Last week, CFTC Chairman Tim Massad said that the agency is preparing to release a rule on automated trading by the end of the year.
"Algorithmic trading has dramatically increased in our markets, and that changes the way we regulate, changes the way we do surveillance," he explained to reporters.
The members of FIA PTG agree that automated trading is a transformative force in our markets, and we have long recognized that automated trading requires a different approach to risk management.
We’re pleased that the CFTC is considering how to address our evolving markets.
Automated trading systems are used across asset classes by all kinds of market participants—from principal trading firms to banks, and from pension funds to asset managers. Automated trading has a number of benefits including greater efficiency and ease of trading. It’s no wonder that market participants are adopting automated trading systems in greater and greater numbers.
But while automated trading has many advantages over manual methods like open-outcry or point-and-click trading, it also presents a new set of challenges.
FIA PTG members have been proactively considering risk management and best practices in automated trading for several years. You can see all of our work on this issue here: https://ptg.fia.org/key-issues/automated-trading.
We’ve been adopting new practices in our own firms and sharing our experience with regulators as they consider new rules.
We recently produced a Guide to the Development and Operation of Automated Trading Systems that includes an overview of the approaches that should be considered when building, managing, and supporting automated trading systems.
The Guide builds on the work we did in 2013, when we joined FIA and FIA EPTA to respond to the CFTC’s initial concept release on automated trading with a comprehensive document that not only answered the agency’s detailed questions but also laid out the foundation that should underlie any rulemaking on automated trading.
We’ve advocated for a principles-based approach that is flexible enough to work for diverse market participants. We also emphasize that any prescriptive requirements might quickly become obsolete as automated trading technology develops. We believe that all market participants using automated trading systems have a responsibility to implement pre-trade risk controls appropriate to their role in the market, whether initiating the trade, routing the trade, executing the trade, or clearing the trade.
Finally, and most importantly, we encouraged regulators to ensure that automated trading standards not only establish effective risk control but also continue to allow for the innovation that is driving efficiencies and productivity in our markets.