ValueWalk – CFTC One Step Closer To Reg AT Requiring Algo Access

ValueWalk – CFTC One Step Closer To Reg AT Requiring Algo Access
Mark Melin reports the CFTC proposed rulemaking changes to issue a “special call” notice to registered participant as opposed to a legal subpoena, when seeking access to the source code of automated traders. CFTC Chairman Tim Massad said engaging in market manipulation “should not be able to hide behind machines.” Modern Markets Initiative CEO Bill Harts said, “The only thing hidden is the CFTCs reason for not using a procedure that has served it well.” “We live in the United States of America,” Harts said. “We have due process rights guaranteed by the Constitution.” Harts wants to specifically understand why subpoena power is not enough for investigators. “We are disappointed the CFTC voted to propose a new process that ignores due process and private property rights of US citizens, while not stating if or why the current subpoena process doesn’t work,” Harts said. “Why is there a necessity to bypass these important Constitutional protections and put US businesses’ intellectual property at risk?”

ValueWalk – CFTC’s Giancarlo Says Regulators Should Keep Hands Off Source Code

ValueWalk – CFTC’s Giancarlo Says Regulators Should Keep Hands Off Source Code
Mark Melin reports CFTC Commissioner Christopher Giancarlo, speaking at the Futures Industry Association conference in Chicago, expressed steadfast opposition to the subpoena-less access to source code provision in the proposed Regulation Automated Trading. He said requiring traders to provide their source code to regulators prior to a market destabilizing event fundamentally violates fundamental property rights “and is bigger than just a CFTC issue.”

Waters – Reg AT Source Code Proposal Remains Lighting Rod

Waters – Reg AT Source Code Proposal Remains Lighting Rod
Dan DeFrancesco reports panelists at the North American Buy-Side Technology Summit discussed the merits of Reg AT calling for subpoena-less access to source code. Bill Harts, CEO of Modern Markets Initiative said the CFTC can already access a firm’s source code through a subpoena, which, because it’s a legal procedure, implies a higher standard of what a regulator is going to do with the data and why it would want it. “So what we’re talking about here is not that regulators shouldn’t have access to it,” said Harts. “What we’re saying is that there should be a higher standard for obtaining access to it.”

Modern Trader Magazine – Open (political) season on traders

Modern Trader Magazine – Open (political) season on traders
MMI CEO Bill Harts writes an opinion piece questioning why traders in general, and HFT specifically, have become the logical scapegoat for the 2008 crisis. That event was spurred by the widespread collapse of heavily leveraged products whose stellar credit ratings turned out to be wildly inaccurate. HFT produced no such products, was never “too big to fail” and didn’t take a dime of TARP bailout money. But, the idea of stopping harmful 2008-like Wall Street speculation by taxing the act of trading is somehow being accepted as reasonable and overdue.

Financial Times – US markets braced for trading tax grab from Democrats

Financial Times – US markets braced for trading tax grab from Democrats
Democratic politicians have proposed a variety of financial transaction tax proposals on trades of stocks, bonds and derivatives. Vanguard, the $3.8tn fund house, has lobbied against transaction taxes, believing that “A tax ostensibly aimed at Wall Street would ultimately be detrimental to Main Street.” Hillary Clinton’s plan is to tax “HFT strategies involving excessive levels of order cancellations.” Bill Harts, CEO of Modern Markets Initiative says that cancelling and replacing orders is important for determining fair prices. If the aim of the proposal is to stop spoofing, that has already been outlawed, he says. “It seems redundant to put a tax on something that’s illegal. People who are spoofing should be subject to prosecution,” he adds.

