Financial regulators in the United States have recently announced new provisions in order to better monitor the practice of high-speed automated trading that have become popular in recent years. These new provisions will affect as many as 100 trading companies that have used complex algorithms to determine their trading patterns.
On Tuesday, the Commodity Futures Trading Commission unanimously voted to introduce new standards of registration. These standards should help the commission in monitoring activities that are conducted using automated systems. Currently, automated trading represents up to 75% of all activity in certain derivative markets. Until recently, there had been little monitoring of such practices.
In recent years, technological disruptions have caused much speculation over the best way to regulate high-speed automated trading practices. For the past two years, the trading commission has been reviewing industry feedback in order to explore the possibility of new rules for computer traders.
According to the chairman of the trading commission Timothy Massad, the new rules aren’t being made to restrict automated trading. Instead, the new regulations should prevent orders that could cause harm to markets and reduce the confidence of investors.
Massad said, “It contains a number of common sense risk controls that I believe recognize the benefits that automated trading has brought to our markets, while also seeking to protect against the possibility of breakdowns.”
It is likely that the new registration standards will have the greatest impact on certain firms that operate out of New York City and Chicago. These firms are not big names in the trading industry.
With the new policies, all automated trading firms will be required to install “kill switches” that can cancel trades that might disrupt financial markets. Additionally, the firms will be required to submit compliance reports every year in order to discuss their risk controls.
Also, the firms will have to provide records of the algorithms that they utilize in their automated trading. The trading commission says that it wants to be able to easily review the algorithms in order to see if they helped to cause a market malfunction. This is highly controversial, as most trading code algorithms represent top-secret information that is vital to the success of automated traders. Traditionally, regulators have only been able to obtain such information through a subpoena.
While these practices shouldn’t do anything to lessen the practice of automated computer trading, they do represent some new obstacles for automated traders. Needless to say, many traders aren’t exactly comfortable with government agencies being able to easily access such critical information. By sharing key data with the government, the secretive information of the companies could become more vulnerable to cyberattacks. Time will tell how the automated trading companies respond to the new policies.