In a speech before the Sandler O’Neill Global Exchange and Brokerage Conference in New York last week, Timothy Massad, Chairman of the Commodity Futures Trading Commission provided some insight into regulatory initiatives the Commission is considering in response to the increased automation of trading and reliance by traders on algorithmic trading systems. Among other things, said Mr. Massad, the CFTC is considering whether proprietary traders with direct access to markets should be required to register with the CFTC if they engage in algorithmic trading. The CFTC is also considering whether it should mandate by rule certain pre-trade risk controls such as message and execution throttles, kill switches and controls to prevent erroneous orders that have already been implemented by exchanges and many market participants themselves, offered Mr. Massad. Finally, Mr. Massad indicated that the Commission is considering whether clearing members should be required to manage the risks of their direct access customers who employ algorithmic trading. Separately, in his opening statement at last week’s CFTC’s Market Risk Advisory Committee, Commissioner J. Christopher Giancarlo bemoaned that “[t]he number of [future commission merchants] has dramatically fallen in the past 40 years: from over 400 in the late 1970s, to 154 before the 2008 financial crisis, and down to just 72 today.” According to Mr. Giancarlo, this decline in the number of FCMs has particularly hurt farmers, ranchers and manufacturers. According to Mr. Giancarlo, “[w]ith fewer firms serving a bigger market, risk is being more concentrated in large bank-affiliated firms, increasing the systemic risk that [the Dodd-Frank Wall Street Reform and Consumer Protection Act] promised to reduce.” He implied that the reduction in the number of FCMs – particularly smaller FCMs – has arisen because of increased costs associated with complying with many new “complex regulations” that were implemented without “a true analysis of the effect on FCMs and end-users.” (Click here for an alternative view on the state of the FCM industry in the article, “The FCM Business Is Not All Doom and Gloom Reports Tabb Group” in the May 3, 2015 edition of Bridging the Week.)

My View: In passing any new regulations, the Commission must continue to be mindful of the limitation of its resources. To the extent that tasks can be performed or already are performed by self-regulatory organizations, it appears more productive to heighten oversight of the SROs than to double-up on the requirements on market participants.

Hard to Believe: Reflecting on Commissioner Giancarlo’s 'Ode to FCMs' prompted me to recall that Shakespeare had also lamented about the state of futures commission merchants many years ago in an early draft of Hamlet’s famous soliloquy in Act 5, Scene 1, prior to amending  it to its more customarily remembered version: “Alas poor FCMs, I knew them, Horatio; entities of seemingly infinite capacity, of most excellent clearing services. They hath carried our trades a thousand times; and now, how abhorred in my imagination it is! My gorge rises at it. Where are those firms we have transacted with now? Your names? Your logos? Your flashes of ingenuity that were wont to make our business folk buoyant? Not one now to ass