The week: SGX RegCo puts out algo trading guide as volume surges amid Covid-19
The Covid-19 pandemic may have roiled the Singapore stock market over much of this year, but many traders took advantage of the volatility. This led to a surge in algorithmic (algo) trading, which is a method of executing orders in the market using pre-programmed trading instructions.
While algo trading allows investors to employ certain trading strategies that cannot be executed easily through conventional means, the risk of incurring losses is higher if the market moves against them or adequate controls are not put in place.
In a recent interview, Singapore Exchange Regulation (SGX RegCo) CEO Tan Boon Gin says none of the brokers who implemented algo trading have suffered any significant losses during the period. There were also no cases of nefarious trading manipulation. This, he adds, is the result of robust internal controls put in place by many brokers.
The surge in algo trading and SGX RegCo’s increased monitoring have inspired the regulator to put together a comprehensive rule book. “This will give members some indication of what the best practices are out there and how they can improve,” Tan tells The Edge Singapore.
According to the guide, there are many kinds of algo trading strategies employed in the local stock market. These can be broadly classified into three different categories — namely benchmark, participation rate and liquidity seeking. In Singapore, the benchmark or scheduled-typed algorithms are the most popular types of trading strategies used, says Tan.
The guide states that brokers who employ algo trading should have proper governance and appropriate management oversights. This is to ensure that their trading framework is effectively deployed and maintained.
For one, brokers should have clear policies and procedures around all aspects of algo trading. These include the development, testing, and deployment of algorithms, as well as minimum standards on the monitoring, controls, and review process of the algo strategies. If third-party developed algorithms are utilised, brokers should ensure that all orders and trades executed by these algorithms are subject to the same level of scrutiny and controls as those performed on in-house developed algorithms.
Secondly, brokers should put in place relevant management committees comprising individuals of appropriate seniority and experience. These management committees should be responsible for the firm’s algo trading framework and for reviewing key trends. They should also ensure that any new algo trading strategies do not cause market disorderliness or disruption. Brokers are also recommended to have in place clearly defined escalation channels from the frontline or working level staff to their supervisors and the appropriate management committees. This is to ensure that any potential issues can be promptly escalated to persons with the relevant authority.
If such potential issues are judged by the management committees to cause market disorderliness or disruption in the market, they should notify SGX as soon as practicable, says Tan. This is so that all parties can work to minimise any potential market impact.
That aside, brokers should also maintain records of all relevant aspects of algo trading. These may include the policies and procedures, inventories of algo trading strategies and controls and management committee meeting records and grounds of decisions of management actions. Records of periodic reviews, as well as supporting documentation related to the development, testing and deployment of algorithms, may also be required to be kept.
Finally, brokers should provide adequate training for relevant staff. This is to ensure that they are equipped with sufficient technical knowledge and expertise, and are kept abreast of developments in this space. Relevant staff may include management, compliance, risk management and algorithm developers and traders.