Hong Kong - Hong Kong's Securities and Futures Commission has proposed guidelines for algorithmic trading and direct market access (DMA), including the annual testing of trading systems.
"We hope that the introduction of the proposed requirements in areas such as testing and risk management will protect the integrity of the market and allow algorithmic trading to continue to play a legitimate role in the execution of orders, " the commission said.
The SFC, in a consultation paper, said algorithmic systems needed to be tested to ensure they did not disrupt markets.
"A licensed or registered person should ensure that the algorithmic trading system as well as trading algorithms are regularly, and no less than annually, reviewed and tested for the algorithmic trading system's ability to handle sizable trading volume and for the trading algorithms' ability to execute orders without interfering with the operation of a fair and orderly market," the SFC said in its paper.
Under the proposals, anyone offering or operating algorithms would be required to provide training for users of the algorithm and have an up-to-date user manual in place. Firms also needed to ensure that algorithms took into account foreseeable extreme market conditions and different types of trading sessions such as auctions.
Regarding DMA, the SFC said firms should conduct due diligence on their clients before providing services. "This process is important as the intermediary bears the ultimate responsibility for the orders sent to the market using its identifier," the SFC said.
Firms would need to make sure that clients were competent in using systems for DMA, that they understood and could comply with regulatory requirements, and that they had arrangements to monitor orders entered through a DMA service.
"As trading becomes an almost instantaneous process without significant human intervention, corresponding effort is required to ensure the integrity of the market and that trading via direct market access or by the use of trading algorithms are conducted in a fair and orderly manner," the SFC said.
The SFC said it considered other regulatory developments elsewhere as well as the market landscape in Hong Kong. It said it sought to strike a balance between facilitating market developments and maintaining Hong Kong's competitiveness on the one hand, and ensuring market integrity and protecting investors on the other.
"It is our hope that the proposals would provide clarity to intermediaries on the standards that they are expected to meet in terms of internal controls and risk management when they engage in electronic trading."
It also said it had informed the market of its concerns regarding algorithmic trading in 2008 and 2010.