High-Frequency Trading Models Get FCA’s Wheatley Scrutiny

Britain’s market regulator is scrutinizing high-frequency trading algorithms to ensure firms can suspend operations at short notice and aren’t abusing the market, its chief executive officer said.

The Financial Conduct Authority is monitoring firms across the industry to understand “the risks associated with the development of algorithms for use in high-frequency trading,” Martin Wheatley said at a conference in New York today.

Wheatley’s remarks are his first on the topic since the publication of Michael Lewis’s book “Flash Boys” on March 31, which argued that the $22 trillion U.S. stock market is rigged in favor of speed traders. High-frequency trading grabbed headlines after the plunge known as the flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

Mary Jo White, chairman of the U.S. Securities and Exchange Commission, told lawmakers on April 1 that the agency is conducting “a number” of enforcement investigations that focus on high-frequency trading and automated trading strategies. The regulator has also said it’s conducting a broad review of equity market structure and may make changes to the way investors trade stocks.

Toughest Rules

European Union lawmakers approved legislation in April that will create some of the toughest rules in the world for high-frequency traders. The limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms, and requirements that market makers provide liquidity for a set number of hours daily.

The EU’s new rules “effectively builds an extra layer of security onto the existing European Securities and Markets Authority guidelines,” Wheatley said.

He said that European rules strengthening the testing of algorithms before they are deployed, a greater focus on responsibility for firms, and requirements for high-frequency traders to be approved by regulators will be improvements.

Wheatley said the industry will be required to report suspicious orders in addition to trades to help police the market.

“Essentially what we have now in the U.K. is a mix of exchange-led monitoring, with the regulator analyzing risks such as cross-market techniques on the one hand,” Wheatley said. “On the other, industry itself reporting suspicious activity, so the challenge here becomes a shared one.”

To contact the reporters on this story: Lindsay Fortado in London at lfortado@bloomberg.net; Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Edward Evans, Keith Campbell

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