March 16, 2016
Mr. Christopher J. Kirkpatrick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581

Re:

Notice of Proposed Rulemaking – Regulation Automated Trading (RIN 3038-AD52)

Dear Mr. Kirkpatrick:
Citadel LLC 1 (“Citadel”) appreciates the opportunity to provide comments to the Commodity
Futures Trading Commission (the “Commission”) on its notice of proposed rulemaking regarding
automated trading (“Regulation AT”) on U.S. designated contract markets (“DCMs”). 2
Over the past two decades, technological innovation has fundamentally changed how market
participants transact on DCMs, spurring a transition to electronic trading and supporting the useof increasingly sophisticated execution strategies. The growth of electronic trading has improved
market conditions for investors by increasing transparency and fostering competition, leading tobetter pricing and deeper liquidity. In parallel, greater automation has improved the operationalsoundness and stability of our markets, minimizing the incidence of trade breaks and other errorsthat frequently resulted from manual processes and enabling the efficient transmission of orderinformation and trade confirmations.
However, the market’s transition to electronic trading has also introduced new operational risks
that deserve the attention of regulators, trading venues and market participants. We firmly support
Commission efforts to improve market resiliency and operational stability, given their fundamental
importance to investor confidence. The Commission’s Regulation AT proposal would establish
minimum risk management standards around the design, testing and monitoring of algorithmic
trading systems and the entry of orders by those systems onto DCMs. Importantly, these proposedrisk controls include order cancellation (“kill switches”) and connectivity monitoring systems atthe DCM level, recognizing that exchanges sit at the center of trading and therefore are best
positioned to monitor activity across a wide variety of participants. In addition, the Commission’sproposal would increase the level of disclosure required to be provided by DCMs regarding theirtrading protocols and market making or other incentive programs offered to participants.

1
Citadel is a global financial firm built around world-class talent, sound risk management, and innovative marketleading technology. For more than a quarter of a century, Citadel’s hedge funds and capital markets platforms havedelivered meaningful and measurable results to top-tier investors and clients around the world. Citadel operates inall major asset classes and financial markets, with offices in the world’s leading financial centers, including
Chicago, New York, San Francisco, Boston, London, Hong Kong, and Shanghai.
280 Fed. Reg. 78824 (Dec. 17, 2015) (the “Reg AT Proposal”).

1While we believe there are several modifications that should be made in order to appropriately
calibrate these proposals, in large part the Commission has leveraged both industry best practices
and recent regulatory initiatives in other asset classes. However, in a sharp departure fromestablished precedent, the Regulation AT proposal also includes a requirement for market
participants to maintain a source code repository that is available for summary inspection by theCommission and other government agencies. As discussed in further detail below, we urge theCommission to remove this requirement and focus on the elements of the proposal directly linked
to improving market resiliency and stability.
I. Source Code is Highly Sensitive Intellectual Property and Not a Standard Book orRecord
The source code utilized by an investment firm is often its most valuable intellectual property
and critical to its overall commercial success and viability. Nearly every aspect of the investment
process, from data analysis to strategy development to trade execution, can be deciphered from thesource code employed to assist with these tasks. The Commission’s Regulation AT proposal
requires market participants to maintain a source code repository that is available for summary
inspection by the Commission and other government agencies, as is currently the case for generalbooks and records maintained by a firm. In seeking to treat source code in the same manner as an
ordinary business record, such as a trade confirmation, the Commission’s proposal alters the status
quo in an unprecedented manner without adequate justification and fails to thoroughly consider
the associated risks and costs for market participants.
Requiring source code to be available for summary inspection by the Commission and othergovernment agencies significantly increases the likelihood of unauthorized disclosure. Risks
include accidental disclosure by Commission staff, disclosure and/or use by Commission staff
following an employment move to the private sector, and security breaches due to cyberattacks,
which could be expected to increase in frequency if the Commission was known to possess sourcecode that could unlock the trading strategies of the world’s most successful investment firms.
Disclosure of a firm’s source code to other market participants would reveal not only the firm’scurrent investment portfolio, but also its expected future trading activity, exposing its mostsensitive proprietary information and leaving it defenseless against the rest of the market. Similar
to other types of highly confidential intellectual property, such as recipes or formulas for consumer
products, it is difficult to overstate the commercial impact that the unauthorized disclosure ofsource code would have on an investment firm.
Given the enormous risks associated with making source code available for summary
inspection similar to a general book or record, it is perhaps unsurprising that the Commission’s
proposal appears to be completely unprecedented. Furthermore, the Commission fails toadequately explain the concern this proposal is intended to address. While we agree that sourcecode may play an important role in any investigation into manipulative or otherwise disruptive
trading activity, and therefore should be maintained by investment firms, the Commission provides
no explanation as to why the current subpoena process is insufficient. The subpoena processprovides important procedural safeguards, including limiting disclosure requests to actual
investigations of wrongdoing and allowing firms to apply for a protective order so as to ensure any
disclosed materials are appropriately handled and maintained.
2

