Regulator Pledges to Keep Secrets for High-Frequency Traders

The U.S. regulator for derivatives said it will look after high-frequency traders’ code once planned new rules oblige them to share their algorithms with the authorities.

High-speed firms Hudson River Trading LLC and CTC Trading Group LLC both filed public letters earlier this week criticizing the regulations because they give the government easier access to their code. The Commodity Futures Trading Commission wants the ability to examine algorithms to help it determine who to blame when markets crash.

CFTC Chairman Timothy Massad said that the regulator wouldn’t jeopardize the security of traders’ proprietary source code. Massad also said he expects to finalize the rule by the end of this year.

“Let me underscore my commitment to a final rule that respects and protects confidentiality while at the same time ensuring that source code is preserved and is available to us when we need to reconstruct market events,” Massad said in prepared remarks at a Futures Industry Association conference in Boca Raton, Florida.

The CFTC said in late November that it would change the rules governing high-speed traders. It published a more than 500-page proposal called Regulation Automated Trading, or “Reg AT”, that attracted criticism from proprietary traders worried they would lose their ability to keep their code secret.

Hudson River Trading argued that the change might prevent it from operating in markets regulated by the CFTC.

“We are not aware of any markets that operate under a regime that requires on-demand access to participant source code and we would have serious misgivings about participating in any such market,” Adam Nunes, Hudson River’s head of business development, wrote in the March 15 letter.

CTC also said that the regulator was going too far.

“This sort of unfettered government access to extremely valuable trade secrets, in which market participants have invested a tremendous amount of resources, is unprecedented and would introduce unreasonable and unnecessary risk into the marketplace,” Eric Chern, CTC’s chief executive officer, said in a March 15 letter.