Industry criticises CFTC’s plans for new automated trading rules

A US regulator is facing pushback against plans to impose new controls on the automated traders that dominate futures markets, including giving the government access to firms’ secret computer code.

Criticism poured into the Commodity Futures Trading Commission before a Wednesday deadline for public comment on so-called “Reg AT”, which is meant to reduce the market risks from computer problems.

Released in November, the 521-page rule would require that proprietary trading firms register with the CFTC and follow mandates such as on how many orders can be placed in a given time.

Reg AT would also give the commission a chance to peek at secret computer source code, what one Chicago-based trading executive called the “lifeblood” of his business.

The filing deadline came as more than 1,000 executives, government officials and lobbyists met for the futures industry’s annual jamboree in Boca Raton, Florida.

Reg AT featured in conversations on the sidelines of the event. “This is a pretty big over-reach,” said one trader.

FIA, the futures industry trade group, said the new rule’s benefits would not justify the costs. It added that it should be sliced into three components, dealing with the use of risk controls before a trade is executed; policies for algorithmic trading; and registration.

The Managed Funds Association, a hedge fund group, called the rule too broad and said it should be broken into five different objectives.

“In our view, Regulation AT is overly expansive in breadth and scope, and uses an unduly broad brush to regulate automated trading by disparate types of market participants,” the MFA said in a letter.

Under the proposed rule, trading firms’ source code repositories would be open to CFTC inspection and the Department of Justice without a subpoena.

Alarmingly,Regulation AT threatens to unveil source code in an irresponsible manner that will likely destroy the confidentiality of source code

– Eric Chern, CTC Trading Group

“Alarmingly, Regulation AT threatens to unveil source code in an irresponsible manner that will likely destroy the confidentiality of source code, and as a result, destroy the value of market participants’ trade secrets forever,” wrote Eric Chern, chief executive of CTC Trading Group.

Tim Massad, CFTC chairman, offered reassurance that source code would be in safe hands and would not be indiscriminately seized.

“What we’re interested in is making sure code is preserved, making sure that if there is a market disruption, we can reconstruct what happened, that there’s this audit trail,” Mr Massad said.

The proposed rule would also require futures exchanges to have tools to prevent a firm from trading with itself. FIA called the requirement “unnecessary”, saying “incidences of problematic self-trading are statistically insignificant”.

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