“Automated trading has revolutionized markets, enhancing efficiency and contributing to liquidity,” said Walt Lukken, president and CEO of FIA. “To be effective, regulation of automated trading must be implemented in a manner that protects market integrity while allowing for continued evolution of trading practices and technology. We appreciate the CFTC’s goal of modernizing regulations and enhancing transparency, but we have concerns with the proposed rule as written, particularly with regard to the scope of their application.”
The proposed rule has significant scope; it addresses entirely new regulatory areas and would impact large numbers of market participants, not just a subset of firms engaged in specific types of activity.
To apply particular requirements to the appropriate scope of market participants, FIA recommended that the CFTC separate the rulemaking into three components:
- Pre-trade and other risk controls to help protect market integrity;
- Policies and procedures for the development, testing, deployment and monitoring of algorithmic trading, including third-party software;
- Registration (if necessary).
FIA said it believes that risk controls are the most critical aspect of this regulation, and all electronic trading should be subject to appropriate pre-trade and other risk controls. FIA’s letter urged the CFTCto address risk controls first and then consider rules around software development, testing, deployment and monitoring. FIA also noted that the approach to both risk controls and policies and procedures is too prescriptive as proposed. Finally, registration requirements should be considered only after risk controls and policies and procedures are in place, when it’s clear whether it is required.
FIA’s comments also addressed the cost-benefit calculation in the proposed rule, noting that the rule’s articulated benefits do not justify the costs, which are likely substantially higher than what was estimated by the CFTC.
FIA’s comment letter represents the work of more than 200 individuals across the industry and builds upon years of work by FIA, FIA PTG and other industry partners on a broad range of guidelines, considerations, and recommendations for automated trading.
“FIA has taken a leadership role in developing thoughtful recommendations and best practices for managing risk in automated systems,” said Lukken. “We look forward to continuing to work with the Commission and our industry partners to ensure we’re appropriately addressing risk management in automated trading.”
In total, FIA has published six papers on this subject over the past five years. The two most recent publications are a detailed response to the CFTC’s Concept Release on Risk Control and System Safeguards for Automated Trading Environments and a comprehensive Guide to the Development and Operation of Automated Trading Systems.