Regulators need to come to grips with the risks posed by the rise of algorithmic trading, says a new report from a group of global policymakers.

The so-called Senior Supervisors Group (SSG) — which includes financial regulators from Canada, the U.S., Japan, the U.K. and Europe — issued a report on Thursday that examines the risks associated with algorithmic trading, including high-frequency trading (HFT). It notes that algo trading and HFT have been associated with events causing “significant volatility and market disruption.”

The report also states: “The complexity of market interactions among HFT firms and other market participants increases the potential for systemic risk to propagate across venues and asset classes over very short periods of time.”

In particular, the report warns that high-speed trading could amplify systemic risks. For instance, an error by a relatively small player could cascade through the market, sparking further risks from other algos, and also possibly impacting clearing and settlement, it says.

It also warns that algo traders may generate significant intraday risk that is not captured by conventional controls; that internal controls generally may not be able to keep up with the speed and complexity of algos; and that this may allow market damage to accumulate and spread rapidly.

Indeed, the primary concern for regulators, the report says, centres on whether the risks associated with algorithmic trading have outpaced the controls on it. With that in mind, it suggests that regulators need to examine whether firms’ risk management frameworks properly capture the risks associated with algo trading; and whether standard risk management tools are effective for monitoring the risks in this area.

The report produces a list of principles for regulators to consider when assessing firms’ trading practices and controls. “These key controls and practices are both preventative and detective in nature, and are the underpinnings of an overall risk management framework,” it says.

It also suggests questions that firms can use to assess their own controls and which supervisors may also consider as they monitor and examine trading activity.

Finally, the report also stresses that supervision needs to remain flexible and adaptable as this sort of trading activity grows and evolves.