Gary Gensler, Chairman, CFTC
"We have witnessed a fundamental shift in markets from human-based trading to highly automated electronic trading."
Washington DC - The U.S. Commodity Futures Trading Commission (CFTC) published a document known as a "concept release" on risk controls and safeguards for automated trading, asking for "extensive public comment" on possible measures to ensure fair and safe trading environments.
CFTC Chairman Gary Gensler said the CFTC had to look to adapt its regulations in a marketplace that had undergone massive change.
"We have witnessed a fundamental shift in markets from human-based trading to highly automated electronic trading. Automated trading systems, including high frequency traders, enter the market and execute trades in a matter of milliseconds without human involvement. Electronic trading makes up over 91% of the futures market. The swaps market also is moving toward electronic trading."
Gensler said 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.
"Further, as sure as computers and programs have had technical glitches in the past, we must look to risk controls and system safeguards to protect markets when such glitches inevitably occur again."
The concept release provides an overview of the automated trading environment, including its principal actors, potential risks, and responsive measures taken to date by the CFTC or industry participants. It also discusses a series of :
1. pre-trade risk controls,
2. post trade reports and other measures
3. system safeguards related to the design, testing and supervision of automated trading systems (ATSs), and
4. additional protections designed to promote safe and orderly markets.
The CFTC said the concept release is driven by US derivatives markets' "fundamental transition" from human-centred trading venues to automated and interconnected trading environments.
"The operational centres of modern markets now reside in a combination of ATSs and electronic trading platforms that can execute repetitive tasks at speeds orders of magnitude greater than any human equivalent. Traditional risk controls and safeguards that relied on human judgment and speeds must be reevaluated in light of new market structures," the CFTC said.
The Commission said it has already taken steps to address the transition to automated trading and require appropriate risk controls, including within designated contract markets (DCMs), swap execution facilities (SEFs), futures commission merchants (FCMs), swap dealers (SDs) and major swap participants (MSPs).
"Relevant measures to date include rules requiring FCMs, SDs and MSPs that are clearing member firms to establish risk-based limits for all proprietary and customer accounts, and to use automated means to screen orders for compliance with risk limits when such orders are subject to automated execution."
The Commission has also adopted requirements for DCMs that provide direct market access, and trading pause and halt requirements for DCMs and SEFs designed to prevent and reduce the potential risk of market disruptions.
Commissioner Scott O'Malia, who chairs the CFTC's Technology Advisory Committee (TAC), said the release asks more than 100 questions, which he said was appropriate given the importance of hearing from all sectors in the industry
"The Concept Release is far from perfect. For example, it could have provided a more thorough and clear cataloguing of existing industry practices and recommendations; a recent TAC reference document is more clear and concise in compiling existing standards and recommendations in the market today," O'Malia said. "Nevertheless, I support today's issuance of the Concept Release in order to receive input from market participants on all of the issues contained herein."