The CFTC has unanimously approved a proposed Rule on Automated Trading. Regulation AT takes a multi-level approach to represent a series of risk controls, transparency measures, and other safeguards to enhance the U.S. regulatory industry for automated trading. The rule proposes risk control and other requirements for 1) Market participants using algorithmic trading systems who are defined as “AT Persons” in the rulemaking, 2) clearing member futures commission merchants with respect to their AT Person customers and 3) Designated Contract Markets (DCMs) executing AT Person Orders. The rules are intended to reduce potential risks arising from algorithmic trading activity. They require the following implementation of risk controls:
- Maximum Order Message and Maximum Order Size Parameters
- Establishment of standards for the development, testing, and monitoring of Algorithmic Trading Systems
- AT Persons and Clearing Member FCMs would be required to submit reports on their risk controls to DCMs
- Maintain books and records regarding their risk controls
- Other algorithmic trading procedures for review by DCMs
- Require registration of certain proprietary traders not currently registered with the CFTC (this requirement would be applicable specifically to proprietary traders engaged in algorithmic trading though direct electronic access to a DCM)
- The use of self-trade prevention tools by market participants on DCMs while permitting trades originating from accounts with independent decision makers
- Digital Contract Markets (DCMs) must publish a description of rules or known attributes of the trade matching platform that materially affect factors such as the time, price, or quantity of execution of market participant orders, the ability to cancel or modify orders, and the transmission of market data and order or trade confirmations to market participants.
These proposed rules are intended to provide transparency. The commission is proposing that AT Persons become members of a registered futures association and will further require registered futures associations to consider membership rules that address algorithmic trading for each category of member withing the registered futures association. A question and answer PDF can be found by clicking here.