Are you ready for the HK SFC’s new electronic trading requirements?
|Purpose:Hong Kong’s regulator the SFC is changing the it polices with respect to intermediaries managing and mitigating risks that arise from trading in an automated environment. Inline with IOSCO’s (International Organization of Securities Commissions) direct electronic access paper it puts the burden of electronic trading mishaps squarely on the shoulders of the intermediary and requires them to have ensured algorithm users are adequately trained and qualified to use them. It further goes on to ensure trading software has been properly tested even though the intermediary may be using a third party vendor.
These rules are expected to go into force 1 January, 2013 so we asked ‘Are you ready for the HK SFC new electronic trading requirements?’
Hong Kong’s regulator, the Securities & Futures Commission (SFC) has recently asked the industry to ensure that algorithms used for trading are properly checked and tested before being deployed and that the end user is qualified to use the algos in the manner in which they were intended. The regulations do not specifically spell out the nature of compliance leaving room for interpretation. The buy-side is believed to be reducing its broker panel given the burden of compliance across several brokers which they customarily do business with. The intention of the regulator is to pre-empt any market disruptions caused by ‘algos gone wild’ which is commendable but complying is no small feat. We, therefore, wanted to get a sense of whether or not Hong Kong’s electronic trading industry was ready for the SFC’s new rules.
The results were surprising, with nearly one third saying that they did not think they would be ready. It is not clear what the penalties will be for non-compliance but this group could be in trouble and subject to reputation risk if an event occurs however small it may be. The 21.95% that said they weren’t aware of the new requirements may also be leaving themselves exposed. Only 12.5% of all respondents said they were absolutely prepared for the new algo policy and 26.83% believed they would be prepared by the deadline. That suggests just under 40% of the industry is ready to comply with the new regulations.
The regulator originally announced in March 2013 that it intended to bring about these rules to be enforced in the New Year but by our measure, not everyone is either ready or taking the rules seriously. The ability of the rules to prevent negative market events remains to be seen. Technology is not infallible and it is inevitable that eventually there will be a market event caused by an errant algo but because the rules are not determinative the regulator will have to make a judgment as to whether the offending technology provider did in fact comply or attempt to comply. Despite significant time and energy invested to ensure compliance in many firms, we still expect the regulator to hand out a fine and a public reprimand.