Algo Trading Controls and Governance


Deliberations of the Armstrong Wolfe 2022 Algo Trading Risk and Governance Working Group

This report, written by GreySpark Partners, summarises the deliberations of 28 global heads of controls, risk and governance during three 2022 Algo Trading Risk and Governance Working Group forums. The Working Group and associated forums were created and chaired by Armstrong Wolfe, a global advisory firm for Chief Operating Officers in financial markets, investment banking and asset management.

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Algorithmic trading has been on the rise since the early 2000s and now accounts for roughly 70% of orders in some markets. This growth is due to technological advancements, such as improved computing power, lower storage costs, and the integration of AI and machine learning. In the capital markets sector, cost considerations, competitiveness, regulatory obligations and profitability are key incentives to trade using algorithms.

Algorithmic trading, however, entails risks stemming from potential failures of algorithms, IT systems and processes. In recent years, several major algorithmic trading failures have resulted in substantial losses, fines and reputational damage for investment firms.

Published on: 10 Feb, 2023

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  • Chapter 1: Trends in Algorithmic Trading
  • Chapter 2: Regulatory Stance on 3LoD
    • 2.1 Regulatory View on 3LoD Model
    • 2.2 Staffing the First and Second Line of Defence
    • 2.3 The Value of Control Work
    • 2.3 A Holistic Future for 3LoD and Data-driven Risk Management
  • Chapter 3: Controls and the Risk & Controls Self-Assessment
    • 3.1 Comprehensive and Risk-Based RCSAs
    • 3.2 The Cost / Benefit Paradigm of the RCSA
    • 3.3 The Road to a ‘Smart’ Comprehensive RCSA
    • 3.4 Finding Value in the RCSA
  • Chapter 4: Governance Models for Algorithm Development and Testing
    • 4.1 Differentiation in Algorithms Development and Testing
    • 4.2 Models of Deployment for Algorithm Development and Testing
    • 4.3 Centralised and Decentralised Algorithm Development and Testing
    • 4.4 The Future of Algorithm Development and Testing
  • Chapter 5: The Algorithmic Trading Outlook for 2023
    • 5.1 Transparency & Clear Division of Roles Between First, Second and Third Lines
    • 5.2 Train from Within versus Acquire Outside Talent
    • 5.3 The Value of Risk Controls
    • 5.4 Horizon Scanning