CFTC's Proposed Algo Trading Rules Need a Few Tweaks
By Tom Lehrkinder, TABB Group
Originally published on TABB Forum
Although Reg AT would go a long way in providing a layer of regulatory oversight on a technology-dependent market, it includes a number of provisions that will need to be tweaked to accommodate the realities of trading in US futures markets. The good news is that CFTC Commissioners Sharon Bowen and Christopher Giancarlo both appear willing to work with market participants to update the proposal as appropriate.
The Commodity Futures Trading Commission’s (CFTC) new proposal, Regulation Automated Trading, also referred to as “Regulation AT” or “Reg AT,” is the regulator’s latest effort to address the perceived lack of transparency, risk controls, registrations, and other safeguards around algorithmic order origination and electronic trade execution in US futures markets. The initiative is intended to target challenges associated with the growing dependence on technology in US futures trading, with an eye to market disruptions occurring due to technology run amok.
At the heart of the proposed regulation are safeguards that mandate adequate risk controls, transparency measures, and other requirements to help ensure that market participants using algorithmic trading systems do not disrupt the otherwise normal course of orderly trading. The CFTC commissioners have argued that many of the risk controls have been the focus of the industry for many years and compliance with the proposals should be relatively easy. TABB Group agrees with this. Below are some of the risk responsibilities discussed in Reg AT:
Responsibilities of Specific Firm Types Impacted by CFTC Regulation AT
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Source: CFTC, TABB Group
Although Reg AT represents a comprehensive proposal that goes a long way in providing a layer of regulatory oversight on a technology-dependent market, it also includes a number of provisions that will need to be tweaked to accommodate the realities of trading in US futures markets. These include the attempt by the CFTC to have carte blanche access to the underlying algo code. The proposal for access to this intellectual property is somewhat unique and is expected to raise the most passionate pushback from market participants.
The CFTC also is seizing the opportunity to update and define some of the registration requirements that have come to the forefront in the age of automated and algorithmic trading. At the most recent meeting of the CFTC Technology Advisory Committee (TAC), on Feb. 23, 2015, there was significant discussion around the definition of terms and how they apply to the registration proposals. But TABB’s research has shown that not every potential registration scenario has been covered by Reg AT, and there are still some significant players that have fallen through the cracks. The administration of these registrations will fall in the lap of the already stretched National Futures Association (NFA), so time will tell if it is up for the task.
Meanwhile, TABB Group is concerned that the additional burden of supervising trading and IT may prove challenging to the smaller shops. New regulation almost always comes with costs, and Reg AT is not exempt; the costs, however, likely will be higher than the estimates the CFTC has floated. Establishing a newly registered floor trader under the AT Person umbrella is estimated by the CFTC to cost close to $1 million. TABB is convinced that the ongoing costs associated with Reg AT will prove significant to the market participants and will put a dent in the affected firms’ bottom lines.
The comment window for Reg AT is still open, and we expect many market participants to share their opinions. The good news is that CFTC Commissioners Sharon Bowen and Christopher Giancarlo both have a pragmatic view to this piece of regulation and are willing to work with the market participants to update the Reg AT proposal as appropriate. Let’s see how much.