Statement of Support by Commissioner Brian D. Quintenz Regarding Proposed Rule on Electronic Trading Risk Principles
June 25, 2020
I support today’s proposal that would require designated contract markets (DCMs) to adopt rules that are reasonably designed to prevent, detect, and mitigate market disruptions or system anomalies associated with electronic trading. It would also require DCMs to subject all electronic orders to pre-trade risk controls that are reasonably designed to prevent, detect and mitigate market disruptions and to provide prompt notice to the Commission in the event the platform experiences any significant disruptions. I believe all DCMs have already adopted regulations and pre-trade risk controls designed to address the risks posed by electronic trading. As I have noted previously, many—if not all—of the risks posed by electronic trading are already being effectively addressed through the market’s incentive structure, including exchanges’ and firms’ own self-interest in implementing best practices. Therefore, today’s proposal merely codifies the existing market practice of DCMs to have reasonable controls in place to mitigate electronic trading risks.
Significantly, the proposal puts forth a principles-based approach, allowing DCM trading and risk management controls to continue to evolve with the trading technology itself. As we have witnessed over the past decade, risk controls are constantly being updated and improved to respond to market developments. It is my view that these continuous enhancements are made possible because exchanges and firms have the flexibility and incentives to evolve and hold themselves to an ever-higher set of standards, rather than being held to a set of prescriptive regulatory requirements which can quickly become obsolete. By adopting a principles-based approach, the proposal would provide exchanges and market participants with the flexibility they need to innovate and evolve with technological developments. DCMs are well-positioned to determine and implement the rules and risk controls most effective for their markets. Under the proposed rule, DCMs would be required to adopt and implement rules and risk controls that are objectively reasonable. The Commission would monitor DCMs for compliance and take action if it determines that the DCM’s rules and risk controls are objectively unreasonable.
The Technology Advisory Committee (TAC), which I am honored to sponsor, has explored the risks posed by electronic trading at length. In each of those discussions, it has become obvious that both DCMs and market participants take the risks of electronic trading seriously and have expended enormous effort and resources to address those risks.
For example, at one TAC meeting, we heard how the CME Group has implemented trading and volatility controls that complement, and in some cases exceed, eight recommendations published by the International Organization of Securities Commissions (IOSCO) regarding practices to manage volatility and preserve orderly trading. We also heard from the Futures Industry Association (FIA) about current best practices for electronic trading risk controls. FIA reported that through its surveys of exchanges, clearing firms, and trading firms, it has found widespread adoption of market integrity controls since 2010, including price banding and exchange market halts. FIA also previewed some of the next generation controls and best practices currently being developed by exchanges and firms to further refine and improve electronic trading systems. The Intercontinental Exchange (ICE) also presented on the risk controls ICE currently implements across all of its exchanges, noting how its implementation of controls was fully consistent with FIA’s best practices. These presentations emphasize how critical it is for the Commission to adopt a principles-based approach that enables best practices to evolve over time. I believe the proposal issued today adopts such an approach and provides DCMs with the flexibility to continually improve their risk controls in response to technological and market advancements. I look forward to comment on the proposal.
It is also long overdue for the Commission to withdraw the Regulation Automated Trading Proposal and Supplemental Proposal (Regulation AT NPRMs). The Regulation AT NPRMs would have required certain types of market participants, based purely on their trading functionality, strategies or market access methods, to register with the Commission, notwithstanding that they did not act as intermediaries in the markets or hold customer funds. Moreover, the NPRMs proposed extremely prescriptive requirements for the types of risk controls that exchanges, futures commission merchants, and trading firms would be required to implement. Lastly, by withdrawing these NPRMs, the market and public can finally consider as dead the prior Commission’s significant, and likely unconstitutional, overreach on accessing firms’ proprietary source code and protected intellectual property without a subpoena.
In my view, the Regulation AT NPRMs were poorly crafted and flawed public policy that failed to understand the true risks of the electronic trading environment and the intrinsic incentives that exchanges and market participants have to mitigate and address those risks. I am pleased the Commission is officially rejecting the policy rationales and regulatory requirements proposed in the Regulation AT NPRMs and is instead embracing the principles-based approach of today’s proposal.