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Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review

Author

Listed:
  • Culley, Alexander

    (Chartered Fellow of the Chartered Institute of Securities and Investments, UK)

Abstract

Trading floors are evolving. While popular culture still reveres antiheroes, such as Nick Leeson, Jordan Belfort and Gordon Gekko, dealing rooms have been gradually falling silent in our Digital Age. Increasingly intelligent algorithms are supplanting human traders and brokers, replacing emotion with the raw power of calculation. What implications does this have for the behaviour of firms active in the financial markets in the 21st century? How should firms and their regulators adapt to mitigate the conduct risks inherent in fully automated and hybrid business models? This systematic literature review adopts an interdisciplinary approach to examine how far research has answered these questions in the context of the British and European fixed income, commodities and currency (FICC) markets. Widely regarded as one of the ‘final frontiers’ for full automation, the FICC markets are currently characterised by a mixture of traditional (eg voice brokerage), ‘hybrid’ (machine–human) and challenger (eg highly automated trading utilising sponsored access) techniques. Accordingly, they represent fertile ground to: (a) gauge the tension that exists between these methods of trading and (b) test potential solutions to mitigate new forms of conduct risk.

Suggested Citation

  • Culley, Alexander, 2020. "Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review," Journal of Financial Compliance, Henry Stewart Publications, vol. 4(1), pages 34-52, September.
    • Handle: RePEc:aza:jfc000:y:2020:v:4:i:1:p:34-52
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    More about this item

    Keywords

    algorithmic trading; artificial intelligence; conduct risk; highfrequency trading; machine ethics; machine learning;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • K2 - Law and Economics - - Regulation and Business Law

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