Ex-CFTC Regulator Opposes Agency’s Demand for Flash Boys’ Code

  • CFTC moves to finalize plan to oversee automated trading
  • Firms are fighting provision to maintain, share source code

A former commissioner for the main U.S. overseer of derivatives said the agency should abandon controversial regulatory measures for high-speed traders until Hillary Clinton or Donald Trump is elected.

The Commodity Futures Trading Commission shouldn’t force traders to hand over records of their algorithmic trading procedures until after a new administration is chosen, said Bart Chilton, the former commissioner. Instead, regulators should finalize less disputed parts of a sweeping proposal to register and boost oversight of automated traders, according to Chilton. That will prevent a legal fight that’s likely to extend past November, he said.

“I would want to see what’s happening with the election” since the new administration may have a different set of priorities for the CFTC, said Chilton, who now works with high-frequency trading firms as a senior policy adviser at law firm DLA Piper. “It’s very likely that it would be litigated.”

While CFTC Chairman Timothy Massad has pledged that regulators will safeguard traders’ proprietary source code, firms from CTC Trading Group LLC to Intercontinental Exchange Inc. have expressed concern over increasing government access to the secret algorithms firms consider intellectual property. Regulators say they need the code to help determine what went wrong when markets crash.

The CFTC is still working on the rule and hasn’t given a date for when it will be finalized.

In June, the CFTC asked for additional comments on certain aspects of the more than 500-page proposal called Regulation Automated Trading, or “Reg AT,” including what constitutes source code. Under the plan, automated traders would be forced to have a repository for the computer code that makes up their electronic trading systems, giving the CFTC an easier way to inspect and review algorithms to see what role they played in a market malfunction.

In some form, the CFTC is likely to move to finalize the rule to increase oversight of automated trading this fall, Chilton said.

“The issue in general is fairly low-hanging fruit,” he said. “People agree that they should be registered and there are some gaps right now.”