Members of Congress from both sides of the aisle are questioning a proposal from the Commodity Futures Trading Commission that would give the agency the ability to get access to the computer code that underpins automated trading systems.
The CFTC currently has the ability to obtain source code from market participants, but only by seeking court approval through a subpoena. The agency is now seeking a more routine method for gaining access to the code as part of a broader effort to develop a more sophisticated and comprehensive framework for regulating automated trading.
At a House Agriculture Committee hearing on July 13, both Republicans and Democrat expressed concerns about the source code proposal. The lawmakers questioned why the traditional reliance on the subpoena process was insufficient, and wondered whether the CFTC would be able to protect the confidentiality of the information.
Excerpts from Congressional Hearing on CFTC’s Automated Trading Rules
“It’s a real head scratcher for me to understand the agency’s fixation on getting source code. I don’t know what they would do with it,” Rep. Michael Conaway (R-Texas), the chairman of the committee, said at the hearing.
Market participants are also protesting the proposal in comment letters, in testimony before Congress, and in roundtable discussions before the CFTC. Industry groups have said the proposed level of access would be "unprecedented among regulators" in the U.S. and suggested that a better solution would be to establish a principles-based retention policy, so that regulators, after obtaining a subpoena, would have access to consistent records in the event of a market disruption.
In testimony before the House Agriculture Committee, Richard Gorelick, chief executive officer of RGM Advisors, a trading firm based in Austin, Texas, emphasized the potential cost of the CFTC's proposal, particularly on trading firms. He suggested that the CFTC's efforts to oversee automated trading should concentrate on strengthening risk controls and improving its own data analytics.
Industry groups have also raised concerns about other aspects of the CFTC's automated trading rules. On June 28, FIA, FIA Principal Traders Group, the International Swaps and Derivatives Association, Managed Funds Association and the SIFMA Asset Management Group submitted a joint letter to the CFTC outlining their views on the proposed Reg AT. The associations urged the CFTC to separate the rulemaking into phases and to first address pre-trade risk controls, which have been proven to be the most effective safeguard for markets. The associations warned against a narrow focus on a particular type of market participant and emphasized that market disruptions can be caused by any type of market participant. The CFTC therefore should make all electronic orders subject to pre-trade risk controls, rather than focusing on orders coming from particular types of firms, they said.
