Regulators are increasingly concerned about the potential for sudden selling sprees by rogue computer programs. Picture / 123RF
Regulators are increasingly concerned about the potential for sudden selling sprees by rogue computer programs. Picture / 123RF
Robot traders blamed for wreaking havoc on financial markets are being targeted in a crackdown by the Bank of England.
Regulators are increasingly concerned about the potential for sudden selling sprees by rogue computer programs which cannot be switched off, the Daily Mail reports.
The clampdown comes after markets around the world suffered days of chaotic swings, with much of the turmoil blamed on algorithms that trade on fear and which were triggered by concerns about rising inflation and higher interest rates.
The robot traders – now responsible for more than half the market by some estimates – ditched millions of shares automatically. A total of £1.5 trillion ($2.9t) was wiped off the S&P 500 index in the US, the Dow Jones suffered the two biggest points falls in its history and the FTSE 100 slipped to its lowest level since December 2016.
Funds which track volatility are now thought to manage as much as £1 trillion, with industry insiders fearful they have created a monster.
The Bank's Prudential Regulation Authority, which is responsible for policing major financial risks, yesterday said it will introduce a new code to govern robot trading. It will require algorithms to be carefully tested before they are let loose on the market, managers must take responsibility for what goes on and there must be proper controls in place to prevent dangerous bets.
The PRA said: "Algorithmic trading can occur at rapid speeds, which means that existing risks could be amplified.
"It is crucial that appropriate governance and risk management arrangements are in place."
The Financial Conduct Authority also revealed its own expectations of how firms which run robot traders should behave.
It said all companies must have a "kill functionality" to stop programs trading immediately if they get out of control.
This isn't going to mean the robots go back in their box, but rather seeks to ensure the humans in charge maintain control.
The watchdog raised concerns about how new algorithms are signed off for use, saying there must be proper checks before they are unleashed. Proper records must be kept and senior staff must understand how robot trading works, the watchdog added.
Laith Khalaf of trading firm Hargreaves Lansdown said: "It's reassuring to see financial regulators taking action. This isn't going to mean the robots go back in their box, but rather seeks to ensure the humans in charge maintain control."
The US market meltdown is thought to have been tightly tied to trades based on volatility.
A host of funds have sprung up that use the Vix index – Wall Street's fear gauge – that tracks the likelihood of price swings.
When the correction hit home last week, many investors were wiped out and a £1.3b fund run by Credit Suisse even closed its doors permanently. Researchers have warned that more than £1 trillion is in Vix-linked funds, and further wild swings could trigger an uncontrolled series of defaults with the potential to shock markets around the world.
Sandy Rattray, who was one of the first people to crack volatility trading when at Goldman Sachs and is now chief investment officer at hedge fund Man Group, called them "terrible products that serve no real purpose".
The firms responsible are estimated to have sold £72b of shares in the past few days, driving markets down further.
Markets rallied strongly yesterday, with the FTSE 100 up 84.63 points at 7177.06 and the Dow up 410.37 points, at 24,601.27.
