1,721,048 research outputs found
Insights into UK investment firms’ efforts to comply with MiFID II RTS 6 that governs the conduct of algorithmic trading
No full textHow effective are the enforcement activities of derivatives exchanges in the digital age? A survey of enforcement notices through the lens of humans
No full textPurpose: the purpose of this paper is to scrutinise the effectiveness of four derivative exchanges’ enforcement efforts since 2007. These exchanges include the Commodity Exchange Inc. and ICE Futures US from the United States and ICE Futures Europe and the London Metal Exchange from the UK.Design/methodology/approach: the paper examines 799 enforcement notices published by four exchanges through a behavioural science lens: HUMANS conceived by Hunt (2023) in Humanizing Rules: Bringing Behavioural Science to Ethics and Compliance.Findings: the paper finds the effectiveness of the exchanges’ enforcement efforts to be a mixed picture as financial markets transition from the digital to artificial intelligence era. Humans remain a key cog in the wheel of market participants’ trading operations, albeit their roles have changed. Despite this, some elements of exchanges’ enforcement regimes have not kept pace with the move from floor to remote trading. However, in other respects, their efforts are or should be, effective, at least in behavioural terms.Research limitations/implications: the paper’s findings are arguably limited to exchanges based in Anglophone jurisdictions. The information published by the exchanges is variable, making “like-for-like” comparisons difficult in some areas.Practical implications: the paper makes several recommendations that, if adopted, could help exchanges to increase the potency of their enforcement programmes.Originality/value: a key aim of the paper is to shift the lens through which the debate concerning the efficacy of exchange-level oversight is conducted. Hitherto, a legal lens has been used, whereas this paper uses a behavioural lens
Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review
No full textTrading floors are evolving. While popular culture still reveres antiheroes, such as Nick Leeson, Jordan Belfort and Gordon Gekko, dealing rooms have been gradually falling silent in our Digital Age. Increasingly intelligent algorithms are supplanting human traders and brokers, replacing emotion with the raw power of calculation. What implications does this have for the behaviour of firms active in the financial markets in the 21st century? How should firms and their regulators adapt to mitigate the conduct risks inherent in fully automated and hybrid business models? This systematic literature review adopts an interdisciplinary approach to examine how far research has answered these questions in the context of the British and European fixed income, commodities and currency (FICC) markets. Widely regarded as one of the ‘final frontiers’ for full automation, the FICC markets are currently characterised by a mixture of traditional (eg voice brokerage), ‘hybrid’ (machine–human) and challenger (eg highly automated trading utilising sponsored access) techniques. Accordingly, they represent fertile ground to: (a) gauge the tension that exists between these methods of trading and (b) test potential solutions to mitigate new forms of conduct risk
Book review: Trading at the speed of light: how ultrafast algorithms are transforming financial markets
No full textDoes the deployment of algorithms combined with direct electronic access increase conduct risk? Evidence from the LME
No full textPurpose– The purpose of this paper is to examine the effectiveness of two regulatory initiatives in developing awareness of conduct risk associated with algorithmic and direct-electronic access (DEA) trading at broker-dealers: the UK Financial Conduct Authority’s algorithmic trading compliance in the wholesale markets and Commission Delegated Regulation 2017/589 (CDR 589) to the second Markets in Financial Instruments Directive. Design/methodology/approach– A qualitative examination of 15 semi-structured interviews with representatives of London Metal Exchangemember firms, theirclients andregulators. Findings– This paper finds that the key conduct related messages in algorithmic trading compliance in the wholesale markets may not yet be fully embedded at broker–dealers. This is because of a perceived simplicity of the algorithms deployed by broker dealers or, alternatively, a lack of reflection on their impact. Conversely, a concern exists that clients’ deployment of algorithms on DEA channels provided by broker–dealers increase conduct risk. However, the threat of harm posed by clients is not envisaged in current definitions of conduct risk. Accordingly, CDR 2017/589 does not currently require firms to evaluate clients’ awareness of it. Research limitations/implications– This study’s findings are limited to the insights provided by 15 participants. Originality/value– This paper contributes to existing research by deepening understanding of conduct risk arising from algorithmic trading and DEA. To account for the potential harm arising from clients’ activities, this paper proposes a revision to Miles’sdefinition of conduct risk. This is complemented by a proposed amendment to CDR 2017/589 to require evaluation of clients’ understanding of conduct risk
The International Convention for the Suppression of the Financing of Terrorism: a legal Tour de force?
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A windfall for counter-terrorist financing or small change: post 9/11 asset freezing and forfeiture under the microscope
No full textThe practical consequences of the transformation of the UK fixed income, currency, and commodity markets (“FICC”) into algorithmic realms for the management of conduct risk
No full textFinancial markets have been transformed into algorithmic realms, which have radically altered humans' role in trading liquid financial instruments. Compliance officers, risk analysts, and developers have become essential stakeholders in a firm’s execution or trading algorithms deployment. Senior managers, usually operating several layers above the front lines, struggle to set a tone for the conduct of business that will resonate. Previously, exchange enforcers largely only had to concern themselves with the behaviour of floor traders. Nowadays, they must detect and deter misbehaviour from a much broader constituency that includes non-member participants worldwide. This thesis employs qualitative research techniques to explore the implications of these shifts for the management of conduct risk. Conduct risk is a relatively new concept in the regulation of financial markets, having emerged as a distinct risk category in the aftermath of the 2007-08 financial crisis. Governments legislated to introduce personal accountability regimes to “hardwire” new expectations to identify and mitigate conduct risk. Nevertheless, the effectiveness of these arrangements is already being tested by digitisation. In 2021, 35 semi-structured interviews were conducted with representatives from (primarily UK-based) investment firms, technology vendors, consulting firms, and regulators. The interview data was supplemented by secondary data from firms’ websites and other sources. This included the analysis of 799 enforcement notices published by four key derivatives exchanges. Key findings from the research include (1) high alignment between firms’ public value statements and their employees’ understanding of conduct risk; (2) low penetration of some priorities on regulators’ agendas; (3) a good understanding of some technical requirements introduced to manage algorithmic conduct risk, counterbalanced by potential fatigue, complacency, cost pressures and concern about the ability to control clients’ deployment of algorithms; and (4) that the effectiveness of exchanges’ enforcement efforts in reducing conduct risk is a mixed picture. Multiple recommendations for practice are made based on the findings. The thesis makes several contributions to knowledge. First, it helps to deepen the understanding of conduct risk in non-bank, non-securities trading environments. Second, it examines for the first time the effectiveness of some aspects of post-crisis regulatory initiatives. Third, the thesis shifts the lens through which the effectiveness of exchange enforcement is scrutinised from a legal to a behavioural one. <br/
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