Flash Crash Regulation

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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
Timeline, Automated Trading, CFTC
Concept Release Date Proposed Rule in Federal Register Comment Deadline
September 9, 2013 December 17, 2015 March 16, 2016

In one of the most gut-wrenching hours in Wall Street history, the Dow Jones Industrial Average (DJIA) plunged almost 1,000 points in early afternoon trade on May 6, 2010 before recovering to close down 348.This move represented the biggest one-day point decline on an intraday basis in Dow Jones history. The drop became known in the industry as the "flash crash" of May 6.

A subsequent report pointed to a large order in the S&P 500 futures as the trigger, but that the move was exacerbated by fears about the European debt crisis.

After the flash crash" the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues was formed in order to address market structure and regulatory issues that may contribute to volatility. On February 18, 2011, the committee issued its recommendations regarding a regulatory response to the flash crash. In response to the recommendations, the two regulators have proposed and finalized several rules:

A brief overview of each rule, with a link to more information, can be found below.

CFTC Proposed Rule: Regulation Automated Trading (Regulation AT)

On November 24, 2015, the CFTC unanimously approved a set of proposed rules addressing the evolution of automated trading on U.S. designated contract markets (DCMs). The proposals, known collectively as "Regulation Automated Trading" or "Regulation AT," involve risk controls, transparency measures and other safeguards.

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SEC Final Rule: Risk Management Controls for Brokers or Dealers with Market Access

On November 3, 2010, the SEC held an open meeting introducing new regulation 15c 3-5, which requires, among other things, the implementation of risk management controls and supervisory procedures for those with direct trading access and prohibiting "unfiltered" or "naked" sponsored access to exchanges or alternative trading systems (ATSs). Final rules were added to the Federal Register on November 15, 2010.

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SEC Final Rule: Consolidated Audit Trail

On August 1, 2012, an SEC final rule was published that adopt Rule 613, which will create a comprehensive consolidated audit trail in order to allow regulators to accurately track all activity throughout the U.S. markets in certain securities known as National Market System (NMS) securities. The rule was first proposed in 2010, soon after the "Flash Crash" of May 6, 2010.

Because markets have become more dispersed, with the advent of multiple trading venues including both "lit" and "dark" markets, regulators, including the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues issued among its recommendations the creation of a single database for uniform, consolidated cross-market order and execution tracking of market data.

The SROs, in conjunction with FINRA, have been tasked with the process of developing the NMS, and are soliciting bids for the development of the system. For more information on the status of the development process, click HERE.

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SEC Proposed Rule: Improving Systems Compliance and Integrity

At a March 7, 2013 meeting, the Securities and Exchange Commission proposed its Regulation SCI, improving system compliance and integrity. Under the proposed rules, self-regulatory organizations, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to carefully design, develop, test, maintain, and surveil systems that are integral to their operations.[5]

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CFTC Concept Release: Risk Controls and System Safeguards for Automated Trading

On September 9, 2013, the CFTC issued a concept release on risk controls and system safeguards for automated trading environments. The release offers a snapshot of the automated trading environment, and presents a system that would involve:

  • pre-trade risk controls;
  • post trade reports and other measures;
  • system safeguards related to the design, testing and supervision of automated trading systems (ATSs); and
  • additional protections designed to promote safe and orderly markets.[6]

The release requests responses from market participants and the general public on 124 questions related to system safety. The release entered the Federal Register on September 12, 2013, and the comment period closed December 11, 2013, but was subsequently reopened until February 14, 2014. Comments may be viewed HERE.

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References

  1. SEC Proposes Rules to Improve Systems Compliance and Integrity. SEC. Retrieved on March 8, 2013.
  2. Glitches send Dow on wild ride. CNN.Money. Retrieved on May 8, 2010.
  3. SEC Proposes Rules to Improve Systems Compliance and Integrity. SEC. Retrieved on March 8, 2013.
  4. CFTC Publishes Concept Release on Risk Controls and System Safeguards for Automated Trading Environments. CFTC. Retrieved on September 10, 2013.
  5. SEC Proposes Rules to Improve Systems Compliance and Integrity. SEC. Retrieved on March 8, 2013.
  6. CFTC Publishes Concept Release on Risk Controls and System Safeguards for Automated Trading Environments. CFTC. Retrieved on September 10, 2013.

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