CFTC Seeks Comment on New Derivatives Restrictions

Today the CFTC issued a concept release requesting input on whether to expand supervision of high-speed trading.

The U.S. Commodity Futures Trading Commission (CFTC) is seeking comment on whether to require registration for automated trading firms, taking a first step in potential restrictions on high-speed and algorithmic derivatives trading.

CFTC members voted unanimously to issue a concept release that requests input on more than 100 questions, including on whether to expand testing and supervision of high-speed trading strategies. The release, a step prior to a formal proposal by the top U.S. derivatives regulator, also considers ways to limit the maximum number of trading orders a firm can place in a given amount of time.

“Traditional risk controls and system safeguards, many of which were developed according to human speed and floor-based trading, must be evaluated in light of new market realities,” CFTC Chairman Gary Gensler said in a statement.

The CFTC, along with the Securities and Exchange Commission (SEC), boosted scrutiny of high-frequency and algorithmic trading after May 6, 2010, when $862 billion in equity value was erased in 20 minutes before share prices recovered. The agency’s concept release was debated for more than a year.

More recent computer malfunctions, including a software glitch that halted Nasdaq Stock Market trading in thousands of stocks and options for three hours on Aug. 22, have raised questions about the reliability of electronic markets.

Scott O’Malia, a Republican CFTC commissioner, said in a statement that the input is necessary to understand protections already in place and whether any additional steps are needed.

“In general, those involved in financial markets seem to have blindly accepted that technology is almost always a good thing,” Bart Chilton, a Democratic CFTC commissioner, said in a statement. “But it doesn’t work well enough if we continue to see aberrations.”

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