/Vol. 78, No. 177/Thursday, September 12, 2013/Proposed Rules
‘‘Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC andSEC to the Joint Advisory Committee on EmergingRegulatory Issues,’’ September 30, 2010[hereinafter, the ‘‘CFTC and SEC Joint Report on theMarket Events of May 6, 2010’’], available at
Jenny Strasburg & Jacob Bunge, ‘‘LossSwamps Trading Firm,’’ Wall St. J. (Aug. 2, 2012),available at
On October 2, 2012, the Securities and ExchangeCommission (‘‘SEC’’) conducted a roundtableentitled ‘‘Technology and Trading: PromotingStability in Today’s Markets’’ (‘‘SEC Roundtable’’).
SEC, Notice of Roundtable Discussion:Technology and Trading Roundtable, 77 FR 56697(Sept. 13, 2012). A transcript of the SEC Roundtable[hereinafter, the ‘‘SEC Roundtable Transcript’’] isavailable at
At the SECRoundtable, then-SEC Chairman Schapiro raisedthe Knight Capital incident and noted that ‘‘[e]ventslike these demonstrate the core infrastructure andtechnology issues that can be problematic in anymarket structure.’’
SEC Roundtable Transcriptat 11.
Dodd-Frank Wall Street Reform andConsumer Protection Act of 2010, Public Law 111–203, 124 Stat. 1376 (2010).
Many of these concepts are in harmony withevolving views of groups responsible for settingstandards and developing regulations for othermarkets around the world.
IOSCOTechnical Committee, ‘‘Regulatory Issues Raised bythe Impact of Technological Changes on MarketIntegrity and Efficiency: Consultation Report’’ (July2011) [hereinafter ‘‘IOSCO Report on RegulatoryIssues Raised by Technological Changes’’], availableat
ESMA, ‘‘Final Report: Guidelines onSystems and Controls in an Automated TradingEnvironment for Trading Platforms, InvestmentFirms and Competent Authorities’’ (December 2011)[hereinafter, ‘‘ESMA Guidelines on Systems andControls’’], available at
available to execute such strategies. Inaddition to these benefits, however,automated trading environments havealso presented challenges unique totheir speed, interconnectedness andreliance on algorithmic systems.In recent years, a number of high-profile system events associated withautomated trading have raised public,Commission and industry awareness.For example, on May 6, 2010, majorequity indices in both the futures andsecurities markets lost more than 5% of their value in a matter of minutes whenan automated order led to extremedownward price movement and aliquidity crisis in the ChicagoMercantile Exchange’s (‘‘CME’’) E-minifutures contract.
In August 2012, atrading firm in the securities markets—Knight Capital Group—submitted asignificant number of errant proprietaryorders to the New York Stock Exchange(‘‘NYSE’’), causing price swings innearly 150 securities and costing thefirm approximately $440 million in theprocess.
Most recently, in August 2013,trading on the Nasdaq stock market wasdisrupted for three hours due tomalfunctions in quote disseminationsystems and potential connectivityissues between it and another tradingplatform’s systems. These and otherrecent events in automated tradingenvironments are discussed in greaterdetail in section II.C., below.The Commission has taken steps toaddress the transition to automatedtrading and require appropriate riskcontrols for designated contract markets(‘‘DCMs’’), swap execution facilities(‘‘SEFs’’), futures commissionmerchants (‘‘FCMs’’), swap dealers(‘‘SDs’’), major swap participants(‘‘MSPs’’) and others. In April 2012, itadopted final rules requiring FCMs, SDsand MSPs that are clearing members toestablish risk-based limits based onposition size, order size, marginrequirements, or similar factors, andrequiring those entities to useautomated means to screen orders forcompliance with the risk limits whensuch orders are subject to automatedexecution. Further, in June 2012, theCommission adopted final rules withrespect to DCMs, includingrequirements that DCMs establish andmaintain risk control mechanisms toprevent and reduce the potential forprice distortions and marketdisruptions. Relevant controls cited inthe rule include trading pauses andhalts under conditions prescribed by theDCM. The Commission adopted similarrequirements in its final rules for SEFsin 2013. Finally, the DCM final rulesalso require risk control requirementsfor exchanges that provide direct marketaccess (‘‘DMA’’) to clients.The Commission has also adoptedrules related to trading practices,including trading in automatedenvironments. In July 2011, theCommission adopted final rulescodified in 17 CFR Part 180 that, amongother things, (i) broadly prohibitmanipulative and deceptive devices,
fraud and fraud-based manipulativedevices and contrivances employedintentionally or recklessly, regardless of whether the conduct in question wasintended to create or did create anartificial price; and (ii) codify theCommission’s long-standing authority toprohibit price manipulation by makingit unlawful for any person, directly orindirectly, to manipulate or attempt tomanipulate the price of any swap, or of any commodity in interstate commerce,or for future delivery on or subject to therules of a registered entity. Further,section 747 of the Dodd-Frank WallStreet Reform and Consumer ProtectionAct (the ‘‘Dodd-Frank Act’’)
amendedthe Commodity Exchange Act (‘‘CEA’’ or‘‘Act’’) to make it unlawful for anyperson to engage in disruptive tradingpractices, and the Commission hasprovided guidance on the scope andapplication of the new statutoryprohibitions. The Commission’smeasures to date are summarized ingreater detail in section II.B., below.With respect to these measures andothers discussed in this ConceptRelease, the Commission requestspublic comment regarding anyadditional steps, guidance orrulemaking that it should undertake.Derivatives market participants,including DCMs, FCMs, clearingmembers and others, have themselvestaken a number of steps to manage risksassociated with automated trading. TheCommission acknowledges these efforts,and, through this Concept Release, seekspublic comment on the extent to whichmeasures already in place may besufficient to safeguard markets inautomated trading environments. Inparticular, section III below summarizesrelevant risk controls implemented byone or more market participants;requests comment regarding the extentof their implementation to date; andseeks input regarding whether existingcontrols would benefit from additionalgranularity or regulatorystandardization.
A. Design of Concept Release and Request for Comments
This Concept Release provides anoverview of the automated tradingenvironment, including its principalactors, potential risks, and preventativemeasures designed to promote safe andorderly markets.
The Concept Releasewas informed by controls already in usetoday by one or more marketparticipants or exchanges, and bestpractices, recommendations andconcepts developed by the CFTC’sTechnology Advisory Committee(‘‘TAC’’); the Futures IndustryAssociation’s (‘‘FIA’’) Principal TradersGroup and Market Access WorkingGroup; the International Organization of Securities Commissions (‘‘IOSCO’’); theEuropean Securities and MarketsAuthority (‘‘ESMA’’); and by existingCFTC regulatory requirements. It beginswith an overview of automated trading,including the development of automated order generation andexecution systems; advances in high-speed communication networks; thegrowth of interconnected automatedmarkets; the changed role of humans inmodern markets; and a discussion of
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