CFTC Approves Supplemental Proposal to Automated Trading Regulation

The proposal is designed to address the increased use of automated trading in the markets.

In a speech given today by the US Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad, a supplemental proposal to Automated Trading Regulation (RegAT) designed to address the increased use of automated trading in the markets was approved.

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Dominance of Automated Trading

Automated trading dominates the markets that the CFTC oversees, with more than 70 percent of trading in futures now automated. This occurrence is not just in financial futures but also in physical commodity futures.

The financial markets have fundamentally changed as a result. In just a few years, the industry has gone from open-outcry pits where floor traders jostled elbow-to-elbow to make trades, to a machine dominated market where even a millisecond is considered slow. 

In the time it would take a trader to hang up the phone and signal a bid with his hands in the pit, today’s machines can generate anywhere from 1,600 to 2,000 orders.

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However, in some respects, the markets have not changed at all. Farmers, manufacturers, exporters and other businesses still depend on them to hedge routine risk and engage in price discovery.

Whether it is corn or copper, equities or treasuries, Japanese yen or British pounds, businesses need these markets. They need them to function reliably, fairly, and free of manipulation or disruption and market participants look to the CFTC to make sure these markets operate with integrity.

Concerns

The landscape has changed dramatically, and the proposal is a part of what the CFTC has acknowledged it needs to do to keep its regulatory system up-to-date. The Commission also acknowledged that it needs to engage in adequate surveillance of modern trading methods.

“We must continue to enhance our ability to receive and analyze message and other types of data. We must have adequate data on trading in related cash markets. Regulators must cooperate to the extent that trading in different markets is linked. And we must continue to address the risk of cyberattacks and other types of technological disruptions in our markets”.

Minimisation of Risks

The proposal is designed to minimise the risk of disruption and other problems that can be caused by algorithmic trading, and to make sure the CFTC has the tools to deal with those problems should they occur. This requires reasonable risk controls, testing and monitoring of algorithms and the preservation of source code and other records.

Chairman Timothy Massad concluded: “We should not have a regulatory regime where those who still trade at human speed are subject to effective surveillance, but those who use machines are not. Our rules should not favor one method over another, and nobody should be able to hide behind their machines”.

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