The UK’s Financial Conduct Authority (FCA) has contacted principal trading firms (PTFs) over the risks brought about by technologies such as algos and AI, and the need for these firms to shore up both their financial and operational resilience in response – with a March 2025 deadline.
The letter, sent on 4 August, outlines the regulator’s strategy for supervising PTFs:, detailing what the FCA considers to be the most important risks arising from PTFs, what it thinks drives those risks and where it will be focusing its energies over the next two years.
Because PTFs are often at the cutting edge of technological developments in financial markets and act as market makers, the FCA said they play a key role in ensuring the smooth functioning of financial markets.
“When operating at their best, the automated technology of firms trading algorithmically can bring significant benefits to investors, including increased execution speed and reduced costs.”
Additionally, trading firms operating Systematic Internalisers (SIs) provide competition to trading venues and may drive better pricing and reduced costs that help their clients achieve best execution.
Speaking to Best Execution, Nick Wallis, managing Director, EMEA and APAC, Eventus, said: “It’s clear that the FCA has had concerns regarding principal trading firms for some time. With the continued development of AI and growth in algorithmic trading, there is a natural focus on governance as regulators look to avoid dysfunctional markets and ensure proper supervision.”
The regulator outlined how the portfolio and the financial markets in which PTFs operate have been impacted by external events in recent years, including the UK’s withdrawal from the European Union, the Russian invasion of Ukraine, the lingering effects of COVID 19, cyber-attacks and the notable collapse of a number of firms.
Given the firms’ relative importance, these uncertainties, coupled with the firms’ reliance on technology, particularly algorithms and AI, means that an incident at a larger firm has the potential to cause harm to wider markets, and therefore these firms must ensure they are operationally resilient, including having effective cyber-security measures in place – a precaution highlighted by last year’s cyber-attack on ION’s Fidessa system, which resulted in material downtime and loss of data.
“Senior management are ultimately responsible and accountable for their firms’ activities, including the outcomes arising from the use of automated systems or models.
“We expect firms to devote appropriate resources to maintaining effective oversight functions and controls aimed at reducing the impact of any trading incidents on the orderly functioning of the markets they operate in, including where firms deploy AI systems,” the FCA added.
On the buck stopping with senior managers, Eventus’ Wallis added: “The reiteration that senior managers are ’ultimately responsible’ sends a strong message that firms need to review their systems and controls – backed up by the expectation that actions will have been agreed by the end of September 2023. The FCA is not simply making a recommendation! Often such notes are followed by a spate of public fines to hammer home the message. Let’s see”.
The FCA conducted a review in 2018 which found weaknesses in some firms’ governance and oversight frameworks, and compliance and risks monitoring related to algorithmic trading controls. “We will conduct follow-up work in this area. This will involve a multi-firm review of firms’ compliance with MiFID RTS 62 requirements governing algorithmic trading controls. We will also review selected elements of the MiFID RTS 73 requirements on trading venues. Where material weaknesses and non-compliance are identified, we will act to ensure risks are mitigated.”
PTFs must also ensure they are financially resilient so as not to cause harm to the wider UK financial ecosystem if they were to collapse, including having robust plans in place to meet potential demands on both capital and liquidity.
“We will undertake targeted reviews of firms’ capital and liquidity now that the new Investment Firm Prudential Regime (IFPR) has been introduced.”
Operational resilience was also highlighted, as the potential for harm is increased by the complexity of the systems and processes supporting firms’ trading activities.
“We expect firms that are in scope of our Operational Resilience policy statement to consider how they will embed the requirements and ensure they operate within their impact tolerances as soon as reasonably practicable, but no later than 31 March 2025,” the regulator said.
“Firms not formally in scope for these rules should also consider them as good practice. We will review in-scope firms’ implementation plans and expect firms to be able to demonstrate that their approach integrates broader resilience requirements into a coherent overall framework.”
©Markets Media Europe 2023
