Traditional risk controls and safeguards that relied on human judgment are not appropriate for automated trading and this has caused issues such as the 2010 Flash Crash.
[8] A distributed processing on-line automated trading system uses structured messages to represent each stage in the negotiation between a market maker (quoter) and a potential buyer or seller (requestor).
Trend following gained popularity among speculators, though remains reliant on manual human judgment to configure trading rules and entry/exit conditions.
[13][14] The concept of automated trading system was first introduced by Richard Donchian in 1949 when he used a set of rules to buy and sell the funds.
Due to the absence of advanced technology at the time, Donchian's staff was obligated to perform manual market charting and assess the suitability of executing rule-based trades.
Although this laborious procedure was susceptible to human error, it established the foundation for the subsequent development of transacting financial assets.
[16] Then, in the 1980s, the concept of rule based trading (trend following) became more popular when famous traders like John Henry began to use such strategies.
[17] Later, Justin-Niall Swart employed a Donchian channel-based trend-following trading method for portfolio optimization in his South African futures market analysis.
[18] The early form of an Automated Trading System, composed of software based on algorithms, that have historically been used by financial managers and brokers.
Since 2010, numerous online brokers have incorporated copy trading into their internet platforms, such as eToro, ZuluTrade, Ayondo, and Tradeo.
[28] United States regulators have published releases[29][30] discussing several types of risk controls that could be used to limit the extent of such disruptions, including financial and regulatory controls to prevent the entry of erroneous orders as a result of computer malfunction or human error, the breaching of various regulatory requirements, and exceeding a credit or capital limit.
The use of high-frequency trading (HFT) strategies has grown substantially over the past several years and drives a significant portion of activity on U.S. markets.
Given the scale of the potential impact that these practices may have, the surveillance of abusive algorithms remains a high priority for regulators.
In this regard, FINRA reminds firms of their surveillance and control obligations under the SEC's Market Access Rule and Notice to Members 04-66,[31] as well as potential issues related to treating such accounts as customer accounts, anti-money laundering, and margin levels as highlighted in Regulatory Notice 10-18 [32] and the SEC's Office of Compliance Inspections and Examination's National Exam Risk Alert dated September 29, 2011.
Firms will be required to address whether they conduct separate, independent, and robust pre-implementation testing of algorithms and trading systems.
FINRA will review whether a firm actively monitors and reviews algorithms and trading systems once they are placed into production systems and after they have been modified, including procedures and controls used to detect potential trading abuses such as wash sales, marking, layering, and momentum ignition strategies.
Finally, firms will need to describe their approach to firm-wide disconnect or "kill" switches, as well as procedures for responding to catastrophic system malfunctions.