The U.S. Commodity Futures Trading Commission is seeking comment on whether to require registration for automated trading firms, taking a first step in potential restrictions on high-speed and algorithmic derivatives trading.
CFTC members voted unanimously to issue a concept release requesting input on more than 100 questions, including whether to expand testing and supervision of high-speed trading strategies. Today’s release, a step prior to a formal proposal by the top U.S. derivatives regulator, also considers ways to limit the maximum number of trading orders a firm can place in a given amount of time.
“Traditional risk controls and system safeguards, many of which were developed according to human speed and floor-based trading, must be evaluated in light of new market realities,” CFTC Chairman Gary Gensler said in a statement.
Gensler’s agency, along with the Securities and Exchange Commission, boosted scrutiny of high-frequency and algorithmic trading after May 6, 2010, when $862 billion in equity value was erased in 20 minutes before share prices recovered. The CFTC concept release was debated for more than a year.
More recent computer malfunctions, including a software error that halted Nasdaq Stock Market trading in thousands of stocks and options for three hours on Aug. 22, have raised questions about the reliability of electronic markets.
About 92 percent of exchange-trading volume in U.S. futures markets was executed electronically last year, according to the CFTC’s document. The industry is vulnerable to flawed algorithms and insufficient testing, according to the agency, which noted that CME Group Inc., owner of the world’s largest futures exchange, fined a firm for inadequately supervising and testing controls.
The CFTC should ensure regulations that promote stability and limit systemic risks, according to the Futures Industry Association’s principal traders group.
“These goals are consistent with fostering competition and enhancing transparency, which lowers costs for hedgers and investors,” according to a statement from the group, which includes Infinium Capital Management LLC, DRW Holdings LLC and RGM Advisors LLC, among more than two dozen firms.
Scott O’Malia, a Republican CFTC commissioner, said in a statement that the input is necessary to understand protections already in place and whether any additional steps are needed.
The CFTC has scheduled a Sept. 12 advisory committee meeting that will discuss, in part, the agency’s release.
“In general, those involved in financial markets seem to have blindly accepted that technology is almost always a good thing,” Bart Chilton, a Democratic CFTC commissioner, said in a statement. “But it doesn’t work well enough if we continue to see aberrations.”