The London Stock Exchange Group (LSEG) is heavily investing in its market surveillance offerings to help members better monitor market activity and comply with global regulatory regimes. One area the exchange group is targeting is testing sell-side algorithms for regulatory compliance.

The algo-testing tool will be offered as an optional add-on to the LSEG’s Member Market Replay, a platform that allows investment firms to replay and analyze historical trading activity. The first version of the technology is currently being tested internally and it is expected to launch early 2020.

In Europe, investment firms are mandated under Mifid II’s Article 17 to put in place necessary systems and risk controls when engaging in algorithmic trading. Additionally, the regulations require investment firms to carry out an annual self-assessment and validations of their algorithmic trading.

We are exploring ways to simulate trading scenarios using historical data as a reference, with the aim of helping clients meet regulatory obligations.

Ann Neidenbach, LSEG

Ann Neidenbach, global head of LSEG technology and its chief information officer, says there is a growing demand for third-party services that can independently back-test and validate trading algorithms.

The exchange group has dedicated quants who work within its surveillance team to help develop their in-house testing algos and machine learning capabilities, which are designed to monitor and test the behavior of algos under different market conditions. So for the new tool, algos will be tested in simulated market environments to ensure they react appropriately to times of high or low price volatility.

Although the technology is aimed at ensuring sell-side algos don’t create or contribute to a disorderly market, Neidenbach says that some banks and brokers could also use the captured data to derive analysis to meet other requirements, such as best execution responsibilities under Mifid II’s RTS 28.

“We are exploring ways to simulate trading scenarios using historical data as a reference, with the aim of helping clients meet regulatory obligations,” Neidenbach adds.

According to Neidenbach, the idea to build an algo-testing product emerged as a result of conversations with clients. She adds that once the Members Market Replay solution goes to market, the LSEG will continue to develop new functionality and services to fulfil other regulatory requirements.

Team Effort

This is all part of an effort to streamline the exchange’s various solutions that will provide trading participants with a robust set of information services for regulatory compliance. 

“We are looking at different parts of LSEG, such as London Stock Exchange, Turquoise [its multilateral trading facility] and UnaVista [its risk solution provider], to see how we can leverage the combined data to provide customers with more information, either from compliance or trading perspective,” Neidenbach says.

Tying all of this together is the exchange group’s data lake, driven by its Cloud-First program, under which it is moving 60% of its service delivery and corporate computing to the public cloud by 2021.

One of the key next phases to this program will be migrating a large portion of its regtech solutions to the cloud in 2020. While LSEG is already working with Amazon Web Services, it is also in talks with Microsoft Azure and Google Cloud Platform in order to deploy a true multi-cloud strategy.

By the end of this year, the LSEG also aims to have built two landing zones within two of the major cloud providers. The firm is currently working with Amazon Web Services, but is also in talks with Microsoft Azure and Google Cloud so as to incorporate a true multi-cloud strategy.