Aligning FX algo trading activities with the principles of the FX Global Code

June 2023 in Previous Features

Two years after its introduction in 2017 the FX Global Code (FXGC) is a defining ideal of the FX market, with significant sell-side and more recent buy-side adoption. The FXGC principles are not a regulatory requirement but foster best global practices to avoid market abuse. Additionally, each regulator also has its own standards for monitoring algo and human trading activity.

Many financial institutions are subject to multiple regulatory jurisdictions. Furthermore, the Senior Managers and Certification Regime (SM&CR) increases personal responsibility. All of these factors have increased investment in trade surveillance technology, and that trend will continue. Surveillance services must evolve with changing regulations while providing essential standardization of definitions.


Global financial regulators are focusing on market abuse violations, imposing heavy fines. The FCA imposed fines of £390 million in 2019, compared to £61 million in 2018. In addition to the FXGC, many banks are also subject to the EU’s Market Abuse Regulation (MAR), which took effect in July 2016. To comply with MAR, financial firms must surveil not only executed trades for market abuse but also orders that did not result in a fill.


Monitoring is the process of evidencing that trading system behaviour aligns with the FXGC, global regulations, and internal risk controls. Monitoring is an essential element of an overall algo governance framework, providing ongoing practical evidence to complement the rigorous documentation by Model Risk groups. Innovation in algorithmic trading increased the amount of data available for analysis, which often originates from a variety of technical systems. Modern surveillance tools must now join these large data sets, which can be a technical hurdle. Additionally, algo experts are essential for analyzing the nuances of high-frequency trading microstructure. It is also important to get the most complete picture of trading activity globally. That means monitoring the activity of both trading algos AND human traders.

What to Monitor

At a minimum, financial firms should highlight potential market abuse issues like last look, spoofing, flashing, layering, order violations, limit breaches, and P&L flags.
At Ideal Prediction, ongoing monitoring additionally includes:

  • FX Pre-Hedging
  • FX Last Look Behavior
  • Market Disruption, e.g., Spoofing, Layering, Flashing
  • Order and Trade Data Quality
  • Performance, e.g., Market Impact, TCA

Understanding Algos

Large banks have a 24/5.5 eFX desk that is typically run by a team of 10 front office traders and quant developers. These experts have graduate degrees in science and engineering from the best schools, and they work hard to compete in a world measured in dollars per million and microseconds. These experts have the domain knowledge to evaluate their systems. And they do. That said, what if they make a mistake? Or given the team’s small size and focus on competing for profit, are they checking for small issues on an ongoing basis that might balloon to larger problems? Also, any potential conflict of interest introduces system risk.  Because algos are designed to execute quickly, risk groups are concerned that without ongoing monitoring, some trading activity could breach FXGC principles without being detected.

Evolving Regulations

Financial firms often find themselves under the jurisdiction of multiple evolving rule books. Keeping up with multiple regulatory bodies can be a challenge, as the FXGC and global regulations are constantly evolving. As an example, the FXGC principle relating to last look has already been refined, and as recently as October this year it was reported that ESMA is contemplating bringing FX Spot into scope for its market abuse rules.  Algos need to evolve to reflect these regulatory changes. However, with millions of lines of code it is sometimes difficult to identify practices that were acceptable when an algo was developed but may now be considered less so. Additionally, surveillance systems must be equally nimble if they are to provide long term value.

Industry Standards

The FXGC and regulators provide guidance for financial firms, but there is still the need to establish common industry standards. While people in the FX industry generally understand terms like spoofing, flashing, and layering, there are no global standard definitions. For the FX industry to evidence compliance to the regulators, risk groups utilize independent monitoring services to analyze their current activity and then evolve as guidance and regulations expand.
Watch this space.