some cases, the algorithmic inventory did not specify the individuals who were approved to operate the algorithm. Deployment protocols were generally formalised, with clear accountability and multi-layered approval processes, especially for new market entries or material changes. However, some firms had outdated policies or lacked clarity on what constituted a material change.

Conformance testing, required under RTS 6, was mostly found to be complied with by firms with policies and procedures clearly defined, although some firms had poorly defined procedures resulting in weak record-keeping. Simulation testing was widely adopted, with firms using both theoretical and historical stress scenarios to assess algorithm behaviour under adverse conditions, though the sophistication and frequency of testing varied. Firms generally maintained robust pre-trade controls calibrated to algorithm type and asset class, often implemented at the internal server level to prevent non-compliant orders from reaching the market. However, some lacked clear ownership and documentation of these controls, with compliance staff occasionally having limited oversight. Surveillance systems were typically tailored to firms' trading profiles and supported by regular Market Abuse Risk Assessments, but in some cases, outdated systems and insufficient governance led to delays in alert investigations and resource strain. The FCA encourages firms to reflect on these findings to strengthen their control environments, with the FCA confirming it will continue to monitor this area as part of its ongoing supervisory work.

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