The FICC Markets Standards Board (FMSB) has today published its first Spotlight Review, looking at emerging themes and challenges in algorithmic trading and machine learning.
This Spotlight Review highlights important emerging issues in this area to assist market participants in considering how to address challenges that may arise.
This Spotlight Review considers:
• managing model risk in algorithmic trading;
• challenges for algorithmic market making in less liquid instruments;
• adoption of machine learning in algorithmic market making;
• increased use of execution algorithms; and
• best practice, and the role for practitioner-led solutions.
FMSB believes this Spotlight Review will be of interest to a wide audience of participants in global wholesale FICC markets and hopes it will generate further discussion on these important topics and their relevance to future standards work by FMSB.
Mark Yallop, Chair of FMSB, said: “This Spotlight Review, the first that FMSB has published, looks at the very important issue of algorithmic trading and machine learning. This is a space that is developing fast and creating exciting opportunities in markets, but also an emerging area of risk and vulnerability. We are very grateful for the insights and support provided by FMSB members and other industry experts in producing this document. We hope it will create further discussion on the nascent challenges market participants face and also inform potential topics for FMSB’s future work.”
Ciara Quinlan, Global Head of Principal Electronic Trading, FX, Rates and Credit at UBS, said: “As the adoption of algorithmic trading expands into new products and new machine learning technologies emerge, model risk is likely to become increasingly relevant. This review discusses these important themes and makes a credible case for industry-led best practices in this area.”
Mark Meredith, Head of FX E-Trading and Algorithmic Trading at Citigroup Global Markets Limited said: “Citi welcomes FMSB’s work in this paper on emerging themes in algorithmic trading and the scope for best practices in this area.”
Both Ciara and Mark are FMSB Standards Board Members and provided input into the Spotlight Review.
This Spotlight Review is the first in a series that will collectively consider issues of FICC market structure and the impact of regulatory and technological change on the fairness and effectiveness of wholesale markets. The next publication will cover the role of data management in the financial system.
Additionally, FMSB members are advancing a Statement of Good Practice on Algorithmic Trading and this topic is certain to remain an important focus for transparency, fairness and effectiveness of trading practices in the coming years. The Spotlight Review is available for download here: fmsb.com
