Statement of Chairman Timothy Massad Regarding Approval of Supplemental Proposal to Automated Trading Regulation
November 4, 2016
Good morning. This meeting will come to order. This is a public meeting of the Commodity Futures Trading Commission (CFTC).
I’d like to welcome members of the public, market participants, and members of the media, as well as those taking part on the phone or via webcast. And I’m pleased to be joined by my colleagues, Commissioners Sharon Bowen and Chris Giancarlo.
Today, we gather to consider a supplemental proposal related to “Regulation AT,” our proposed rule to address the increased use of automated trading in our markets.
As we all know, automated trading dominates the markets we oversee. More than 70 percent of trading in futures is now automated. And this is not just in financial futures; we see it in physical commodity futures as well.
Our markets have fundamentally changed as a result. In just a few years, we have gone from open-outcry pits where floor traders jostled elbow-to-elbow to make trades, to a machine dominated market where a millisecond is considered slow—in fact, the new measure is a microsecond. In the time it would take a trader to hang up the phone and signal a bid with his hands in the pit, today’s machines can generate anywhere from 1,600 to 2,000 orders.
But in another respect, our markets have not changed at all. Farmers, ranchers, manufacturers, exporters—businesses of all types—still depend on them to hedge routine risk and engage in price discovery. Whether it is corn or copper, crude oil or cocoa, equities or Treasuries, Japanese yen or British pounds—businesses need these markets. They need them to function reliably, fairly, and free of manipulation or disruption.
If anything has changed, it is that those needs are greater today. Businesses operate worldwide, commodity markets are global, and products are more diverse.
Market participants look to us to make sure these markets operate with integrity. So while the landscape has changed dramatically, our mission has stayed the same.
I meet with market participants of all types, and I find that traditional end-users— such as those from the agricultural community—are particularly concerned about the effects of automated trading on these markets. It is especially important for us to be able to respond to the concerns of those who are not so-called “flash boys,” and are only moving at human speed.
It is an illustration of the fact that our regulations have not kept up with our modern markets. Today’s proposal is a part of what we need to do to keep our regulatory system up-to-date, just as you need updates for your phone’s operating system from time to time. There are other things we need to do to modernize our regulatory oversight and, in particular, to engage in adequate surveillance of modern trading methods. We must continue to enhance our ability to receive and analyze message and other types of data. We must have adequate data on trading in related cash markets. Regulators must cooperate to the extent that trading in different markets is linked. And we must continue to address the risk of cyberattacks and other types of technological disruptions in our markets.
Our proposal is designed to minimize the risk of disruption and other problems that can be caused by algorithmic trading, and to make sure we have the tools to deal with those problems should they occur.
It requires reasonable risk controls, using a principles-based approach that would codify many industry best practices.
But it does not prescribe the parameters or limits of such controls, because we know how diverse market participants can be, and we believe they are the ones who should determine those specifics.
It requires testing and monitoring of algorithms. It requires the preservation of source code and other records — the equivalent of the records that those trading at human speed have preserved for years.
And it ensures that we would have access to such records when necessary, just as for years we have reviewed the records of traders at human speed.
In the last year, we received significant feedback on the proposal that the Commission unanimously approved in November of 2015. And today’s supplemental proposal makes a number of changes to that initial measure. They reflect the helpful suggestions and comments we have received.
The changes we will consider today modify the basic risk control requirements so that we achieve the proper coverage in an efficient manner. They modify the registration requirement so that it focuses instead on the larger participants. They lessen some of the reporting requirements while still requiring a certification of compliance. And they address the concerns raised about access to source code.
On that issue, the proposal requires the Commission itself to make the decision to seek access to source code. No staff member can do so without Commission approval. This is a significant departure from our standard practice, which allows staff to seek access to information that registrants are required to preserve without a subpoena or specific Commission authorization. The Commission could authorize the staff to seek such access either by means of a subpoena or a special call. That is, the process will require the same level of Commission review that comes with the issuance of a subpoena even if it is for surveillance purposes. Our proposal also describes the steps we can take to preserve the confidentiality of source code.
Our staff will highlight these changes in more detail in a moment, and I want to thank them for all their hard work on this rule.
Let me just conclude by saying we have long engaged in surveillance that involves reviewing information that has significant proprietary value—information on trading strategies, including activities in related markets, or information that would go to whether a position truly is a bona fide hedge, such as purchase or supply commitments of related cash commodities, inventory levels, production expectations and so forth.
We should not have a regulatory regime where those who still trade at human speed are subject to effective surveillance, but those who use machines are not. Our rules should not favor one method over another, and nobody should be able to hide behind their machines.
Last Updated: November 4, 2016