Vol. 78 Thursday, 

No. 177 September 12, 2013 

Part IV 

Commodity Futures Trading Commission 

17 CFR Chapter I 

Concept Release on Risk Controls and System Safeguards for Automated 

Trading Environments; Proposed Rule 

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56542 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Chapter I 

RIN 3038–AD52 

Concept Release on Risk Controls and 

System Safeguards for Automated 

Trading Environments 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Concept release; request for 

comments. 

SUMMARY: U.S. derivatives markets have 

experienced a fundamental transition 

from human-centered trading venues to 

highly automated and interconnected 

trading environments. The operational 

centers of modern markets now reside 

in a combination of automated trading 

systems (‘‘ATSs’’) and electronic trading 

platforms that can execute repetitive 

tasks at speeds orders of magnitude 

greater than any human equivalent. 

Traditional risk controls and safeguards 

that relied on human judgment and 

speeds, and which were appropriate to 

manual and/or floor-based trading 

environments, must be reevaluated in 

light of new market structures. Further, 

the Commission and market participants 

must ensure that regulatory standards 

and internal controls are calibrated to 

match both current and foreseeable 

market technologies and risks. This 

Concept Release on Risk Controls and 

System Safeguards for Automated 

Trading Environments (‘‘Concept 

Release’’) reflects the Commission’s 

continuing commitment to the safety 

and soundness of U.S. derivatives 

markets in a time of rapid technological 

change. The Concept Release serves as 

a platform for cataloguing existing 

industry practices, determining their 

efficacy and implementation to date, 

and evaluating the need for additional 

measures, if any. The Commission 

welcomes all public comments. 

DATES: Comments must be received on 

or before December 11, 2013. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AD52, by any of 

the following methods: 

• CFTC Web site, via Comments 

Online: http://comments.cftc.gov. 

Follow the instructions for submitting 

comments through the Web site. 

• Mail: Melissa D. Jurgens, Secretary 

of the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

‘‘mail,’’ above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit comments by only one 

method. All comments should be 

submitted in English or accompanied by 

an English translation. Comments will 

be posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act 

(‘‘FOIA’’), a petition for confidential 

treatment of the exempt information 

may be submitted according to the 

procedures established in 17 CFR 145.9. 

The Commission reserves the right, but 

shall have no obligation, to review, 

prescreen, filter, redact, refuse, or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under FOIA. 

FOR FURTHER INFORMATION CONTACT: 

Sebastian Pujol Schott, Associate 

Director, Division of Market Oversight, 

sps@cftc.gov or 202–418–5641; Marilee 

Dahlman, Attorney-Advisor, Division of 

Market Oversight, mdahlman@cftc.gov 

or 202–418–5264; Camden Nunery, 

Economist, Office of the Chief 

Economist, cnunery@cftc.gov or 202– 

418–5723; or Sayee Srinivasan, 

Research Analyst, Office of the Chief 

Economist, ssrinivasan@cftc.gov or 202– 

418–5309. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

A. Design of Concept Release and Request 

for Comments 

II. Background 

A. Characteristics of Automated Trading 

Environments 

1. Automated Order Generation and 

Execution 

2. Advances in High-Speed 

Communication Networks and 

Reductions in Latency 

3. Rise of Interconnected Automated 

Markets 

4. Manual Risk Controls and System 

Safeguards in Automated Trading 

Environments 

B. The Commission’s Regulatory Response 

to Date 

C. Recent Disruptive Events in Automated 

Trading Environments 

III. Potential Pre-Trade Risk Controls, PostTrade Reports, System Safeguards, and 

Other Protections 

A. Overview of Existing Industry Practices 

1. Existing DCM Risk Controls 

2. Existing Trading and Clearing Firm Risk 

Controls 

B. Overview of Risk Controls Addressed in 

This Concept Release 

C. Pre-Trade Risk Controls 

1. Message and Execution Throttles 

2. Volatility Awareness Alerts 

3. Self-Trade Controls 

4. Price Collars 

5. Maximum Order Sizes 

6. Trading Pauses 

7. Credit Risk Limits 

D. Post-Trade Reports and Other PostTrade Measures 

1. Order, Trade, and Position Drop Copy 

2. Trade Cancellation or Adjustment 

Policies 

E. System Safeguards 

1. Controls Related to Order Placement 

2. Policies and Procedures for the Design, 

Testing and Supervision of ATSs; 