Bloomberg – Algorithmic Traders Might Keep Trade Code Secret as CFTC Mulls Tweaks

Bloomberg – Algorithmic Traders Might Keep Trade Code Secret as CFTC Mulls Tweaks
Commodity Futures Trading Commission Chairman Timothy Massad said his commission is considering modifying its push for access to computer code after high-speed traders said the effort would be unprecedented and could put the industry’s secret trading formulas at risk. “We can think of no other circumstance where market participants have been required to reveal, to a regulator, their thoughts, words or actions regarding future automated or manual trading intent,” the Modern Markets Initiative wrote in a June letter to the CFTC. Forcing firms to provide their code without a subpoena “constitutes an unlawful seizure of protected intellectual property,” the industry trade group said in its letter.

Yahoo Finance Op-Ed: New CFTC proposal could jeopardize the IP lifeblood of many businesses

Yahoo Finance Op-Ed: New CFTC proposal could jeopardize the IP lifeblood of many businesses
Countless companies around the world have developed and perfected sophisticated and multifaceted algorithms which are the intellectual property (IP) lifeblood of their business. Imagination and innovation have enabled thousands of these companies to conquer the free market and be prosperous. In the US, however, that extremely valuable commodity—intellectual property—could be jeopardized if a government agency (ironically, the Commodity Futures Trading Commission—CFTC) succeeds in doing what they propose.

MMI Blog – A “Source” of Serious Concern

MMI Blog – A “Source” of Serious Concern
The goal of the CFTC’s proposed regulation is a good one.  Namely, to codify the best practices and risk controls of electronic trading firms to ensure the stability of the markets.  MMI stands in broad support of just about all the proposed measures.  But I firmly believe that intellectual property belongs under the care of companies for whom stealing the source code is stealing the company.

Barron’s – How to Fix the ETF Industry

Barron’s – How to Fix the ETF Industry
Chris Dieterich reports ETFs aren’t in crisis, but are in transition. Changes are needed so investors can trade safely. Modern Markets Initiative, a trade group for high-speed traders, suggested a mechanism it called the “retail circuit breaker,” which would automatically suspend a trade if it was about to be executed above or below some threshold, say 5%, of the value of the ETF’s assets.

Bloomberg News – Democrats Assail Wall Street with Plan That May Hit Mom and Pop

Bloomberg News – Democrats Assail Wall Street with Plan That May Hit Mom and Pop
Democrats are courting progressive-minded Americans by calling for a tax on Wall Street trades. If the party succeeds, the mom-and-pop investors they’re wooing could bear the brunt. The party supports a financial transaction tax but small investors would probably see an increase in the cost to buy and sell, which has never been lower. Tim Buckley, the chief investment officer of Vanguard Group, said taxes on financial transactions can backfire, upsetting a natural part of the market’s ecosystem. “When you put a tax on transactions, you risk damaging liquidity. As mutual fund investors we rely on having liquidity,” he added. “A drop in liquidity is bad for fund shareholders.”

Letter from U.S. Chamber of Commerce Center for Capital Markets Competitiveness and Seven other Associations to the CFTC regarding Reg AT

Letter from U.S. Chamber of Commerce Center for Capital Markets Competitiveness and Seven other Associations to the CFTC regarding Reg AT
“In short, if not significantly amended, the proprietary source code provisions of Regulation AT will: (1) compromise the established and expected due process rights of our members; (2) increase the threat of “copycat” measures from other countries and contradict established U.S. policy on intellectual property disclosure; (3) heighten the possibility of cyberattacks against government-mandated data repositories; and (4) do little to assist the CFTC in its market surveillance activities.”

MMI Second Comment Letter to the CFTC Regarding Reg AT

MMI Second Comment Letter to the CFTC Regarding Reg AT
As previously stated, MMI stands in broad support of the CFTC’s proactive efforts to codify industry best practices and enforce high standards for automated trading. However, the Agency’s Proposal to move source code inspection from a judicial process to books and records provisions (Commission Regulation 1.31) unduly imperils sensitive intellectual property and violates the Fourth Amendment.

