Regulation Automated Trading

On November 24, 2015, the U.S. Commodity Futures Trading Commission (CFTC) proposed Regulation Automated Trading (Reg AT), a set of rules now in the process of industry review and comment.  It represents “a series of risk controls, transparency measures, and other safeguards to enhance the U.S. regulatory regime for automated trading.”  In essence, it is recognition that the commodities and futures markets are increasingly served by high frequency trading firms.  Therefore, the rules governing those markets need to be updated to better suit electronic markets.

Modern Markets Initiative (MMI) largely supports Reg AT and most HFT firms already comply with most of its provisions.  We believe it is in the interest of all investors that participants are accountable to act in support of stable and resilient markets.

However, MMI has written three comment letters to the CFTC, a letter to the CFTC Technical Advisory Committee and contributed to a joint industry letter in opposition to the proposed rules within Reg AT allowing inspection of a trading firm’s source code under the provision of “book and records” because it makes the code accessible outside the existing, highly-regulated subpoena process.  Source code is the “secret sauce” of technology firms such as high frequency trading firms, Google and Apple, for example.  It is unprecedented for regulators to have routine access to this sensitive intellectual property.

MMI believes the Reg AT’s establishment of strict rules, regulations and guidelines will help instill investor confidence in the futures and commodities markets.  But it should not come at the cost of the legal protections of the market participants serving them.

What Lawmakers, Regulators and Others are Saying About Reg AT:

January 12, 2017: Amendment to the Commodity End-User Relief Act
Amendment sponsored by Rep. Sean P. Duffy [R-WI-7] prohibits the CFTC from compelling the production of algorithmic trading source code and similar intellectual property unless it has issued a subpoena.

January 11, 2017: Letter from the U.S. Chamber of Commerce to the U.S. House of Representatives
“The Chamber also supports the amendment sponsored by Congressman Duffy and Congressman Scott to clarify that the CFTC shall not have the authority to access proprietary source code without a subpoena. Their amendment would protect highly sensitive intellectual property, which would respect established due process rights and ensure that proprietary source code does not fall into the wrong hands as a result of a cyberattack or wrongdoing.”

November 18, 2016: Letter from K. Michael Conaway, Chairman of the House Committee on Agriculture to CFTC Chairman Timothy Massad
“President Obama told the public that he was looking forward to doing everything he could to make sure the next administration is successful. That must include preserving difficult and controversial rulemaking for the next chairman to complete. I urge you to extend the Reg AT comment period by 180 days, which will provide the new chairman time to plan and announce a new agenda to the public and allow commenters the opportunity to file one comment letter on the supplemental and any additional proposed changes.”

November 4, 2016: Statement of Dissent by Commissioner J. Christopher Giancarlo Regarding Supplemental Notice of Proposed Rulemaking on Regulation Automated Trading
“The subpoena process provides property owners with due process of law before the government can seize their property. It protects owners of property – not the government that already has abundant power. It allows property owners an opportunity to challenge the scope, timing and manner of discovery and whether any legal privileges apply to the process of surrendering property to the government … Abrogating the legal rights of property owners is not assuaged by imposing a few additional procedural burdens on the government agency seizing their property.”

August 10, 2016: Letter from Representative Sean P. Duffy to the U.S. SEC
Representative Sean P. Duffy (WI-7), Chairman for the House Financial Services Subcommittee on Oversight & Investigations, wrote to the Chairman of the SEC expressing concern over the CFTC proposal to maintain a source code repository and make it available for inspection by the Commission or the Department of Justice without a subpoena. He wrote “as a former prosecutor, I take very seriously the due process rights of Americans under the Fifth Amendment which I believe would be undercut by the source code provision of the CFTC’s proposed rule.”

August 3, 2016: Letter from Congressmen Scott Garrett & Randy Neugebauer to CFTC
Representative Scott Garrett (NJ-05), Chairman of the Subcommittee on Capital Markets for the House Financial Services Committee and Representative Randy Neugebauer (TX-19), majority member of the House Committee on Agriculture which oversees the CFTC, wrote to the CFTC expressing concern over the prospect of the CFTC having subpoena-less access to source code. They wrote “it will create a due process ‘race to the bottom’ as other regulators, both in the United States and overseas, would be tempted to follow the CFTC’s lead.”

June 10, 2016: Letter from seven Congressmen on the House Committee on Agriculture and one from the Homeland Security Committee to the CFTC
Representatives Sean P. Duffy (WI-7), David Scott (GA-13), Austin Scott (GA-8), Bob Frank Lucas (OK-3), Rodney Davis (IL-13), Bob Goodlatte, and Randy Neugebauer (TX-19) of the House Committee on Agriculture which oversees the CFTC, and Representative Michael McCaul (TX-10), Chairman, Committee on Homeland Security, wrote to the CFTC to express concern over the prospect of the CFTC having subpoena-less access to source code. They wrote “we question whether the proper security and due process safeguards are in place to prevent such information from being compromised or mishandled.”