High Frequency Trading Review


    20th September 2012 – The Futures and Options Association has published guidance to provide listed derivative market participants with industry standards that aim to mitigate risks in electronic trading environments.

    The FOA recognises widespread concerns associated with “high-frequency” and automated trading and supports regulatory focus on the stability and integrity of European markets. The Association is committed to providing proactive thought- leadership for its membership, legislators and regulators in this area.

    In that context, the FOA Guidance supports ESMA’s ‘Guidelines on systems and controls in an automated trading environment’ which came into force in May this year. We understand that regulators have been conducting supervisory reviews to gauge the market’s response to, and implementation of, ESMA’s Guidelines, and that there are on-going discussions with market participants to discuss their findings.

    FOA’s practical Guidance complements and builds on ESMA’s Guidelines, and is designed to assist clients, direct electronic access (DEA) providers, venues and service providers with a hands-on perspective on how to comply. The document will also help market participants understand the reasonable expectations of one another.  

    In recognition that European listed derivative markets are largely electronic (orders are sent electronically to venues, either via automated processes or when individuals type messages into order entry systems), FOA’s Guidance addresses electronic markets. This is intended to be broader than high-frequency trading, algorithmic trading or even automated trading issues. We consider this approach is necessary to ensure that systems and controls across the market are sufficiently robust.

    Key objectives of the FOA Guidance are 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 markets; and
      • Explain how the industry is implementing the ESMA Guidelines in practice to ensure there is an appropriate control environment to minimise any risks posed by electronic trading.

    The Guidance provides standards for issues subject to regulatory interest such as technical and functional conformance and stress testing, the definition of “naked access”, pre-trade risk controls, and live-market access restrictions such as “kill switches”. It also provides example policies for consideration by market participants when they approve new strategies or technology changes, and to help them manage business and disaster recovery.  

    Paul Marks, chair of the FOA’s E-Trading/Risk Working Group and EMEA Head of Electronic Execution, Listed Derivatives Products at Citi, said: “This industry is fluid, dynamic and innovative. Our intention has been to deal with the concerns within the industry, among regulators and politicians, and the general public in a way which protects market integrity without stifling a successful and beneficial industry.”

    Blake Stephenson, Regulation Manager at FOA, said: “With this document the FOA has taken meaningful action to help the industry to implement a key objective of regulators, which is to secure the safety and resilience of European electronic market environments. We’ve been talking with legislators and member state regulators about these issues and look forward to using this Guidance as a basis for continuing this constructive dialogue.  FOA members are keen to ensure that risks posed to markets are adequately addressed, and we’re committed to helping them achieve this.”

    The project was led by Blake Stephenson, Regulation Manager at FOA, with considerable input from Sam Tyfield, Partner of Katten Muchin Rosenman UK LLP, and the FOA’s E-Trading / Risk Working Group. This group has broad market representation and includes firms, venues and service providers.

    The document is available here


    Catherine Alexander, Rostron Parry

    [email protected]

    Tel: +44 (0) 20 7490 8062

    Emma Davey, Director Member Services, FOA

    [email protected]; Tel: +44 (0)20 7090 1348

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