Financial regulators are continuing their push to modernize rules and regulations to accommodate the algorithmic trading that now dominates both securities and commodities futures markets. The Commodity Futures Trading Commission estimates between nearly 50% and 80% of trading volume on regulated derivatives markets is algorithmic.
To keep up, the CFTC proposed Regulation AT, for automated trading. It has two significant changes that would upend the algorithmic strategies to trade commodity futures, options or swaps on U.S. designated contract markets.
In addressing who must register as an algorithmic trader, it sweeps in a larger group than is practical or necessary for the CFTC's purposes. And it would require firms to provide their algorithms — the source code underlying the trading — to the CFTC, in advance.
The proposed rule would extend the CFTC's regulatory reach significantly.
Regulation AT would apply to any computer algorithm or system that determines whether to initiate, modify or cancel an order where such order is electronically transmitted to a designated contract market — both high- and low-frequency trading, from sophisticated proprietary trading firms and financial institutions to small shops using off-the-shelf automated systems or even simple spreadsheets that enable rudimentary automated trading.
The regulation would create onerous registration and regulatory requirements to anyone trading for proprietary accounts using direct electronic access.
Many market players submitted comments to the CFTC objecting to these two points.
The commenters were almost uniformly opposed to the proposed source code repository and they were especially critical of the new registration requirements.