Automated Trading Regulation - Comment Letters

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Timeline, Automated Trading, CFTC
Concept Release Date Proposed Rule in Federal Register Comment Deadline
September 9, 2013 December 17, 2015 March 16, 2016
Timeline, Improving Systems Compliance and Integrity, SEC
Proposal Date Comment Deadline Final Rule Issue Effective Date
March 25, 2013 July 8, 2013 November 19, 2014 February 3, 2015
Dodd-Frank Timeline, Risk Management Controls for Brokers or Dealers with Market Access, SEC
Final Rule Issue Effective Date Compliance Date
November 15, 2010 June 30, 2011 November 30, 2011

Comment Letters addressing regulation stemming from the May 6, 2010 "flash crash," specifically, letters pertaining to automated and high frequency trading systems.

The letters on top are from the CFTC's proposed rule from December 2015, Regulation Automated Trading (Reg AT).

For comment letters on the SEC Regulation SCI, Systems Compliance and Integrity, click HERE.

Modern Markets Initiative - January 15, 2016[edit]

Proposed Rulemaking on Regulation Automated Trading (“Regulation AT”)
January 15, 2016

From the comment letter:

MMI supports the vast majority of definitions and designations proposed by the Commission and its specific efforts to ensure all market participants: 1—Seek registration with the Commission; 2—Adhere to written policies and procedures for the development and testing of automated trading systems (“ATSs”); 3—Implement pre-trade risk controls including kill switches, and; 4—Provide needed transparency around market maker programs and trading incentives. The cumulative impact of these proposals should propel a virtuous cycle of increased confidence in the futures markets begetting greater liquidity, producing improved pricing, which in turn, will further increased market confidence.

That support stated, which covers the vast majority of the Proposal, we have grave concerns with the proposed criteria, under section § 1.81(a), that AT Persons must produce for inspection “a source code repository to manage source code access, persistence, copies of all code used in the production environment, and changes to such code.” We believe this will do little to further propel the aforementioned virtuous cycle, while placing the trade secrets and intellectual property of algorithmic trading firms at precarious, unwarranted and unnecessary risk. A more detailed explanation of our concerns is contained later in this letter.

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Virtu Financial - December 28, 2015[edit]

Notice of Proposed Rulemaking on Regulation Automated Trading (“Regulation AT”)
December 28, 2015

From the comment letter:

While we generally favor principles-based requirements to ensure that any risk controls are reasonably designed and appropriately implemented and monitored, we do support the specific requirements proposed by the Commission regarding messaging and price limitations. We are generally supportive of multiple layers of risk controls to be applied at different points in an order’s life cycle, however, we encourage the Commission to consider the potential adverse consequences of overlapping or redundant risk controls at separate levels which may not be perfectly congruent.

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Futures Industry Association - December 11, 2013[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
December 11, 2013

From the press release:

The response describes the many risk controls and system safeguards that are currently in use in the futures industry, and outlines several principles for the CFTC to consider as it examines ways to further strengthen those controls and safeguards. The response also contains detailed responses to specific questions posed by the CFTC in its concept release, and draws on the collective expertise of nearly 100 individuals from members of FIA and the FIA Principal Traders Group.

The letter includes an overview of the types of systems in use at exchanges, firms and FCMs, and answers to over 100 questions posed by the CFTC in the concept release.

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Tellefsen and Company - October 31, 2013[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
October 31, 2013

From the letter:

We are concerned that the concept release, as structured, is overly broad and has numerous potential and unintended consequences. Many of the questions, definitions and potential safeguard areas contain numerous absolute determinations that would trigger compliance requirements.

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RGM Advisors - December 17, 2013[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
December 17, 2013

From the comment letter:

The vast majority of evidence is clear that automation, competition and “high frequency trading” improve market quality. While some critics have claimed otherwise, we urge the Commission to make its own assessment of the relevant literature. We hope the attached literature review is helpful in that regard.

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IntercontinentalExchange Group - February 14, 2014[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
February 14, 2014

From the letter's executive summary:

  • In addition to complying with the Commodity Exchange Act and Commission rules, exchanges have a competitive reason to implement risk controls.
  • The Commission should not “federalize” existing exchange risk controls and practices. Exchanges are better able to implement and update risk controls on a market-by-market basis than through a Commission rulemaking.
  • Furthermore, prescribed Commission rules on risk controls could stifle exchange innovation in this area.
  • The Commission should not attempt to define high frequency trading or separately regulate high frequency traders from other automated trading systems.
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Managed Funds Association - December 11, 2013[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
December 11, 2013

Summary of Key Points from the letter:

  • High frequency trading (“HFT”) is not a strategy, but the use of technology to deploy certain trading strategies. The Commission should monitor the markets for abusive trading rather than the means of transaction delivery; as such, it is not necessary, nor particularly effective for the Commission to define HFT.
  • To protect market integrity and prevent market disruptions, the Commission should address risk controls and system safeguards with respect to all electronic trading and not just automated trading or so-called HFT.
  • Operational, infrastructure and security risks should be addressed by centralizing risk controls at the trading platform and clearing member levels. Risk controls and system safeguards at such entities will protect market participants and the markets by acting as gateways that monitor activity for market participants and block inappropriate or erroneous orders from the markets.
  • In considering proposed rulemaking, the Commission should take a principles-based approach that encourages effective self-regulation through trading platforms, futures commission merchants (“FCMs”), swap dealers (“SDs”) and major swap participants (“MSPs”).
  • Maximum order size and credit risk controls should be available and apply to all market participants regardless of a customer’s trading method or strategy.
  • Trading platforms, FCMs and derivatives clearing organizations (“DCOs”) should provide real-time post-trade reports to market participants and their clearing firms.
  • Trade cancellation and adjustment policies should be clear, objective and predictable.
  • We support more robust and more routine testing of trading software at the trading platform-level. In addition to individual testing, trading platforms should offer integrated or holistic testing where a firm’s software interacts with others.
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Americans for Financial Reform - December 11, 2013[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
December 11, 2013

From the letter:

  • If the deployment of some technological changes creates the danger of market disruption without creating reasonable public benefit then the CFTC would be justified in setting absolute limits on such deployment.
  • A second issue in the Release is a general focus on catastrophic disruptions to the market, rather than the everyday damage to market integrity that can be created by predatory high frequency trading practices enabled by ATS.
  • High-frequency, predatory ATS operating in the zero-sum game of the market are a powerful example of a practice that can be extraordinarily profitable for individual market participants but could lack any benefit and likely impose costs on the public as a whole.
  • The Release does query concerning a number of regulatory reforms that could be of significant benefit in restraining the harmful effects of high speed trading. This is particularly true of minimum resting periods.
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Better Markets - December 11, 2013[edit]

CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading Environments
December 11, 2013

From the letter:

In the discussion that follows, we illustrate some of the more damaging HFT practices and elucidate the following points:

  • The CFTC must implement corrective measures to reduce the most egregious practices, increase volumes, and restore trust and confidence in the markets;
  • Most HFT is not market making;
  • HFT has caused innumerable market disruptions: the flash crash was not an isolated incident;
  • The academic literature on HFT demonstrates its harmful effects; and
  • The CFTC must define HFT from the ground up.
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