Exchange Considerations 

3. Self-Certifications and Notifications 

4. ATS or Algorithm Identification 

5. Data Reasonability Checks 

F. Other Protections 

1. Registration of Firms Operating ATSs 

2. Market Quality Data 

3. Market Quality Incentives 

4. Policies and Procedures To Identify 

‘‘Related Contracts’’ 

5. Standardize and Simplify Order Types 

G. General Questions Regarding All Risk 

Controls Discussed Above 

IV. List of All Questions in the Concept 

Release 

V. Appendices (Specific Measures in Bold 

Font) 

A. Pre-Trade Risk Controls 

B. Post-Trade Reports and Other PostTrade Measures 

C. System Safeguards 

D. Other Protections 

I. Introduction 

U.S. derivatives markets have 

experienced a fundamental evolution 

from human-centered trading venues to 

highly automated and interconnected 

trading environments. Traditionally, 

traders and market participants directly 

initiated, communicated and executed 

orders, while other personnel provided 

a range of order, trade processing and 

back office services. In contrast, 

automated trading environments are 

characterized precisely by their high 

degree of automation, and by the wide 

array of algorithmic and information 

technology systems that generate, risk 

manage, transmit and match orders and 

trades, as well as systems used to 

confirm transactions, communicate 

market data and link related systems 

through high-speed communication 

networks. Automated trading 

environments have conferred a number 

of benefits upon market participants, 

including an expanded range of 

potential trading strategies, and a surge 

in the speed, precision and tools 

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1See ‘‘Findings Regarding the Market Events of 

May 6, 2010, Report of the Staffs of the CFTC and 

SEC to the Joint Advisory Committee on Emerging 

Regulatory Issues,’’ September 30, 2010 

[hereinafter, the ‘‘CFTC and SEC Joint Report on the 

Market Events of May 6, 2010’’], available at http:// 

www.cftc.gov/ucm/groups/public/@otherif/

documents/ifdocs/staff-findings050610.pdf. 

2See Jenny Strasburg & Jacob Bunge, ‘‘Loss 

Swamps Trading Firm,’’ Wall St. J. (Aug. 2, 2012), 

available at http://online.wsj.com/article/SB100008

72396390443866404577564772083961412.html. 

On October 2, 2012, the Securities and Exchange 

Commission (‘‘SEC’’) conducted a roundtable 

entitled ‘‘Technology and Trading: Promoting 

Stability in Today’s Markets’’ (‘‘SEC Roundtable’’). 

See SEC, Notice of Roundtable Discussion: 

Technology and Trading Roundtable, 77 FR 56697 

(Sept. 13, 2012). A transcript of the SEC Roundtable 

[hereinafter, the ‘‘SEC Roundtable Transcript’’] is 

available at http://www.sec.gov/news/

otherwebcasts/2012/ttr100212.shtml. At the SEC 

Roundtable, then-SEC Chairman Schapiro raised 

the Knight Capital incident and noted that ‘‘[e]vents 

like these demonstrate the core infrastructure and 

technology issues that can be problematic in any 

market structure.’’ See SEC Roundtable Transcript 

at 11. 

3See Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010, Public Law 111– 

203, 124 Stat. 1376 (2010). 

4Many of these concepts are in harmony with 

evolving views of groups responsible for setting 

standards and developing regulations for other 

markets around the world. See, e.g., IOSCO 

Technical Committee, ‘‘Regulatory Issues Raised by 

the Impact of Technological Changes on Market 

Integrity and Efficiency: Consultation Report’’ (July 

2011) [hereinafter ‘‘IOSCO Report on Regulatory 

Issues Raised by Technological Changes’’], available 

at http://www.iosco.org/library/pubdocs/pdf/

IOSCOPD354.pdf. 

See also ESMA, ‘‘Final Report: Guidelines on 

Systems and Controls in an Automated Trading 

Environment for Trading Platforms, Investment 

Firms and Competent Authorities’’ (December 2011) 

[hereinafter, ‘‘ESMA Guidelines on Systems and 

Controls’’], available at http://www.esma.europa.eu/ 

system/files/2011–456_0.pdf. 

available to execute such strategies. In 

addition to these benefits, however, 

automated trading environments have 

also presented challenges unique to 

their speed, interconnectedness and 

reliance on algorithmic systems. 

In recent years, a number of highprofile system events associated with 

automated trading have raised public, 

Commission and industry awareness. 

