UNITED KINGDOM Law and Practice Contributed by: James Burnie, Kathryn Dodds, Olga Antonova and Nicky Androsov, gunnercooke llp
7. High-Frequency and Algorithmic Trading 7.1 Creation and Usage Regulations There is no specific regulation of high-frequency and algorithmic trading technologies; however, they can - not be used in a way that breaches the more general requirements that all firms are subject to – for example in relation to securities, they need to comply with the rules on market abuse and market manipulation. Dealing as principal is a regulated activity in the UK requiring FCA authorisation, and such firms need to comply with the FCA’s requirements generally. An area of particular note here is as regards capital require - ments. Firms that deal as principal have a permanent minimum capital requirement of GBP750,000. This reflects the fact that such firms have a higher solvency contagion risk. 7.3 Regulatory Distinction Between Funds and Dealers 7.2 Requirement To Be Licensed or Registered as a Market Maker When Functioning in a Principal Capacity Funds and dealers are subject to very different regu - latory regimes, reflecting the different nature of the activities undertaken. The activities of fund managers involve exercising discretion on behalf of investors, and so there are specific requirements in terms of ensuring that that discretion is properly defined and monitored, for example by fund administrators, cus - todians, accountants, etc. Dealers do not exercise discretion – they simply execute – and the risks here are different. Considera - tions are more limited and focused on matters such as disclosure, best execution and avoiding conflicts of interest. 7.4 Regulation of Programmers and Programming Programmers who develop and create trading algo - rithms and other electronic trading tools are not regu - lated. However, those that use such in connection with undertaking a regulated activity will be regulated, and will therefore have responsibilities in monitoring and
The regulatory challenge has been to ensure that such platforms treat customers fairly, and, for example, do not hold themselves out as having done more due diligence on the products they make available than is actually the case. 6.7 Rules of Payment for Order Flow In relation to securities, whilst not necessarily pro - hibited outright per se, the FCA considers that pay - ment for order flow is generally incompatible with the FCA’s rules on conflicts of interest and inducements, and risks compromising firms’ compliance with best execution. As a result, the general position is that this is effectively not permitted in the UK. There is no prohibition in relation to exchanges for unregulated crypto-assets; however, this may change in the future as new requirements are coming into force in relation to crypto-asset exchanges generally. 6.8 Market Integrity Principles The UK position on market abuse and market integrity in relation to securities generally follows a similar posi - tion to that in the EU, as the Market Abuse Regulation has been onshored to the UK post-Brexit. Preventing, detecting and punishing market abuse is a high prior - ity for the FCA. The FCA has powers and responsibilities for prevent - ing and detecting market abuse, including insider dealing, unlawful disclosure, market manipulation and attempted market manipulation (which are civil offences). Furthermore, insider dealing and market manipulation are also criminal offences. Currently, unregulated crypto-assets fall outside of the UK market abuse and market integrity rules; howev - er, this is going to change in the near future as new requirements are being considered in relation to cryp - to-asset exchanges. It is worth noting that offences such as fraud exist independently of the market abuse rules, and firms should, in any event, be careful as behaviour which may technically fall outside of the market abuse rules on the basis that the assets are not securities may still be considered illegal.
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