The changing mood amongst US regulators towards the regulation of automated trading was reflected in a speech by CFTC commissioner Brian Quintenz late last week, when the newly-confirmed regulator said the controversial RegAT rule was “D-E-A-D”.
Commissioner Quintenz, who was appointed in August 2017,spoke of “one of the most serious missed opportunities of the agency’s prior pending rulemakings – Regulation Automated Trading, or “Reg AT”.
He argued the CFTC’s process on this rule development was “so confused” because while the regulation is titled Regulation Automated Trading the entities it would require to register were classified as Algorithmic Trading Persons. “Those are not interchangeable terms,” he said. “Not all algorithmic trading strategies have completely automated functionality.
“This is more than semantics – it demonstrates a top-level disregard for the enormity of the trading method spectrum and, therefore, a disregard for the proper assessment of market risk posed throughout that broad spectrum,” Quintenz continued. “Evidence of that disregard permeates the original proposal.”
Quintenz further observed that in its originally-conceived form, an Algorithmic Trading Person, or an AT person, was defined so broadly that anyone using something as simple as a trailing stop – or anything with a similar, limited amount of automated functionality would have been captured, forced to register with the Commission, and subject to the same rules and requirements as the most sophisticated High Frequency Trading firms.
“That is poorly-crafted and flawed public policy,” he stated. “While the agency’s lame-duck re-proposal of Reg AT in December of last year attempted to address the breadth of the AT person definition by including a trading frequency threshold, it was still a registration scheme.
“I don’t believe the right answer is to regulate and dictate all algorithmic trading activity,” Quintenz continued. “The right answer is to understand and address automated trading risk. The agency needs to reset its posture on this issue, and we need to have a serious discussion about the finite circumstances under which automated, algorithmic activity can create large-scale market disruptions. Only then should we examine what, if any, additional regulatory solutions are necessary to address those concrete and specific instances.”
Significantly, while Quintenz issued the usual disclaimer about the speech reflecting his views and not necessarily those of the CFTC, he closed the section of his speech on automated trading with a very strong statement. “Lastly, let me use this opportunity to say that the prior administration’s massively over-reaching and highly concerning “source code repository” proposal is D-E-A-D,” he stressed.
Such sentiments will be popular amongst several financial markets participants, the RegAT proposal has been the subject of much criticism from industry bodies who claim it is over-prescriptive.