The CFTC has launched its first proposal for regulating automated trading in the futures market. The regulations, which will be subject to a 90-day public comment period, are still months, if not years, away from being implemented.
The CFTC proposal contains a number of initiatives, including:
- Registration of automated trading firms (approximately 100 firms);
- Pre-trade risk controls including a cap on the number of trades within a certain period;
- Implementation testing, kill switches to cancel orders. and annual compliance reports on risk controls; and
- Safeguards against self-trading.
One of the more controversial features is the requirement that the code used by automated traders must be available for inspection by the CFTC and DOJ. One of the CFTC Commissioners expressed concerns about their ability to maintain the confidentiality of the proprietary systems.
The proposal has been in the works for several years, perhaps beginning with the CFTC’s investigation into the 2010 flash crash. In 2013, the CFTC issued a concept release asking for input into various issues related to automated trading. In early 2015, the SEC proposed that approximately 125 high frequency trading firms register with FINRA in order to enhance their ability to monitor the markets.
High speed trading has been an area of multiple enforcement actions by both the SEC and the CFTC over the past few years. The CFTC has brought enforcement actions in this area primarily for spoofing, while the SEC has targeted favorable policies adopted by dark pools to help high speed traders without adequate disclosure to other investors.
Electronic trading has been the source of a number of whistleblower tips to both the SEC and CFTC since Congress created financial incentives for securities whistleblowers as part of the Dodd-Frank Act. Individuals have already claimed they have provided assistance to the SEC and CFTC through this program to bring actions concerning high-speed electronic trading.
If you have information about violations of federal securities laws by a high-speed trader or service provider, please contact one of the cftc whistleblower attorneys in our office for a free, initial legal consultation concerning your potential tip.