Market Participants Criticize CFTC Proposal on Automated Trading
A wide array of market participants, including industry associations and exchanges, requested that the CFTC reconsider "Regulation AT," the proposed rule on automated trading. In public comment, various groups offered criticisms and suggestions concerning proposed rule requirements. Several participants suggested that the CFTC: (i) consider narrowing the scope of the proposal, (ii) adopt a core-principles approach rather than prescriptive requirements and (iii) determine whether anticipated benefits of registration will outweigh anticipated costs. A number of commenters also asked for an extension of the comment period, which ended on March 16, 2016.
Highlights from various comments include:
CME Group. "We believe that much of the well-intentioned Proposal is unwarranted and could be counterproductive. The Commission's goals for Regulation AT would be better served if it removed the floor trader registration requirement and focused instead on risk mitigation controls under a truly principles-based regime that could be tailored to the different business operations and roles of traders, intermediaries and exchanges. In our view, the Proposal does not provide a clear justification for why additional federal regulation is necessary or appropriate and how the new rules would fulfill those objectives in a workable manner. In addition, as discussed below, major elements of the Proposal are based on a series of fundamental inconsistencies and flaws. As a result, the Commission has significantly underestimated the Proposal's costs to market users and market operators."
Mercatus Center. "This regulation is not necessary given ongoing, voluntary industry efforts to address risks surrounding algorithmic trading, other rules, and the Commission's existing enforcement authority. The proposed regulation is overly broad in reach and excessively prescriptive in nature. Allowing regulators and others unfettered access to firms' source code unnecessarily compromises proprietary business information."
Futures Industry Association. "We recommend that a core principle approach would work better than the prescriptive requirements in proposed § 1.80 (and referenced in other proposed rules such as §§ 1.82, 38.255 and 40.20). By taking this approach, we believe this section of the NPR could likely be completed quickly and final rules implemented in a short time.
"On the other hand, we believe that the CFTC's proposed requirements for policies and procedures for the development, testing, deployment, and monitoring of algorithmic trading systems require substantial work, including careful analysis and consideration of the treatment of third-party systems, as well as a better understanding of the anticipated benefits and actual costs. We also believe that any proposal regarding potential registration should be deferred until it can be better understood whom the CFTC hopes to cover with such a requirement, whether registration is necessary, and whether the anticipated benefits of such registration truly outweigh anticipated costs."
ICE. "The Proposal's scope and applicability of Regulation AT is overly broad and should be focused specifically on trading activity that may be impactful to orderly markets while leveraging the risk control infrastructure currently employed by [designated contract markets] and market participants."
Investment Adviser Association. "Specifically, we recommend that the CFTC: (A) amend the definition of 'AT Person' to exclude entities without direct electronic access ('DEA'), (B) confirm that investment algorithms used by buy-side investment advisory firms are excluded from the definition of 'algorithmic trading' and exclude order routing from the definition of 'algorithmic trading,' (C) reduce the scope of the proposed standards for AT systems to exclude registered CPOs and CTAs that do not have DEA and do not own any source code but rather license it from the developer or other owners and (D) allow for an appropriate compliance period."