Since the CFTC published their proposed rule on automated trading, dozens of comments have come in from across the industry. Given the importance of this topic and the scope of the CFTC’s proposed rule, that’s not surprising.
FIA PTG members worked with FIA as part of a broad coalition of more than 200 industry participants to draft our response to the CFTC. Our ten working groups brought together exchanges, FCMs, commercial end users, and principal traders to consider the details of the proposed regulation and the question that forms its foundation: how do we reduce risk and increase transparency in automated trading?
That was the CFTC’s stated goal in their summary of the proposed rule, and it’s an objective CFTC Chairman Timothy Massad has emphasized repeatedly, saying his goal for the regulation was to, “embrace the benefits that automated trading has brought to our markets, while also protecting against the increased possibility of breakdowns and disruptions that come with it.”
With a 517-page proposed rule (and, yes, a 112-page response from FIA and FIA PTG), it’s easy to get mired in the overwhelming number of complexities that must be addressed when making policy that will impact our markets. But we’ve found that market participants and regulators share this same fundamental objective: to mitigate the risk of automated trading while preserving its benefits.
After careful consideration of the proposed rule, it’s clear that the best way to meet this goal is to break the rule into three components which can be addressed separately and in order:
- Pre-trade and other risk controls to help protect market integrity
- Policies and procedures for the development, testing, deployment and monitoring of Algorithmic Trading (including third-party software)
- Registration (if necessary)
Why focus on risk controls first? Risk controls are the most important aspect of market protection in automated trading. We have long advocated for risk controls for all electronic trading activity. These controls can be developed and implemented by individual market participants, or provided by third parties – including exchanges and clearing firms. The key is not who applies the risk controls, but rather that all activity is covered by risk controls, so that there are consistent safeguards in place to prevent market disruptions, no matter where they arise.
Finalizing a proposed rule that solely addresses risk controls could be done in short order. This would allow regulators to modernize their oversight capabilities and—most importantly—meet the shared goal of mitigating the risk of automated trading.
Only after these principles are final should the CFTC turn to policies and procedures for software development, testing, deployment and monitoring, and finally, registration if it proves necessary.