Introduction On November 24, 2015, the Commodity Futures Trading Commission (“CFTC”) held an open meeting at which it unanimously approved its long-anticipated notice of proposed rules referred to as Regulation Automated Trading (“Regulation AT”).1
The proposed rules seek to bolster the U.S. regulatory regime for automated trading through a series of risk controls that target potential risks and volatility sometimes associated with automated or algorithmic trading systems (“ATSs”) on three levels: (a) the trader, (b) the intermediary, and (c) the trading platform. Regulation AT requires registration of certain persons as “Floor Traders” who are not currently registered with CFTC, yet nonetheless participate in “Algorithmic Trading.” The proposed rules also seek to increase transparency around designated contract market (“DCM”) electronic matching platforms and market maker and trading incentive programs.
While Regulation AT only refers to ATSs, its application is much broader. Given that today less than 10 percent2 of trading volume on DCMs is executed via voice or on the trading floor – as compared with 90 percent3 15 years ago – now automated and algorithmic trading (“Algorithmic Trading”) encompasses the majority of trading volume on the DCMs. In other words, this regulation aims at the most sweeping overall reform of trading on DCMs since federal regulation of DCMs started in 1922.4
Below, we first briefly summarize the effects of this regulation on various market participants and on the markets as a whole. Second, we analyze substantive provisions of Regulation AT, such as the new definitions and new compliance requirements on various market participants and systems operators. Third, we discuss potential costs of compliance with these new regulations. Fourth, we provide a brief summary of EU regulations applicable to high frequency traders (“HFTs”), and conclude with a summary.
- Regulation Automated Trading (proposed Nov. 24, 2015) (to be codified at 17 C.F.R. pts. 1, 38, 40, 170); see also Concept Release on Risk Controls and System Safeguards for Automated Trading Environments, 78 Fed. Reg. 56542 (Sept. 12, 2013). http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2015-30533a.pdf
- Appendix 3 – Concurring Statement of Commissioner Sharon Y. Bowen, Regulation AT (Nov. 24, 2015) (citing Keynote Address by Commissioner Sharon Y. Bowen before ISDA North America Conference, CFTC (Sep. 17, 2015), http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-6) (also available at http://www.cftc.gov/PressRoom/SpeechesTestimony/bowenstatement112415).
- See Grains Futures Act of 1922, c. 369, § 1, 42 Stat. 998 (1922) (revised into the Commodities Exchange Act, June 15, 1936).
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