21 October 2017

CFTC commissioner: plans to seize algo trading source code are 'D-E-A-D'

05 October 2017  |  5469 views  |  0 Stock market graph

The Commodity Futures Trading Commission (CFTC) is killing off controversial plans to seize algorithmic traders' source code.

New CFTC commissioner Brian Quintenz declared the "massively over-reaching and highly concerning" source code plans "D-E-A-D", during a speech at an industry conference.

In 2015, the Commission unanimously approved a host of new rules designed to minimise the risks posed by automated trading and to give it the tools to deal with problems when they arise.

The plan included giving CFTC staffers the ability to see regulated firms' source code - something that they can only currently do with a subpoena. Last year, in the face of industry fury, the Commission amended its proposal, requiring it to issue a "special call".

However, with the political complexion of the watchdog now much changed, Republican Quintenz has hit out at the "prior administration".

In addition to the source code issue, the commissioner is unhappy with the way that Regulation Automated Trading (Reg AT) rule defines an 'Algorithmic Trading Person'.

This is "defined so broadly that anyone using something as simple as a trailing stop...would have been captured, forced to register with the Commission, and subject to the same rules and requirements as the most sophisticated High Frequency Trading firms," he told his audience, adding: "That is poorly-crafted and flawed public policy."

Says the commissioner: "The agency needs to reset its posture on this issue, and we need to have a serious discussion about the finite circumstances under which automated, algorithmic activity can create large-scale market disruptions."

Quintenz also used his speech to highlight a problem with the CFTC's fintech lab, recently set up to explore the application of new innovations in fintech and RegTech to guide policy and aid market stability.

LabCFTC is being hampered in its ability to demo and carry out proof-of-concept projects with fintech firms by ethics rules which demand it provide fair compensation for "anything of value" - making sandbox demos "enormously burdensome and time consuming".

However, Quintenz says that he is hopeful of working with Congressman Patrick McHenry, the Chairman of the House Innovation Caucus, on a legislative fix.

More generally, the commissioner wandered off his beat, musing on the rise of new players in the financial services sector, offering a vision of Amazon's future.

"Amazon is leveraging its visibility into micro-sales growth rates to strategically extend credit to fast growing small businesses. Imagine if Amazon had access to low cost deposits via a bank charter and put branch infrastructure in its brick and mortar Whole Foods stores.

"By combining low cost deposits with its real time sales and customer satisfaction visibility to make credit quality decisions, Amazon might become THE dominant retailing-merchant lender overnight."

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