Key High Frequency Algorithmic Trading Controls

Disruptive trends like High-Frequency Algorithmic Trading (HFAT) are transforming financial services. So it's important to know what controls you need.

Key takeaways

• Determine if you qualify as HFAT: Ensure your trading strategy meets regulatory definitions, especially under MiFID II.
• Register and comply: HFAT firms must follow RTS 6, disclosing algorithms, stress tests, and monitoring processes.
• Clarify internal terminology: Have consistent definitions of “algorithm” and “algo-trading” to ensure proper governance.
• Synchronise system clocks: Accurate timestamps across servers and networks are critical for regulatory compliance.
• Maintain detailed records: Keep comprehensive, time-sequenced logs of algorithms and trades for current and future compliance.
• Balance benefits vs. risk: HFAT boosts liquidity and execution speed but requires strong controls to prevent market disruption.

What are the benefits of HFAT?

Many firms, including Goldman Sachs, have expanded their own algorithmic trading programmes to take advantage of the numerous benefits.

• Creating greater liquidity
• Increased volumes
• Reduced short-term volatility
• Narrower spreads
• Lower costs for investors
• Better price formation
• Faster execution of orders

But there are also considerable risks that can potentially cause widespread and significant market distortion and create a disorderly market.

Algorithmic trading will continue to face more scrutiny as new obligations appear like within MiFID II. This isn't anything new - Germany's High-Frequency Trading Act was introduced in 2013 - but critics are sceptical about whether the measures will do anything to combat market abuse and question whether the time invested in data collection could be better spent.

What are five essential HFAT controls?

1. Check the HFAT definition

Until recently, there was no clear definition of HFAT, and still, there's some dispute about whether the MiFID II definition is too broad.

Check whether you fall under the definition of HFT:

"trading in financial instruments where a computer algorithm automatically determines individual parameters of orders, such as whether to initiate the order, the timing, price or quantity of the order, or how to manage the order after its submission, with limited or no human intervention."

2. Registration

Firms engaging in HFT must be formally registered and meet Regulatory Technical Standard 6 (RTS 6) requirements, demonstrating where software is purchased from, how it is developed, audited and stress-tested, how trades are monitored, and the mechanisms for triggering alerts.

3. Clarify terminology

Get broad consensus across the firm about what constitutes an algorithm, algo-trader and algo-trading. For example, would you class a simulated stop order as algorithmic trading? This will ensure consistent application of the rules.

4. Clock synchronisation

(RTS 25) - is this technically possible? How can you overcome practical challenges? What management oversight is there over the time distribution chain? Are there systems in place to ensure a rapid response if problems are experienced? What checks can be carried out to ensure that everything is set up correctly? What sorts of events might cause time lags - e.g. maintenance or failed network switches - and how can you mitigate this? How can errors be detected? How can you ensure accuracy between data centres and servers running trading platforms?

5. Check capability for record-keeping

Are you currently able to keep detailed time-sequenced records of all algorithms? What capabilities will you need in future?

HFAT FAQs

What counts as High-Frequency Algorithmic Trading (HFAT)?

HFAT typically involves algorithms that automatically determine trading parameters (timing, price, quantity) with minimal human intervention. Regulators may classify strategies differently, so firms must confirm their status under frameworks like MiFID II.

Do all algorithmic traders need to register?

Not all, but firms engaging in HFAT must register with regulators and comply with RTS 6, which governs algorithmic trading systems, monitoring, and risk controls.

What regulatory controls are required for HFAT?

Key controls include:

• Algorithm testing and approval
• Trade monitoring and alert systems
• Detailed, time-sequenced record-keeping
• Accurate clock synchronisation across infrastructure

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