Algorithmic and high-frequency trading has been the object of a lot of regulatory activity in the U.S. and Europe as of late, with the more draconian solutions emanating from Brussels. As part of its Mifid review, the EU suggested that firms involved in automated trading should notify their local regulatory authority--the FSA in the U.K.--about the computer algorithms they use, including an explanation of its design and how it is supposed to work.

That has stoked a lot of opposition from a wide array of participants, including the FSA. "No way in a million years will we be able to look through millions of lines of code. I can't really see what regulators are going to do save recruiting a small army of PhDs," one FSA representative said at a trade show recently. He suggested that better testing of the algorithms was the answer.

For the high-frequency community on both sides of the Atlantic, this is a huge issue. The general view from the SEC is that more oversight is warranted, in light of the May 6 Flash Crash.

But there are significant resource issues that must be thought out. Submitting code for approval by the SEC or another authority is likely not going to fly. Most likely, the SEC will leave it up to the industry. Regarding sponsored access, the SEC has moved to require more risk management checks by the sponsoring broker dealer, though the enforcement aspects are a bit unclear. That might satisfy those who think a more direct approach would be more appropriate.

For more:
- here's an article from Finextra

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