FMSB publishes Spotlight Review on Algorithmic Trading and Machine Learning

23rd April 2020 – 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

Media contacts

Maitland/AMO
Andy Donald or Sam Turvey
+44 207 379 5151
adonald@maitland.co.uk
sturvey@maitland.co.uk

Notes to Editors

1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.

FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets.

FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets.

FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants.

All FMSB publications are available on the FMSB website at fmsb.com/our-publications/.

2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.

FEMR set FMSB four strategic goals:

i) Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks.
ii) Developing best market practice
through the production of standards and other materials that create a common understanding.
iii) Driving global adherence
through ensuring standards are comprehensible and practical.
iv) Developing consistent approaches to market practices
through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies.

3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities.

4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique. The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/

AstraZeneca
Australia and New Zealand Banking Group
BAE Systems
Bank of America Merrill Lynch
Bank of New York Mellon
Barclays
BHP
BlackRock
Bloomberg
BNP Paribas
BP
Citadel Securities
Citigroup Global Markets Limited
Crédit Agricole CIB
Credit Suisse
Deutsche Bank
Euronext FX Inc.
Goldman Sachs
HSBC
Invesco
JP Morgan
Legal & General Investment Management
Linklaters (Legal Advisor)
Lloyds Banking Group
London Stock Exchange Group
M&G Investment Management Limited
MarketAxess
Morgan Stanley & Co. International plc
National Australia Bank
Nomura
RBS
Refinitiv
Rio Tinto
Royal Bank of Canada
Royal Dutch Shell
Royal Mail Group
Société Générale
Standard Chartered
Standard Life Aberdeen
TP ICAP
Tradeweb
Tradition
UBS
Vodafone
XTX Markets

Last updated 23 April 2020