CFTC Technology Advisory Committee Meeting
AT TODAY’S CFTC TECHNOLOGY ADVISORY COMMITTEEE (TAC) MEETING, panel members and CFTC staff discussed automated and high frequency trading (HFT), the development of technological solutions to improve oversight of customer funds held by futures commission merchants (FCMs), and risk management solutions for FCMs and central counterparties (CCPs).
In his opening statement, Commissioner Scott O’Malia, Chairman of the TAC, said analysis presented at the meeting will help inform the advanced concept release on the testing and supervision of automated trading systems that is currently being developed by Commission staff. Additionally, O’Malia noted the recent report an automated trading by the U.K. Government Office for Science, which he said is a useful research tool going forward on the topic. In closing, O’Malia said the next TAC meeting may take place in the first quarter of 2013 and will include a gap analysis of existing market controls and regulations
During the meeting, the TAC Subcommittee on Automated and High Frequency Trading presented their final recommendations concerning the definition of HFT, the development of new surveillance capabilities and economic analysis, and market microstructure impacts. The presentations were developed by four working groups within the Subcommittee.
The first working group focused on the definition of HFT within the context of automated trading systems. The group attempted to devise a broad definition with recognized legal interpretation that utilizes mechanical descriptions so the other working groups could build off their work. The definition states that HFT is a form of automated trading that employs: algorithms for decision making, order initiation, generation, routing or execution, for each individual transaction without human direction; low-latency technology; high speed connections to markets for order entry; and has recurring, high message rates determined using specific forms of measurement. The group noted that the definition is intended to complement further studies into trading strategies that rely on the mechanics of HFT.
The second working group focused on issues related to market quality and data. The group noted a number of factors that can be used when determining market participant quality, including how much displayed liquidity is provided, the persistence of resting bids and offers, and how quickly orders are adjusted given changing values. The group also looked at studies on HFT and found that the majority of HFT trading volume and “more than 80 percent” of limit order submissions were associated with market making. They used these findings to point out that any policies aimed at limiting the scope of HFT would primarily impact market makers.
The third working group discussed tagging attributes, tagging methodology assessment, registration of high frequency traders, registration and examination of algorithms, and related controls and monitoring. The group stated that current methodology allows self-regulatory organizations (SROs) to gather highly granular data on message trails, allowing them to produce comprehensive audit trails of market activity and book data. They believed registration of HFT would not add any additional regulatory value and did not support registration for algorithms, noting that inputs and parameters of the codes change frequently and do not always involve HFT. They added that auditing of algorithms by an SRO or regulator would be very costly to undertake.
The group also stated that the proper testing of algorithms and trading systems should be the responsibility of those introducing them. This testing should be a part of the overall process of implementing new algorithms along with initial planning and analysis, compatibility with matching engines, installation, and monitoring. They proposed that a certification process be employed to establish when appropriate controls have been implemented, but added that industry-wide standards would have to first be created and implemented.
Speaking on cross-market surveillance, the group stated that federal agencies are in the best position to access data across venues and should work to bridge the gaps between the SROs, who only have data from their own markets. They concluded that registration of HFTs and algorithms would be redundant as the exchanges have sufficient data and tracking information on all of their participants.
The fourth working group focused on market microstructure issues and risk management. The group said recent disruptions in trading from HFT strategies have proven to be disruptive to market stability, noting that errors similar to those that affected equity markets could affect the futures market. They did, however, say that basic understanding of what causes errors is limited, and suggested encouraging anonymous information sharing and analysis of trading errors by the industry to prevent future errors.
Finally, the group stressed that quality control and testing are essential for new algorithm rollouts. While they believe that industry-wide testing procedures should be developed, they do not feel that regulatory certification of algorithms or testing methods would be effective or practical. They concluded that a central clearinghouse or “hotline” could be used to share information on unusual market events for post-incident investigation to help mitigate trading risks moving forward.
In addition to the subcommittee recommendations, the TAC also discussed the progress of developing automated systems to monitor customer’s assets held by FCMs as well as changes made to Rule 1.73, which concerns risk management controls for clearinghouses, including order screening, stress testing, and liquidity assessments. The Committee reported that a third party vendor has been found to provide technology that will enable daily customer account information to be sent to the SROs. With regard to Rule 1.73, panel members raised concerns over the integration of such risk management systems by next year. The panel also raised concerns about how the ruling dealt with auto-rejections of trades and the ability to resubmit a trade after rejection.