CNBC.com – Former CFTC Commissioner – CFTC rule ‘extreme overkill’

CNBC.com – Former CFTC Commissioner – CFTC rule ‘extreme overkill’
Former CFTC Commissioner Bart Chilton writes that one would not expect Coca-Cola to divulge their secret recipe for the world-renowned soft drink…nor is it required by government. The same is true for other proprietary trade secrets and intellectual property. That, however, could all change by the end of the year if the U.S. Commodity Futures Trading Commission — where I previously served as a commissioner for seven years, is allowed to obtain such secret formulas known as “source code” from traders and trading venue operators (exchanges).

Op-Ed in FoxBusiness.com – Financial Transaction Tax: A Failure In The Making

Op-Ed in FoxBusiness.com – Financial Transaction Tax: A Failure In The Making
FoxBusiness.com published an opinion piece from former CFTC Commissioner Bart Chilton who writes that the most troubling outcome (of a financial transaction tax) could be that consumers, mom and pop investors, pensioners and end users (those actually using markets to hedge their legitimate business risk) wind up being victims of such a mindless—perhaps momentary lapse of reasoned—policy.

Study – Taxing High Frequency Market Making: Who Pays the Bill?

Study – Taxing High Frequency Market Making: Who Pays the Bill?
Professors Katya Malinova, Andreas Park and Ryan Riordan analyze the effect of a message fee imposed on the Canadian stock markets.  It was designed to target high frequency trading to ensure that they pay their fair share of the regulatory surveillance costs of the Investment Industry Regulatory Organization of Canada.  Yet ultimately, all investors faced worse market conditions and thus, arguably, paid the “tax.”

Breakingviews: Regulator’s Plan to Rein In Trading Risks Raises Concerns

Breakingviews: Regulator’s Plan to Rein In Trading Risks Raises Concerns
Columnist Gina Chon writes that the Commodity Futures Trading Commission is overreaching in its quest for market safety and soundness.  The agency wants the power to obtain access to the source codes of trading companies without a subpoena. Record retention is a worthy goal, but it is unclear whether the strapped regulator can protect such intellectual property. Worse, it may open the door for other officials to ask for the same gateway.

POLITICO Pro – Massad eyes flexibility ahead for algorithmic trading rule

POLITICO Pro – Massad eyes flexibility ahead for algorithmic trading rule
Patrick Temple-West reports the CFTC proposed rule that includes a provision to obtain traders’ computer codes for algorithms, has angered high-frequency traders who argue that the CFTC should get a subpoena for their sensitive information.  Speaking to reporters at a CFTC event on Friday about the proposal, Chairman Timothy Massad did not rule out re-proposing the rule once the latest comment period expires on June 24.

Opening Statement of Commissioner J. Christopher Giancarlo before the CFTC Staff Roundtable on Regulation Automated Trading

Opening Statement of Commissioner J. Christopher Giancarlo before the CFTC Staff Roundtable on Regulation Automated Trading
“As a lawyer, I am aware of no legal foundation on which to haphazardly set aside long-established, due process protections afforded by agency subpoena practice.   It is for the people’s representatives in Congress, and not an unelected agency, to decide whether valuable private property may be taken without specific authority arising from a legal proceeding.”

Op-Ed in The Guardian – The overselling of financial transaction taxes

Op-Ed in The Guardian – The overselling of financial transaction taxes
Kenneth Rogoff, professor of economics and public policy at Harvard University and chief economist of the International Monetary Fund from 2001-03 writes against a financial transaction tax (FTT).  He concludes that the fundamental problem with FTTs is that they are distortionary; for example, by driving down stock prices, they make raising capital more expensive for firms. In the long run, this lowers labor productivity and wage levels.

Study – Phantom Liquidity and High Frequency Quoting

Study – Phantom Liquidity and High Frequency Quoting
Professors Jesse Blocher, Ricky Alyn Cooper, Jonathan Seddon and Ben Van Vliet find that “the only thing occurring during high levels of cancellation activity is HFT firms seeking the correct price level. This is good for the market. It means that HFT firms process information and help improve price discovery without the need for intermediate executions.”