CFTC Regulation of Automated Trading Approaches

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The U.S. Commodity Futures Trading Commission is preparing to announce new regulations aimed at managing the risk of automated trading. Automated trading strategies are used for more than 40 percent of futures traded in Treasury, energy, metals and agricultural markets.

One focus of the new regulations will be trading in Treasury bonds. The concern with the nearly $13 trillion government bond market stems from the flash rally in Treasuries last October where there was substantial volatility during a short 12 minute window.

The regulations have been debated for more than two years at the agency and could be announced as soon as a month from now. CFTC Chairman Timothy Massad spoke about this area in a speech this week. Any regulations will still need to go through notice and comment rulemaking so it would still be months or even years before they were actually implemented.

Among the proposals under considerations are increased registration requirements for proprietary trading firms, pretrade risk controls, and possibly even kill switches to aid efforts to stop out of control computer programs from impacting the markets.

The CFTC has placed increased emphasis on algorithmic trading and has begun enforcement actions against several traders and firms for spoofing, the placement of orders intended to manipulate the market rather than execute. It is unlikely to impose special requirements on high-frequency trading of the type that was detailed in Flash Boys because of the difficulties in defining the term.

As always, reporters of violations of these regulations, once they are implemented, will be eligible for whistleblower rewards when the monetary sanctions for noncompliance exceed $1 million and the individual otherwise meets the terms and conditions of the program set form in the Dodd-Frank Act and CFTC rules. Our CFTC whistleblower attorneys can assist you with answers to questions about this information as well as assistance reporting violations of the Commodity Exchange Act to the U.S. Government. To speak to an attorney, fill out our contact form or call 1-800-590-4116.

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