algorithmic trading

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On November 24, 2015, the CFTC announced the new proposed Regulation Automated Trading (“Reg. AT”), which contains a variety of measures designed to prevent potential market disruptions arising from algorithmic trading.   Among other things, Reg. AT proposes certain pre-trade risk and order management controls, the implementation of policies and procedures governing algorithmic trading, and additional registration and reporting obligations.  Many of these proposals were foreshadowed in a recent speech by the CFTC Chair, which we blogged about here.

The SEC announced this week its proposal to substantially overhaul the rules regarding alternative trading systems (“ATS”), often referred to as dark pools. The proposed rules would require firms operating ATSs to make additional disclosure about business activities that may present conflicts of interest between firms and ATS subscribers, and considerable information as to how the ATS operates. The proposed rules would also require advance SEC approval of a firm’s ATS disclosures.

On November 2, 2015, the Director of the SEC Division of Enforcement Andrew Ceresney spoke at the “SIFMA Compliance & Legal Society New York Regional Seminar” and outlined the SEC’s enforcement priorities with respect to market structure issues.  This is yet another response by regulators to the growth of algorithmic trading and alternative trading venues, which we have blogged about here, here and here. 

On October 21, 2015, CFTC Chair Timothy Massad spoke at the “Evolving Structure of the U.S. Treasury Market” conference organized by the U.S. Department of Treasury and the Federal Reserve Bank of New York.  His remarks came the day after SEC Chair Mary Jo White’s comments, which we blogged about here, and follow this summer’s Joint Staff Report analyzing the significant volatility that the U.S. Treasury market experienced on October 15, 2014, which we blogged about here. 

On October 20, 2015, SEC Chair Mary Jo White gave the keynote address at the “Evolving Structure of the U.S. Treasury Market” conference organized by the U.S. Department of Treasury and the Federal Reserve Bank of New York. The conference and speech follow this summer’s Joint Staff Report analyzing the significant volatility that the U.S. Treasury market experienced on October 15, 2014. The Joint Staff Report was a cooperative effort of the Department of Treasury, the Federal Reserve, the SEC and CFTC, and was the subject of a previous post on this blog (Regulators Fail To Identify Cause Of Abnormal US Treasury Trading on October 15, 2014).

Potentially abusive trading algorithms, such as algorithms that purportedly engage in “spoofing” or “layering” are the subject of considerable regulatory interest.  However, in an interesting complaint filed on October 19, 2015, the CFTC alleged that a firm manually entering futures orders engaged in illegal spoofing that appears to have lured algorithmic traders into the market. 

Mistakes in computer coding by a high frequency trading firm that went undetected for approximately four years were responsible for approximately 12.6 million orders that violated Reg NMS, according to an Order settling an enforcement proceeding with Latour Trading LLC, announced by the SEC on September 30.  These noncompliant orders involved more than $4.6 billion shares and had a notional value of $116 billion. 

FINRA’s recently-released Regulatory and Examinations Priorities Letter for 2015 reflects substantial regulatory interest in high-frequency trading and other issues arising from trading technology.  Regulatory concern over these issues has been previously reported on this blog here and here.

The 2015 Letter states that FINRA has adapted its surveillance program to identify potentially violative conduct such as trading by “abusive algorithms” made possible by advances in technology and changes in market structure.  Abusive algorithms, according to FINRA, include trading algorithms that seek to manipulate the market through layering, spoofing, wash sales, marking the close, or other manipulative techniques.