CFTC meets this morning to propose a registration standard applying to as many as 100 firms that have changed markets by trading their own money using complex algorithms and advanced technology. As Bloomberg notes, this proposal follows more than 5 yrs of debate about market disruptions, such as the May 2010 flash crash. Crucially, as is well known now, high-speed, automated trading in recent years has surged to account for almost three-quarters of certain derivatives markets which means any regulatory crackdowns will no doubt have impacts on markets.
As Bloomberg adds,
High-speed and other forms of computer-driven trading have surged in recent years to make up almost three-quarters of trading in some derivatives markets. One top U.S. regulator now wants to catch up.
The Commodity Futures Trading Commission on Tuesday is set to propose a new registration standard that would affect as many as 100 firms that have changed markets by trading their own money through complex algorithms and advanced technology like microwave towers. The rules are designed to help the agency oversee firms that represent a significant amount of trading but so far haven’t had to directly follow key government policies for curbing risk.
The proposals are the biggest step by the CFTC to oversee automated trading. Over the past five years, disruptions such as the May 2010 flash crash and a series of technological failures in equities trading have spurred questions about the resilience of markets and led to a debate over the best way to regulate. The CFTC has already spent two years reviewing industry feedback on just the possibility of new rules.
“It’s time for regulators to have laws and regulations that are commensurate with the realities of trading today,” Bart Chilton, a former commissioner at CFTC who has provided advice to a group of high-frequency traders, said yesterday in an interview. “Clearly some of the rules are antiquated.”
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The agency’s plans being discussed on Tuesday would require automated trading firms to have kill switch policies and technology to cancel trades that could disrupt markets. They would have to submit annual compliance reports about the risk controls and keep records on their algorithmic trading procedures.
The agency’s proposal would also require firms to have a repository for the computer code that makes up their electronic trading systems. That would give the CFTC an easier way to inspect and review algorithms to see what role they played in a market malfunction. That may prove a controversial requirement because trading code contains firms’ secrets and trading strategies.
The CFTC is also moving to require greater transparency around incentive programs exchanges such as CME Group Inc. and Intercontinental Exchange Inc. offer to spur trading in derivatives. The agency said those programs may encourage unnecessary amounts of trading.
A separate part of the proposal seeks to curb how often a high-speed trading firm winds up being on both sides of the same trade, a practice highlighted by regulators in a report on price swings in the Treasury market in October 2014. Exchanges would need to publish quarterly statistics on the amounts of self-trading.
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