Algo surveillance? Any time, as long as it is real-time!

By  Magnus Almqvist, Aquis Technologies

The question no longer is ‘do we need surveillance for algo trading?’ The answer to that is ‘yes’ and was given last year. The issue now is ‘what sort of surveillance is correct?’ And the obvious answer is ‘real-time’. 

Under the Market Abuse Regulation (MAR), which came into force in July 2016, trading firms need effective systems and procedures to detect potential market abuse. The Regulatory Technical Standards (RTS) of MAR[1] allow for proportionality based on the nature of a firm’s business.

Indeed, if your trading volumes are low, or your trading methods are such that your risk based analysis shows very low to no risk of manipulating the markets, you may deem an automated solution generating alerts on a T+1 basis adequate, or even find that a manual process is fit for purpose.

But things are about to get tougher, much tougher. RTS6 in Markets in Financial Instruments Directive II (MiFID II), addresses the “regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading”, which also includes Direct Electronic Access (“DEA”) providers[2]. Given the very broad definition of algorithmic trading[3] a large number of proprietary, buy and sell side firms will be impacted come January 2018.

So what does RTS 6 actually say?

RTS 6 Article 13 “Automated surveillance system to detect market manipulation” can be seen as the exclamation mark after MAR. In effect, it is saying that if you engage in algorithmic trading or are a DEA provider, you must do what MAR is saying using an automated surveillance system.

RTS 6 Article 16 “Real-time monitoring” explicitly states that monitoring of algorithmic and DEA activity for signs of disorderly trading must be done in real time. This monitoring should be done across markets, asset classes or products.

Article 16 also suggests an organisational structure where someone outside the compliance department, someone closer to trading and customer management (but independent enough to challenge) performs this function.

Does this mean that a firm needs an automated surveillance solution for its compliance team, and a real-time monitoring system to be used by some new independent group sitting next to its traders? Is there a smart answer to this?

The good news is that both requirements are underpinned by the same underlying data consisting of orders, changes, cancellations and trades. This means that the same system can be used for both surveillance and monitoring, with users configured within Chinese walls. This will also allow them to collaborate and be part of a joined-up and more efficient workflow then if they were using separate systems.

Regulation will continue to change, and the trend is clear: we are moving towards National Competent Authorities expecting more immediate detection and reporting. Flexibility, speed, configurability per alert and a software vendor who will work with you as regulation evolves, will be paramount to ensure cost efficient and appropriate solutions for the future. Buying a limited functionality low cost solution today will most likely turn out to be expensive long term; if deployed correctly, your systems and staffing costs can be spent where they make a difference. So be smart – buy a real-time surveillance system now to prevent issues later.


[1] Article 3 of delegated regulation 9 March 2106 on appropriate arrangements, systems and procedures


[2] MiFID II, RTS 6 “A DEA provider should comply with the provisions of this Regulation even where it is not engaged in algorithmic trading…”


[3]algorithmic trading’ means 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, and does not include any system that is only used for the purpose of routing orders to one or more trading venues or for the processing of orders involving no determination of any trading parameters or for the confirmation of orders or the post-trade processing of executed transactions;

Magnus Almqvist  can be contacted on  020 3597 6341 for further information.