Coping with European regulatory requirements for automated trading: Best practices and new requirements resulting from regulation

Abstract

Risks resulting from large trade and order volumes made possible by the automation of trading processes have been steadily climbing the agenda of regulators — even before the publication of books capturing the popular imagination. At the same time, it is widely accepted that automation significantly reduces the risk of ‘classical’ mistakes like fat fingers, with regulation increasingly explicitly or implicitly demanding straight-through processing and setting limits for trade-related processing which, without a highly automated trading environment, are not achievable. Nevertheless, even where automated trading is used only in a conservative way, the volume of trades in a volatile market can impact risk management and order facilities. This paper discusses the implications for operational risk management of the requirements introduced by the Markets in Financial Instruments Directive (MiFID) II in Europe for a firm using automated trading to support market-making and risk management across a number of different markets and products.