The Financial Services Authority (FSA) is set to implement software provided by Nasdaq OMX to bolster its market abuse monitoring capabilities.
Nasdaq's software will help the UK financial regulator to review trades conducted by computer algorithms in equities, options, foreign exchange and over-the-counter products from early next year.
The FSA already uses a market abuse monitoring system, which is provided by Zen and implemented last year, but is looking to build a tool that detects "not only market abuse like classic insider dealing, but also for other forms of market abuse, using intelligence-driven alerting," according to a document see by the Financial Times.
Regulators are becoming increasingly concerned that high frequency trading, aided by algorithmic trading, is being used to carry out manipulative tactics beyond insider trading. Such tactics may include flooding the market with large orders that are then rapidly withdrawn, which leaves rivals struggling to cope.
This news follows a working paper that was released by the Government Office for Science last week, entitled 'Economic impact assessments on MiFID II policy measures related to computer trading in financial markets', which proposed that investment firms engaging in algorithmic trading should provide annually to the regulator a description of their algorithmic trading strategies.
Firms should provide details of the trading parameters and limits, the key compliance and risk controls that are in place, and details of how its systems are tested.
It also states that this should lead to the regulator having to invest in new skills and IT to understand how investment firms are using trading algorithms.
The report reads: "Regulators will have to acquire greater technical sophistication to understand and evaluate the algorithms being used in trading, which would improve their ability to investigate abusive practices."
"However, this would require substantial increases in personnel and greater investments in technology."