Members of the House Committee on Agriculture and all four witnesses that appeared before it last week during a public hearing on the Commodity Futures Trading Commission’s proposed Regulation Automated Trading were generally critical of the Commission’s initiative. In his opening remarks, Committee Chairman K. Michael Conaway expressly warned that the Commission’s proposal for it and the Department of Justice to have “on-demand access” to algorithmic traders’ source code “is fraught with danger.” He also suggested that the Commission’s proposal to require certain algorithmic traders who directly access exchanges to register with it as “Floor Traders” not only raises a “legal question” in light of the Congressional purpose in designing that registration category, but may also “unintentionally captur[e] thousands of end-users.” Mr. Conaway suggested that, as an alternative to its current proposed rule, the CFTC consider leveraging “already ongoing processes across the industry to impose and refine risk controls.” In his testimony, Richard Gorelick, CEO of RGM Advisors, LLC, likened the CFTC’s claimed need to access source code in order to better detect potential market disruptions to disassembling and studying the parts of an automobile in order to better predict driving conditions in the future. Mr. Gorelick also argued that “Reg AT tries to accomplish too much in a single regulation, making it unwieldy and impractical.” As a result, he and other witnesses applauded the suggested willingness of CFTC Chairman Massad to issue Regulation Automated Trading in parts, potentially addressing pre-trade and other risk controls first. (Click here for background on Regulation AT in the article, “CFTC’s Proposed New Algorithmic Trading Rules Augur Potential Increased Costs, and a New Registration Requirement” in the November 29, 2015 edition of Between Bridges.)

My View: Reg AT should be broken apart, and solely nonprescriptive measures dealing with risk and other controls should be adopted first. A multi-industry organizations’ proposal that all algorithmic orders should be subject to risk controls capable of being administered either by the routing or sponsoring futures commission merchant or another registrant makes sense. It is not too difficult to implement and addresses a major flaw in the current proposed Regulation AT that it excludes from coverage, algorithmic trading systems of many non-registrants, except for certain algorithmic traders that trade through direct electronic access to exchanges and would be required to register with the CFTC for the first time. (Click here for a summary of comment letters received by the CFTC in response to its recently conducted roundtable in the article, “CFTC Receives 18 Formal Comment Letters in Response to Staff Reg AT Roundtable; Myriad of Issues Raised” in the June 26, 2016 edition of Bridging the Week.)