SEC, CFTC Look to Enhance Oversight of Alternative Trading Systems, High Speed Trading

The Securities and Exchange Commission has voted to propose rules to make enhancements to the regulatory oversight and operational transparency of Alternative Trading Systems (ATSs). The proposal would mandate that a ATS trading through the National Market System (NMS) submit detailed disclosures regarding: operations and broker-dealer operator and affiliated-related activities, the kinds of orders and market data used on these trading systems, and procedures regarding priority and execution. The information would be submitted on the newly proposed-Form ATS. ATSs trade stocks on national securities exchanges, such as dark pools.

The SEC’s proposal would make the disclosures at issue are available to the public on the regulator’s website. This could make it easier for market participants to be able to better assess whether to do business with an ATS. The disclosures could also allow participants to have more information when assessing decisions made by their brokers regarding their orders.

Also, the proposals would give the commission a process for qualifying NMS stock ATS for the exemption that they operate under and allow them to review disclosures submitted on Form ATS.

Following the proposal’s publication on the federal register, the SEC has allotted 60 days for comments.

This week, the Commodity Futures Trading Commission voted to propose a registration standard that would impact firms that have changed markets by trading their own funds using complex algorithms and advanced technology. The rules are set up to assist the CFTC in overseeing automated activities, which are now 75% of trading in certain derivatives markets.

Under the proposed rule, automated trading firms would have to put into place kill switch policies and technology to cancel trades that could cause market disruption. They also would need to turn in yearly compliance reports regarding risk controls while keeping records about algorithmic trading procedures.

Firms would also need a repository for the computer code of electronic trading systems. This would allow the CFTC to more easily inspect and examine algorithms to see if they have played any part in market malfunction. At the moment, the federal government can only get this information through subpoena. The new regulation would make it so that automated traders would have to make the computer code available not just to the CFTC but to the U.S. Department of Justice.

The derivatives regulator, which has been seeking to enhance surveillance of computer-driven trading, spent two years looking at industry feedback on whether to implement new rules for traders that engage in high-speed trading, allowing them to purchase and sell orders at rapid speed. CFTC Chairman Timothy Massad said the objective isn’t to prohibit automated trading but to stop orders that could hurt investor confidence or the markets. Massad noted that there are risk controls inherent to the proposal, which acknowledges that automated trading does render benefits.

About 100 firms are expected to be impacted. However, those to be most likely affected are a number of firms run out of New York and Chicago.

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High-Speed Trading Would Face U.S. Scrutiny in New CFTC Plan, Bloomberg, November 24, 2015