Global securities regulators have published recommendations to help local regulators deal with the challenges posed by technological developments in the trading business, including algorithmic trading and high frequency trading.
The International Organization of Securities Commissions’ Technical Committee, which is its key policymaking body, has published its final report on regulatory issues raised by technological innovation. The report examines the most significant technological developments in recent years and their impact on market integrity and efficiency; and, it sets out recommendations to help regulators in mitigating these effects and the risks posed to the financial system.
The recommendations set out high level guidance to address issues in two specific areas: trading venue operators and trading participants. They include recommendations that: regulators should require that trading venues to provide fair, transparent and non-discriminatory access to their markets and to associated products and services; regulators should seek to ensure that trading venues have suitable controls (such as trading halts) to deal with volatile market conditions; and that the order flow of trading participants must be subject to appropriate controls, including automated pre-trade controls.
It also says that regulators should continue to assess the impact of these sorts of technological advances on market integrity and efficiency, and that they should ensure that suitable measures are taken to mitigate any risks that emerge, including risks to price formation or to the resiliency and stability of markets. Finally, it says that authorities should also monitor for novel forms of market abuse that may arise, and they should review their arrangements (including cross-border information sharing arrangements) and capabilities for continuously monitoring trading.
Masamichi Kono, chairman of the Technical Committee, said, “Markets are evolving rapidly and it is important for regulators not only to monitor developments in technology and market structure, but also to continue to assess the impact of these changes on market integrity and efficiency and to address any risks identified.”
He added that implementation of these recommendations will help regulators in identifying the impact developments such as high frequency and algorithmic trading have on the markets they oversee, will promote a globally consistent approach by regulators in addressing these issues, and contribute to regulators’ ability to mitigate the risks that these activities may pose to the integrity and efficiency of global capital markets.
The recommendations were developed in response to a request from the G20, and Kono noted that the G20 finance ministers and governors have asked for further work by IOSCO by mid-2012 on the subject. “IOSCO will focus upon such issues as development of recommendations for market surveillance and an analysis of the evolving new market structure in its next stage of work,” he said.
Specifically, IOSCO said its future work will assess the new challenges that technological changes pose for regulators in their market surveillance, which include: the fragmentation of markets; the dispersal of trading information; the increased speed of trading; and the ability to gather and process the increased volume of trading data. It will consider the feasibility of regulators having additional tools to deal with the challenges arising from market surveillance, including an additional audit trail or surveillance data consisting of all orders and trades by market participants in a given instrument; a single reporting point for all orders and for all transactions, by jurisdiction or geographical zone and across asset classes; and, unique legal entity identifiers.
It also plans to analyze the evolving markets’ structure, in order to assess how such structural developments may affect market efficiency and integrity; and to consider whether recommendations may be needed to address any risks. IOSCO will provide an update on the progress of this work in mid-2012.