U.S. CFTC proposes new rules for automated trading
Source: John McCrank
U.S. regulators on Tuesday proposed new rules to limit disruptions in the futures market from high-speed electronic trading by imposing risk controls and safeguards around the use of trading algorithms.
The Commodity Futures Trading Commission voted unanimously in favor of proposing the rules, which would affect trading firms, clearing members and exchanges, and will now be open for a 90-day public comment period.
“I strongly support the proposal,” said CFTC Chairman Timothy Massad. “It contains number of common sense risk controls that I believe recognize the benefits that automated trading has brought to the markets while seeking to protect against the possibility of break down and disruption that can come with it.”
Nearly all trading is electronic and many trading firms use pre-programmed instructions, known as algorithmic trading strategies, to make lightning-fast decisions on which securities to buy and sell, with little to no human intervention. Automation has made trading cheaper and more efficient, but because of the speed at which such systems can trade, glitches can quickly cascade throughout the market.
Around 70 per cent of futures trading is automated and the new rules included requirements that firms have risk controls in place around the development, testing and real-time monitoring of algorithmic trading systems.
Proprietary traders who use automated trading strategies and have direct electronic access to the markets would be required to register with the CFTC to ensure that they are in compliance with pre-trade risk controls, testing and other requirements.
One aspect of the proposal that has already proven controversial would require trading firms to keep records of the source code for their algorithms, which amounts to the “secret sauce” that the firms use to compete with rivals, and make them available to the regulator upon request.
“I don’t think the federal government or regulatory agencies have great deal of credibility with the American public in terms of ability to maintain confidentiality of intellectual property and data,” CFTC Commissioner Christopher Giancarlo cautioned, before voting in favor of the proposal.
Futures exchanges, such as those run by CME Group and Intercontinental Exchange Inc, would need to have limits on order sizes in place, as well as the ability to cancel existing orders, and would be required to monitor their members’ compliance with the new rules.
The CFTC also took measures to limit the practice of self-trading, with a focus on increasing transparency for market-making firms and trader incentives.
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