Financial regulators are urging firms to implement policies and controls to prevent their automated trading (AT) strategies from disrupting the markets. To wit: the CFTC recently proposed risk controls and other restrictions for certain market participants that use algorithmic trading systems. European firms will soon be subjected to similar restrictions for their algorithmic trading systems in all markets covered by MiFID II, including the equities markets. FINRA and several industry organizations have begun to fill in the gaps on the U.S. equities side by issuing detailed guidance covering everything from pre-trade controls to system documentation procedures. Consequently, all firms that use AT strategies must begin establishing policies and controls to mitigate risks associated with those strategies. In this two-part guest series, Douglas A. Rappaport, Patrick M. Mott and Elizabeth C. Rosen of Akin Gump outline five high-level first steps for legal and compliance professionals to jumpstart the process of designing and implementing a control framework tailored to a hedge fund manager’s particular AT program that will stand up to regulatory scrutiny. This article will cover the first two steps, including conducting a risk assessment of and documenting the AT system. The second article will explore the remaining steps, addressing protocols for monitoring and reviewing trading activity, code and disclosures. For additional insight from Rappaport, see “How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China?” (Mar. 28, 2013). For insight from other Akin Gump partners, se
e “Non-E.U. Hedge Fund Managers May Not Be Required to Comply With AIFMD’s Capital and Insurance Requirements
” (Jul. 9, 2015); and “Structuring Private Funds to Profit From the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options
” (Mar. 19, 2015).