NEW YORK -- Regulators are proposing new procedures to monitor high-speed trading more closely in response to wild market swings produced by a series of technical breakdowns.
More than 70 percent of all trading now is automated, the Commodity Futures Trading Commission said Tuesday as it voted unanimously in favor of new registration standards for high-speed traders.
The systems use algorithms to spot variances in market data, allowing trading firms to deliver buy and sell orders in milliseconds.
That technology has led to a number of high-profile glitches, including one this summer that shut down the New York Stock Exchange for almost half a day.
The commission's proposals, approved by a 3-0 vote, would require some traders to register with the commission, specifically those "engaged in algorithmic trading through direct electronic access" to major U.S. markets. The new rules are meant to foster greater transparency, and they are open for a 90-day public comment period.
They also call for tools to prevent "self-trading," when one firm takes both sides of a trade.
Key elements of the proposal involve market participants, including merchants, setting up risk controls for the trading orders. They also must submit compliance reports describing those controls.
Timothy Massad, commissioner of the Commodity Futures Trading Commission, said the proposal "provides some common-sense risk controls" that also embrace the benefits of automated trading. In a statement, he said the goal is to have risk controls at multiple levels, from the exchange itself to clearing members and trading firms.
The approach comes one year after high-speed trading firm Athena Capital Research agreed to pay a $1 million penalty to settle allegations of market manipulation. The Securities and Exchange Commission alleged that the company used an algorithm to manipulate closing prices of thousands of stocks. The company placed a large number of rapid trades in the final seconds of every trading day over a six-month period.
New York-based Athena neither admitted nor denied the allegations under the settlement, but it did agree to refrain from future violations of the securities laws.
Steven Todd, a professor at Loyola University's business school in Chicago, said the proposal is just a first step and that it could take years for the rules to have an effect.
"I just don't expect anything to come out of them that is going to be really harmful to what many of these firms are trying to do," Todd said of the Commodity Futures Trading Commission in an interview.
While the commission's plan is described as a broad way to review automated trading, the registration standard probably will have the biggest effect on a group of firms that operates out of Chicago and New York, and are far from household names. A lobbying group for proprietary traders including DRW Holdings LLC, XR Trading LLC and Jump Trading LLC has said that registration standards should be determined by derivatives exchanges rather than the commission. Exchanges also serve as industry regulators and have sufficient powers to audit firms, the group said.
The proposal "dramatically lowers the bar for the federal government to obtain this information," J. Christopher Giancarlo, a Republican commissioner, said in a statement on Tuesday. "Currently, the federal government may only obtain such sensitive information through a subpoena."
Information for this article was contributed by The Associated Press and by Silla Brush and Brian Louis of Bloomberg News.
Business on 11/25/2015