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Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review

Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review
Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review
Trading floors are evolving. While popular culture still reveres antiheroes, such as Nick Leeson, Jordan Belfort and Gordon Gekko, dealing rooms have been gradually falling silent in our Digital Age. Increasingly intelligent algorithms are supplanting human traders and brokers, replacing emotion with the raw power of calculation. What implications does this have for the behaviour of firms active in the financial markets in the 21st century? How should firms and their regulators adapt to mitigate the conduct risks inherent in fully automated and hybrid business models? This systematic literature review adopts an interdisciplinary approach to examine how far research has answered these questions in the context of the British and European fixed income, commodities and currency (FICC) markets. Widely regarded as one of the ‘final frontiers’ for full automation, the FICC markets are currently characterised by a mixture of traditional (eg voice brokerage), ‘hybrid’ (machine–human) and challenger (eg highly automated trading utilising sponsored access) techniques. Accordingly, they represent fertile ground to: (a) gauge the tension that exists between these methods of trading and (b) test potential solutions to mitigate new forms of conduct risk.
Regulation, algorithmic trading, High frequency trading, MIFID II
34-52
Culley, Alexander Conrad
2f899523-c2b7-473c-8ab9-3128483e732e
Culley, Alexander Conrad
2f899523-c2b7-473c-8ab9-3128483e732e

Culley, Alexander Conrad (2020) Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review. Journal of Financial Compliance, 4 (1), 34-52.

Record type: Article

Abstract

Trading floors are evolving. While popular culture still reveres antiheroes, such as Nick Leeson, Jordan Belfort and Gordon Gekko, dealing rooms have been gradually falling silent in our Digital Age. Increasingly intelligent algorithms are supplanting human traders and brokers, replacing emotion with the raw power of calculation. What implications does this have for the behaviour of firms active in the financial markets in the 21st century? How should firms and their regulators adapt to mitigate the conduct risks inherent in fully automated and hybrid business models? This systematic literature review adopts an interdisciplinary approach to examine how far research has answered these questions in the context of the British and European fixed income, commodities and currency (FICC) markets. Widely regarded as one of the ‘final frontiers’ for full automation, the FICC markets are currently characterised by a mixture of traditional (eg voice brokerage), ‘hybrid’ (machine–human) and challenger (eg highly automated trading utilising sponsored access) techniques. Accordingly, they represent fertile ground to: (a) gauge the tension that exists between these methods of trading and (b) test potential solutions to mitigate new forms of conduct risk.

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Accepted/In Press date: 13 November 2020
Published date: 2020
Keywords: Regulation, algorithmic trading, High frequency trading, MIFID II

Identifiers

Local EPrints ID: 446838
URI: http://eprints.soton.ac.uk/id/eprint/446838
PURE UUID: 058d5341-1c85-468f-9b33-ddd689db1d88

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Date deposited: 24 Feb 2021 17:30
Last modified: 12 Dec 2021 12:15

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