Concurring Statement of Commissioner Sharon Y. Bowen on Supplemental Notice of Proposed Rulemaking for Regulation AT

November 4, 2016

Thank you. I’m glad to be here this morning as the Commission considers this supplemental proposal to our rulemaking on Automated Trading. I’ve said several times that I am a firm believer in two things: the need to enhance our rules to ensure that they are appropriately rigorous and protective and to find a rule that works and can be effectively implemented. I am pleased to say that I believe today’s release does both. I commend our staff for their hard work on this proposal.

Following significant engagement with a variety of stakeholders, from exchanges and proprietary traders to advocates of financial reform, we are making several important revisions to our proposed rule on automated trading. Of these changes, there are two in particular that I want to flag. First, we are revising our registration regime to better focus our attention and regulations on the firms responsible for substantial amounts of automated trading in our markets. Under this proposal, firms that make use of Direct Electronic Access (DEA) to connect to our markets will not automatically have to register. Instead, only those firms which use DEA and also have an average of 20,000 or more trades each day over a six month period will be required to register.¹ It only seems appropriate that the firms responsible for a substantial portion of trades in our markets should have heightened regulatory requirements than small firms only entering a handful of trades a day. While a one-size-fits-all system may work in some cases, I believe it would be unduly burdensome to small firms to require that anyone who uses DEA automatically has to register. By offering a specific threshold for registration, however, it is critical that we pick the right number. I therefore am looking forward to the comments from market participants on whether 20,000 trades per day is the right level, too high, or too low. Given the interest that our previous proposal on registration engendered, I am sure that there will be some spirited debates about just what the proper threshold should be.

However, while small firms with small volumes will not be required to register, it is not the case that their trades will be unregulated. In fact, the second major revision of today’s proposal will require that all electronic trading, algorithmic as well as non-algorithmic, will have two separate layers of pre-trade risk controls on it. For those trades originating from an AT Person, both the designated contract market (DCM) and the AT Person will be obligated to place pre-trade risk controls on their electronic trades, with the AT Person having the option of delegating this responsibility to the relevant futures commission merchant (FCM). Meanwhile, any electronic trading from entities other than AT persons will also be subject to two levels of pre-trade risk controls: one level set by the DCM and one by the FCM. As a result, under this proposal, we will be ensuring that every single electronic trade, automated as well as non-automated, in our markets is subject to two levels of pre-trade risk controls without exception. Given the nearly constant technological innovations and redesigns involving algorithmic trading, I believe having two levels of risk controls is not only the most prudent course of action for our markets, it is also critical protection against a market malfunction harming investors or our broader economy. For those of you worried that automated trading is occurring free of any oversight or regulation, this rule seeks to allay some of those fears.

As I have said before, however, this regulation is merely a first cut. Having looked at this issue for nearly a year, I have some doubts whether we are doing enough to ensure that all market participants, especially end-users in certain markets, are being given a level-playing field at present due to the proliferation of algorithmic trading. I therefore believe that we should consider instituting pilot programs in certain small sections of the market that can test the effects of additional, more substantial restrictions on algorithmic trading on market operations. Please note, I do not believe it is the time to place more rigorous restrictions on algorithmic trading on all the markets we regulate. Instead, I believe only that we should see whether there are some markets where a significant percentage of end-users are interested in establishing greater monitoring and regulation of algorithmic trading. If one or two such markets do exist, then those markets could be candidates for a tailored pilot program to gather data on the effects of algorithmic trading on those markets. We could then gain important insight on the effects of new market dynamics that continue to evolve. If you are an end-user and believe that your market would benefit from such a tailored pilot program, I encourage you to convey that message to the Commission.

I had the pleasure of meeting with some members of the National Cattlemen’s Beef Association earlier this year and more recently, who informed me that they believe algorithmic trading is having a substantial impact on livestock markets and that they are interested in gaining more data on how algorithmic trading is influencing livestock prices. I share a desire for more information, both about whether this rule is regarded as being a step in the right direction and about what, if any, effects algorithmic trading is having on our markets. If an observer has an issue with any part of this rule, especially if you feel it is too weak, I sincerely hope you will lay out that concern in detail and let us know how we can improve it.

Finally, I want to thank stakeholders, particularly several industry groups, for their engagement with the Commission since we released our proposal. I was very happy to learn that some aspects of this proposal, including the idea of requiring pre-trade risk controls on all electronic trades, were suggested by members of the industry. We have notice and comment requirements for many reasons: increased transparency, an opportunity for public involvement, and of course to set procedural strictures on the government. But one of the reasons undergirding our system of notice and comment is the idea that regulators do not have all the answers all of the time, and there is a role for market participants to play during the regulatory process. The fact that industry participants were able to devise and endorse a broad regulatory requirement on all automated trading is to be commended.

¹ Supplemental Notice of Proposed Rulemaking on Regulation on Automated Trading at 29, 215.

Last Updated: November 4, 2016