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An article relating to this blog post on Finextra:

FSA not interested in trawling through algo code

The UK's Financial Services Authority has no intention of "looking through lines of code" before signing off algorithms used by high-frequency traders, describing the prospect, floated by the European...


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Regulators dereliction of duty

Now it's just dandy that the FSA does not see a role in regulating Algo trading! Surely this is a dereliction of duty of the first order! The financial services industry is highly technical relying on new developments and innovation to produce increased revenue. The business of Algo trading is a fundamental factor in today's securities markets and the codes used a determining feature. How then can the FSA say they do not intend going over reams of code?

Surely the modern market is based on codes and the ability of financial services firms to service the investor? How can the FSA stand back and not take an interest? This is not serving the investor or the markets and calls into question why is the FSA there?

European laws are being created where Algo trading and the like will have to be regulated at code level and the FSA will be at odds with Europe if it rebels. Are we seeing the first death rolls of the FSA leading to a central European Regulator that actually will do its job?

Comments: (6)

Chris Errington
Chris Errington - None - London 13 April, 2011, 15:32Be the first to give this comment the thumbs up 0 likes

It does worry me that a trader can start up a sell algorithm, to say hedge a holding, and then assume the algo technology will identify when it is moving into dangerous (whole of market moving) territory and stop.  The absence of inherent safety parameters (like say checking on the % change in price over time as a check) may lead to a market moving significantly for an artificial reason.

I guess the FSA should be on the case.  I'd like to think the requirements around allowing a human access to a live exchange would apply equally to technology - you just have to know when to stop sometimes and unless you tell it, the technology won't.

Ploughing through that code is going to be a tough one though and I doubt they will ever find the wood for the trees.  Suspending that part of the market when trading looks really odd (through technology I guess) is probably the best you can hope for.

A Finextra member
A Finextra member 13 April, 2011, 16:20Be the first to give this comment the thumbs up 0 likes

Yes it's difficult but not impossible. Surely they can use technology to produce an audit check of the code. The Regulator needs to set parameters that they can check code against and use an AI type system that updates the audit parameters as and when new code is introduced.

It's too important for the FSA to stand back and allow a free for all. Hedge Funds can be set up and closed very quickly and already there is enough experience to show that there are some very sharp people out there that will prey on the FSA's lack of capability.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 April, 2011, 16:49Be the first to give this comment the thumbs up 0 likes

Frankly, the very notion that regulators with their shoestring budget can do a meaningful code review of algo trading software that's the outcome of tens, if not hundreds, of million dollars in investment by investment banking firms, sounds a bit strange to me.    

A Finextra member
A Finextra member 14 April, 2011, 17:09Be the first to give this comment the thumbs up 0 likes

Sounds like you think that if the regulator is short of cash they give everyone a free for all. Since when does good and sound regulation depend on the size of budget? Its a very strange notion i think

The Regulator must move with the times and if that entails learning new skills and being able to find methods to regulate Algo trading via code then thats what they must do. Otherwise why have regulation if its meaningless?

Chris Errington
Chris Errington - None - London 28 April, 2011, 12:07Be the first to give this comment the thumbs up 0 likes

The recent Amazon algorithm issue caught my eye - with a widely reported sell price escalated to $23million.  CNN for one reporting: "Amazon seller lists book at $23,698,655.93 -- plus shipping"

That's what can happen to markets when machines takes over.  Of course valuing a book is easier for humans than equities - you have a rough idea of worth so you don't actually buy at those prices.  But its harder with things that you don't necessarily yet understand, such as equities and even tulips, so the market becomes real (or a false real, if there is such a thing) and people do buy. 

 

A Finextra member
A Finextra member 28 April, 2011, 15:29Be the first to give this comment the thumbs up 0 likes

Thanks Chris

What is needed is some AI to be developed. AI is comming and maybe this will eventually prove the answer , otherwise human grey matter looks like being arround for some time