CFTC Warned Algorithm Rules `Virtually Impossible' to Enforce
It would be “virtually impossible” for the U.S. Commodity Futures Trading Commission to enforce rules governing how traders use algorithms before they complete transactions, an advisory subcommittee told the agency.
“The only way to independently enforce any sort of specific regulations on quality assurance for trading firms would be to have a virtual army of CFTC employed quality assurance professionals who have complete access to all trading firms’ intellectual property,” the CFTC Technology Advisory Committee’s pre-trade functionality unit said in a report.
Exchanges should require trading firms to have measures in place that can disable algorithms, including a “kill button” that could simultaneously cancel all existing orders and prevent a firm from placing new orders, said the group, which met in Washington today.
The report was written by a group that included Gary Dewaal, general counsel at Newedge USA LLC; Bryan T. Durkin, CME Group Inc.’s chief operating officer; Michael Gorham, professor at Illinois Institute of Technology; Chuck Vice, president and chief operating officer of IntercontinentalExchange Inc.; and Chuck Whitman, chief executive of Infinium Capital Management.
The CFTC and the Securities and Exchange Commission are writing new derivatives regulations required under the Dodd- Frank Act after largely unregulated trades, including credit- default swaps, helped fuel the 2008 credit crisis. The law, enacted in July, seeks to reduce risk and boost transparency in the swaps market by having most transactions guaranteed by clearinghouses and traded on exchanges or other venues.
‘Race to the Bottom’
Without government rules, exchanges and trading platforms might compete in a “race to the bottom” if they were able to set their own trading limits, CFTC Chairman Gary Gensler said at the meeting.
“It’s like saying there should be speed limits, but don’t set them,” Gensler said.
The financial industry hasn’t told regulators how the private market would impose its own trading limits, CFTC Commissioner Michael Dunn said at the meeting.
“You’re giving us the same argument that we heard for credit defaults,” Dunn said.
The CFTC’s staff is working on a proposal for testing and supervision of algorithmic trading, Gensler said on Feb. 24. The agency’s proposal will be based in part on recommendations from a task force set up by the CFTC and SEC in response to last year’s May 6 stock-market plunge, he said.
Regulators or exchanges should test high-frequency and algorithmic trading programs before they are used in markets, Commissioner Bart Chilton said in a speech on Feb. 1.
“By raising the standards and establishing best practices, we can ensure that all participants are treated equally and ensure that the markets are protected from untested algorithms that could undermine well-functioning markets,” Commissioner Scott O’Malia said at the hearing.
To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net
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