For related materials from the meeting, please click here.
AT TODAY’S CFTC TECHNOLOGY ADVISORY COMMITTEEE (TAC) MEETING, panel members and CFTC staff discussed automated and high frequency trading (HFT), the development of technological solutions to improve oversight of customer funds held by futures commission merchants (FCMs), and risk management solutions for FCMs and central counterparties (CCPs).
In his opening statement, Commissioner Scott O’Malia, Chairman of the TAC, said analysis presented at the meeting will help inform the advanced concept release on the testing and supervision of automated trading systems that is currently being developed by Commission staff. Additionally, O’Malia noted the recent report an automated trading by the U.K. Government Office for Science, which he said is a useful research tool going forward on the topic. In closing, O’Malia said the next TAC meeting may take place in the first quarter of 2013 and will include a gap analysis of existing market controls and regulations
During the meeting, the TAC Subcommittee on Automated and High Frequency Trading presented their final recommendations concerning the definition of HFT, the development of new surveillance capabilities and economic analysis, and market microstructure impacts. The presentations were developed by four working groups within the Subcommittee.
The first working group focused on the definition of HFT within the context of automated trading systems. The group attempted to devise a broad definition with recognized legal interpretation that utilizes mechanical descriptions so the other working groups could build off their work. The definition states that HFT is a form of automated trading that employs: algorithms for decision making, order initiation, generation, routing or execution, for each individual transaction without human direction; low-latency technology; high speed connections to markets for order entry; and has recurring, high message rates determined using specific forms of measurement. The group noted that the definition is intended to complement further studies into trading strategies that rely on the mechanics of HFT.
The second working group focused on issues related to market quality and data. The group noted a number of factors that can be used when determining market participant quality, including how much displayed liquidity is provided, the persistence of resting bids and offers, and how quickly orders are adjusted given changing values. The group also looked at studies on HFT and found that the majority of HFT trading volume and “more than 80 percent” of limit order submissions were associated with market making. They used these findings to point out that any policies aimed at limiting the scope of HFT would primarily impact market makers.
The third working group discussed tagging attributes, tagging methodology assessment, registration of high frequency traders, registration and examination of algorithms, and related controls and monitoring. The group stated that current methodology allows self-regulatory organizations (SROs) to gather highly granular data on message trails, allowing them to produce comprehensive audit trails of market activity and book data. They believed registration of HFT would not add any additional regulatory value and did not support registration for algorithms, noting that inputs and parameters of the codes change frequently and do not always involve HFT. They added that auditing of algorithms by an SRO or regulator would be very costly to undertake.
The group also stated that the proper testing of algorithms and trading systems should be the responsibility of those introducing them. This testing should be a part of the overall process of implementing new algorithms along with initial planning and analysis, compatibility with matching engines, installation, and monitoring. They proposed that a certification process be employed to establish when appropriate controls have been implemented, but added that industry-wide standards would have to first be created and implemented.
Speaking on cross-market surveillance, the group stated that federal agencies are in the best position to access data across venues and should work to bridge the gaps between the SROs, who only have data from their own markets. They concluded that registration of HFTs and algorithms would be redundant as the exchanges have sufficient data and tracking information on all of their participants.
The fourth working group focused on market microstructure issues and risk management. The group said recent disruptions in trading from HFT strategies have proven to be disruptive to market stability, noting that errors similar to those that affected equity markets could affect the futures market. They did, however, say that basic understanding of what causes errors is limited, and suggested encouraging anonymous information sharing and analysis of trading errors by the industry to prevent future errors.
Finally, the group stressed that quality control and testing are essential for new algorithm rollouts. While they believe that industry-wide testing procedures should be developed, they do not feel that regulatory certification of algorithms or testing methods would be effective or practical. They concluded that a central clearinghouse or “hotline” could be used to share information on unusual market events for post-incident investigation to help mitigate trading risks moving forward.
In addition to the subcommittee recommendations, the TAC also discussed the progress of developing automated systems to monitor customer’s assets held by FCMs as well as changes made to Rule 1.73, which concerns risk management controls for clearinghouses, including order screening, stress testing, and liquidity assessments. The Committee reported that a third party vendor has been found to provide technology that will enable daily customer account information to be sent to the SROs. With regard to Rule 1.73, panel members raised concerns over the integration of such risk management systems by next year. The panel also raised concerns about how the ruling dealt with auto-rejections of trades and the ability to resubmit a trade after rejection.
For related materials from the meeting, please click here.