23/10/2020 12 Top Tips for Monitoring Algo Trading - Eventus Systems

12 Top Tips for Monitoring Algo Trading

algo trading (https://www.eventussystems.com/tag/algo-trading/), compliance
(https://www.eventussystems.com/tag/compliance/), trade surveillance (https://www.eventussystems.com/tag/trade-
surveillance/)July 17, 2019 | Industry Insight (https://www.eventussystems.com/category/industry-insight/)

In August 2012, the capital markets witnessed a trading catastrophe of monumental proportions
as a new market-making algorithm deployed by Knight Capital Group (KCG) managed to elude
the firm’s core monitoring systems and amass a multi-billion dollar position which ultimately
resulted in over a $440 million loss. KCG was left hobbled and needed to sell to Getco in order to
survive. After a fairly short period of time, the issue of monitoring algo trading seemingly
vanished from the press and market structure landscape. In reality, however, nothing could be
further from the truth. While the likelihood of another KCG-scale meltdown is unlikely (but not
impossible, see Tether (https://www.coindesk.com/tether-accidentally-minted-5-billion-of-its-
stablecoins-then-deleted-them)), the stakes around monitoring algo trading have continued to
rise due to increased usage of algos from all industry participants and a heightened interest from
regulators. 

12 Key Strategies
Clearly, the issue of monitoring algo trading is critically important to trading and clearing firms
as well as exchanges. Here are 12 key strategies to consider when addressing the need for the
monitoring of algo trading:

Reconciling core data streams

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You can’t monitor what you don’t know.  Employ a real-time reconciliation engine that can
match multiple streams of data so if one system isn’t picking up something, the recon process
will generate an alert.

Breaking down the functional silos

Algo monitoring is not just analyzing order and cancel rates, it requires a comprehensive view of
trading, surveillance and compliance in a single platform. This is critical to get a complete and
accurate picture of activity.

Meeting the minimum is not enough

Most regulators require annual testing and attestation, but meeting the minimum would be
foolhardy at best. Even a program that relies on semi-annual or quarterly testing would be
courting trouble. Just like the markets, your algo monitoring needs to be a living, breathing
process.

Going old school to handle the new school

New technologies like AI and ML are fast and comprehensive, and they bring all new levels of
capabilities, but their inner workings are often a black box; it’s not immediately apparent what
they’re doing and why. For this reason, it is all the more important that “old school” functions
like manual clearance of alerts and inspection of outputs be an active part of a surveillance
regime.

Minding your WSPs

Written supervisory procedures (WSPs) are the foundation for an effective algo monitoring
regime. Care should be taken to involve all functional areas of the business including IT,
operations, legal and compliance in crafting WSPs with a particular emphasis on ensuring that
all relevant regulatory requirements are being met.

Backing them up with SCPs

WSPs aren’t worth the paper they are printed on if they are not backed up with robust
Supervisory Control Procedures (SCPs) that are actively employed.

Needing to be real-time
Algos can put a lot of information into the market quickly. If you are not monitoring in real-time,
you have the potential for losses in real-time.

Looking back
At the same time, a system must be able to replay and review past activity. In many, if not most,
cases there are warning signs of adverse activity from algos prior to a meltdown or big event,
and keeping a keen eye on day-to-day activity can prevent a small problem from becoming a big
one.

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Monitoring must be comprehensive

Records must be thorough and complete, taking care to include all order types and special
instructions that may have an impact on investigations.

Integrating the whole ecosystem

It’s important to have a view of the full lifecycle of activity from internal systems, ISVs, EMSs,
exchanges and other execution venues. Important metrics to monitor include excessive order
entry, aberrant quote patterns, trading outside of normal hours, and crossed or self-matched
trading, 

Finding data when you need it

In all cases, regulation requires that data be held for an appreciable amount of time, sometimes
years. In any case, the data needs to be in a format that allows for fast and flexible retrieval and
analysis.

Reporting functionality
The system should have a fulsome repository of standard reports as well as the capability to
custom-craft reports both quickly and efficiently.

The need for monitoring algo trading

As the recent example with Tether (https://finance.yahoo.com/news/tether-accidentally-minted-
5-billion-134234477.html) as well as continuing regulatory actions
(https://www.nasdaqtrader.com/content/marketregulation/NASDAQ/DisciplinaryActions/Virt_NQ_
demonstrate, the need for active and rigorous monitoring algo trading is very much alive. The
specifics surrounding algo monitoring are getting more complex as usage increases and
regulators continue to add to the obligations and rules that market participants must follow. The
issues and challenges are complex, but a partnership with an experienced software provider can
pay incalculable benefits in both peace of mind and protecting your bottom line. 

Eventus Systems, Inc. offers one of the leading global trade surveillance and market risk
platforms, including algo monitoring.  Available as a cloud-based or real-time enterprise on-
premise solution, the Validus platform provides sophisticated market surveillance and financial
risk capabilities, enabling clients to solve some of the most pressing regulatory challenges.
Eventus won Market Surveillance Product of the Year in the global Risk Technology Awards 2019.
For more information, contact us at info@eventussytems.com
(mailto:info@eventussytems.com). 

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