The top U.S. derivatives regulator took its biggest step yet to increase surveillance of high-speed and other forms of computer-driven trading that have surged in recent years, while presenting new challenges to market stability.
The Commodity Futures Trading Commission on Tuesday voted 3-0 to propose a 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 registration rules and other risk controls put forth by the agency are designed to help the CFTC oversee automated activities, which now represent three-quarters of trading in some derivatives markets but aren’t subject to key government policies for curbing risk.
The agency’s plans 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.
Disruptions such as the May 2010 flash crash for equities and a harrowing swing for Treasuries a year ago 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 for traders known for submitting thousands of buy and sell orders at speeds faster than the blink of an eye.
The CFTC’s proposal will be open to public comment and could lead to months or years of lobbying. The agency’s chairman, Timothy Massad, said the goal of the proposal isn’t to restrict automated trading. Rather, it’s to prevent activities that could damage markets and undermine investor confidence, Mr. Massad said.
“It contains a number of common-sense risk controls that I believe recognize the benefits that automated trading has brought to our markets, while also seeking to protect against the possibility of breakdowns,” Mr. Massad said at a CFTC public meeting in Washington on Tuesday.
The CFTC’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 and was the subject of the most debate at the meeting because trading code contains firms’ secrets and trading strategies.
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.
