Automated trading of futures is set to become more tightly regulated in the US, following the approval of new rules by the Commodity Futures Trading Commission (CFTC).
Regulation Automated Trading (Reg AT) represents a series of risk controls, transparency measures and other safeguards to enhance the US regulatory regime for automated trading on designated contract markets (DCMs) according to the CFTC.
Reg AT will affect market participants using algorithmic trading systems, clearing member futures commission merchants and DCMs executing orders on behalf of participants.
It will also require some proprietary traders are not currently registered with the CFTC to become registered.
Specific rules include using self-trade prevention tools, publishing more detail information of how DCMs match trades and transmitting data to market participants. The CFTC has also proposed that market participants should become members of a registered futures association, which should apply membership rules addressing algorithmic trading.
Timmothy Massad, chairman of the CFTC, said: “Automated trading has brought many benefits to market participants. These include more efficient execution, lower spreads and greater transparency. But its extensive use also raises important policy and supervisory questions and concerns.
“The proposal approved today addresses several areas discussed in [a previous Concept Release], and incorporates much of that public input [received in response to the release]. It focuses on minimising the potential for disruptions and other operational problems that may arise from the automation of order origination, transmission or execution. They may come about due to malfunctioning algorithms, inadequate testing of algorithms, errors and similar problems.”
Massad added that many of the proposals are in line with best practice already being adopted by larger firms in the industry, and said the CFTC wanted to establish effective standards without raising barriers for entry for smaller firms.
The proposals are now subject to a 90-day comment period, with stakeholders able to submit their responses via the CFTC’s website.