We urge the Commission to reconsider its proposal to equate proprietary source code withstandard business records and to require it to be made available for summary inspection anddisclosure to the Commission and other government agencies. The existing subpoena process has
proven effective in appropriately balancing the interests of public and private sector stakeholders
and in affording source code the protective treatment that is required for it to be safely disclosed.
Abandoning this established precedent would create enormous risks for nearly every investment
firm trading on a Commission-regulated DCM. The Commission should remove this aspect of theproposal and focus instead on the risk management requirements that can further improve market
resiliency and stability.
II. Further Enhancing Market Resiliency and Transparency
A. The Commission Should Calibrate the Regulation AT Definitions to Ensure a Level Playing
Field and Focus on Trading Activity that Can Impact Market Resiliency
The requirements in the Commission’s Regulation AT proposal apply to “AT Persons”, whichinclude (a) firms registered with the Commission that engage in algorithmic trading on DCMs and(b) previously unregistered firms that now must register with the Commission as a result ofengaging in algorithmic trading via direct electronic access on DCMs. While this definition of an“AT Person” captures a large number of market participants, it excludes unregistered trading firmsthat engage in algorithmic trading but do not have direct electronic access to a DCM. In order tomaintain a level playing field, we believe the Commission should apply the proposed riskmanagement standards uniformly to the relevant trading activity, without regard to the registration
status of the firm or the method of connectivity to the DCM.
Certain other definitions in the Regulation AT proposal would benefit from revision in orderto ensure the focus remains on trading activity that can impact market resiliency. The proposal
requires “AT Persons” to implement risk controls that are designed to prevent an “Algorithmic
Trading Compliance Issue” or an “Algorithmic Trading Disruption.” However, the definition of
an “Algorithmic Trading Compliance Issue” includes, among others, events that violate a firm’sown internal requirements, while the definition of an “Algorithmic Trading Disruption” includes,
among others, all events that disrupt the algorithmic trading of a firm. We urge the Commission
to focus on trading activity that can impact the proper functioning of the market, instead of purelyinternal events within a firm that do not impact other market participants, such as an inadvertent
violation of an internal trading-related process. In addition, regarding any violation of a firm’sinternal processes as an “Algorithmic Trading Compliance Issue” could result in a race to thebottom, contrary to the overall goals of reducing operational risk and enhancing market resiliency.
B. Certain of the Proposed Risk Management Requirements Appear to be Overly Prescriptive
The Regulation AT proposal sets forth important risk management requirements that canimprove market resiliency. In addition to controls at the trading firm and clearing firm level, theproposal requires order cancellation (“kill switches”) and connectivity monitoring systems at theDCM. Given the central role of exchanges in monitoring activity across market participants, westrongly support execution venues having clear authority and responsibility to use kill switches to3

immediately block activity that appears erroneous and likely to materially impact members or themarket.
The Regulation AT proposal also requires DCMs to either apply, or provide and require theuse of, self-trade prevention tools that are reasonably designed to prevent self-trading. In addition,
DCMs are required to publicly disclose the amount of approved self-trading (by trade count andvolume). Together, we believe these aspects of the proposal can increase transparency for market
participants regarding trading activity on DCMs and enhance market efficiency and resiliency byrequiring the implementation of effective self-trade prevention tools.
However, certain of the proposed requirements relating to testing and monitoring ofalgorithmic systems appear overly prescriptive and may not accommodate different types oftrading strategies and investment firms. For example, with respect to system testing, the current
proposal requires regular back-testing and stress testing of each algorithmic trading system. Withrespect to system monitoring, the proposal sets forth several required elements, including thetriggering of automated alerts whenever message behavior breaches design parameters and control
panels that allow monitoring staff to interact with the algorithmic system in real-time, including
being able to disengage the system and cancel resting orders.
Given that the testing and monitoring requirements must be implemented across a wide rangeof firms, systems and investment strategies, the Commission should seek to avoid prescriptive
requirements that deviate from industry best practices and that may be overly onerous whengenerally applied under Regulation AT. For example, back-testing using historical data may not
be appropriate for every system that falls within the scope of the Regulation AT proposal. Inaddition, the Commission should clarify that Regulation AT is not intended to require firms tomaintain an additional layer of personnel dedicated solely to real-time monitoring of algorithmic
trading systems and that trading personnel can fulfill certain of these responsibilities. It should
also be clear that compliance staff are not expected to review source code in connection with theirgeneral monitoring and surveillance responsibilities.
C. The Commission Should Extend the Operational Transparency Requirements to All
Registered Trading Venues
Under the Regulation AT proposal, a DCM is required to publicly disclose (a) descriptions ofits trading protocols and matching engine and (b) the details of any market maker or trading
incentive programs. We commend the Commission on proposing rules that would significantly
increase the amount of public information required to be disclosed by DCMs and believe theCommission should clarify that platform revenue share agreements are a type of incentiveprogram.
We also urge the Commission to require the same level of information to be provided by all
regulated trading venues, including swap execution facilities (“SEFs”). While the Commission
expressed concerns about imposing additional requirements on SEFs that may decrease market
liquidity, 3 minimum operational transparency standards do not impose significant burdens on
3See the Reg AT Proposal at 78827, FN 14.

4platform operators and provide critical information to market participants assessing the relative
merits of these trading venues. Applying the operational transparency requirements to all trading
venues regulated by the Commission also serves to level the playing field, as DCMs may directlycompete with other types of venues by listing swaps or economically similar contracts. A
cornerstone to open, fair and efficient markets is providing investors with sufficient transparency,
which removes information asymmetries and enables trading venues and market participants tocompete on the merits.
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We appreciate the opportunity to provide comments on the Commission’s automated trading
proposal. Please feel free to call the undersigned at (312) 395-3100 with any questions regardingthese comments.
Respectfully,/s/ Adam C. Cooper
Senior Managing Director and Chief Legal Officer5