A Central Bank review had found that some firms under its remit have failed to show evidence of effective oversight of controls and practices related to algorithmic trading.
The Central Bank said this included minimal board involvement, both in setting or challenging key controls, and in the oversight of the development of trading algorithms.
This resulted in a lack of regular reporting to the Board and an absence of formalised governance documentation, it stated.
The Central Bank said that algorithmic trading can give rise to significant risks stemming from potential failures of algorithms, IT systems and related processes.
In recent years, a number of significant algorithmic trading failures have resulted in substantial losses, fines and reputational damage for firms globally.
It said that firms undertaking algorithmic trading must comply with specific regulatory requirements. A framework was introduced in 2018 and is key to protecting investors and aims to make the financial market resilient and transparent.
The Central Bank has today written to the chief executives of firms undertaking algorithmic trading following its thematic review.
The review assessed how firms have complied with risk management and control framework requirements as required by regulatory technical standards for investment firms.
It found that significant disparities existed between firms with respect to the level of detail within documentation on development, testing and deployment processes.
The review also identified weaknesses around annual self-assessments and a lack of clarity with regard to the third line of defence and the role of Internal Audit.
Mary-Elizabeth McMunn, Director of Credit Institutions Supervision at the Central Bank, said that some of the findings of its review do not align with its expectations, given the nature, scale and complexity of firms within its scope.
"We expect all firms to ensure risk management and control frameworks in respect of algorithmic trading are appropriately embedded and are operating to a high standard," Ms McMunn said.
"The regulations provide a framework to mitigate these, and other risks, through the requirement to maintain effective systems, procedures, arrangements and controls," she added.
The central banker said, however, that the review did note many positive practices.
These included the presence of experienced, competent professionals across the first and second lines of defence, supported by a comprehensive suite of controls in terms of monitoring, development, testing and deployment of trading algorithms.
"But continued vigilance is necessary to ensure the risk management frameworks and implementation are to a high standard," she added.
The Central Bank said it will continue to drive higher standards of governance and oversight of the use of technology in financial services firms.
"We will continue to assess whether firms have taken sufficient steps to reduce risks arising from algorithmic trading through our ongoing intrusive supervisory work," Mary-Elizabeth McMunn added.