For example, on May 6, 2010, major 

equity indices in both the futures and 

securities markets lost more than 5% of 

their value in a matter of minutes when 

an automated order led to extreme 

downward price movement and a 

liquidity crisis in the Chicago 

Mercantile Exchange’s (‘‘CME’’) E-mini 

futures contract.1 In August 2012, a 

trading firm in the securities markets— 

Knight Capital Group—submitted a 

significant number of errant proprietary 

orders to the New York Stock Exchange 

(‘‘NYSE’’), causing price swings in 

nearly 150 securities and costing the 

firm approximately $440 million in the 

process.2 Most recently, in August 2013, 

trading on the Nasdaq stock market was 

disrupted for three hours due to 

malfunctions in quote dissemination 

systems and potential connectivity 

issues between it and another trading 

platform’s systems. These and other 

recent events in automated trading 

environments are discussed in greater 

detail in section II.C., below. 

The Commission has taken steps to 

address the transition to automated 

trading and require appropriate risk 

controls for designated contract markets 

(‘‘DCMs’’), swap execution facilities 

(‘‘SEFs’’), futures commission 

merchants (‘‘FCMs’’), swap dealers 

(‘‘SDs’’), major swap participants 

(‘‘MSPs’’) and others. In April 2012, it 

adopted final rules requiring FCMs, SDs 

and MSPs that are clearing members to 

establish risk-based limits based on 

position size, order size, margin 

requirements, or similar factors, and 

requiring those entities to use 

automated means to screen orders for 

compliance with the risk limits when 

such orders are subject to automated 

execution. Further, in June 2012, the 

Commission adopted final rules with 

respect to DCMs, including 

requirements that DCMs establish and 

maintain risk control mechanisms to 

prevent and reduce the potential for 

price distortions and market 

disruptions. Relevant controls cited in 

the rule include trading pauses and 

halts under conditions prescribed by the 

DCM. The Commission adopted similar 

requirements in its final rules for SEFs 

in 2013. Finally, the DCM final rules 

also require risk control requirements 

for exchanges that provide direct market 

access (‘‘DMA’’) to clients. 

The Commission has also adopted 

rules related to trading practices, 

including trading in automated 

environments. In July 2011, the 

Commission adopted final rules 

codified in 17 CFR Part 180 that, among 

other things, (i) broadly prohibit 

manipulative and deceptive devices, 

i.e., fraud and fraud-based manipulative 

devices and contrivances employed 

intentionally or recklessly, regardless of 

whether the conduct in question was 

intended to create or did create an 

artificial price; and (ii) codify the 

Commission’s long-standing authority to 

prohibit price manipulation by making 

it unlawful for any person, directly or 

indirectly, to manipulate or attempt to 

manipulate the price of any swap, or of 

any commodity in interstate commerce, 

or for future delivery on or subject to the 

rules of a registered entity. Further, 

section 747 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (the ‘‘Dodd-Frank Act’’) 3 amended 

the Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’) to make it unlawful for any 

person to engage in disruptive trading 

practices, and the Commission has 

provided guidance on the scope and 

application of the new statutory 

prohibitions. The Commission’s 

measures to date are summarized in 

greater detail in section II.B., below. 

With respect to these measures and 

others discussed in this Concept 

Release, the Commission requests 

public comment regarding any 

additional steps, guidance or 

rulemaking that it should undertake. 

Derivatives market participants, 

including DCMs, FCMs, clearing 

members and others, have themselves 

taken a number of steps to manage risks 

associated with automated trading. The 

Commission acknowledges these efforts, 

and, through this Concept Release, seeks 

public comment on the extent to which 

measures already in place may be 

sufficient to safeguard markets in 

automated trading environments. In 

particular, section III below summarizes 

relevant risk controls implemented by 

one or more market participants; 

requests comment regarding the extent 

of their implementation to date; and 

seeks input regarding whether existing 

controls would benefit from additional 

granularity or regulatory 

standardization. 

A. Design of Concept Release and 

Request for Comments 

This Concept Release provides an 

overview of the automated trading 

environment, including its principal 

actors, potential risks, and preventative 

measures designed to promote safe and 

orderly markets.4 The Concept Release 

was informed by controls already in use 

today by one or more market 

participants or exchanges, and best 

practices, recommendations and 

concepts developed by the CFTC’s 

Technology Advisory Committee 

(‘‘TAC’’); the Futures Industry 

Association’s (‘‘FIA’’) Principal Traders 

Group and Market Access Working 

Group; the International Organization of 

Securities Commissions (‘‘IOSCO’’); the 

European Securities and Markets 

Authority (‘‘ESMA’’); and by existing 

CFTC regulatory requirements. It begins 

with an overview of automated trading, 

including the development of 

automated order generation and 

execution systems; advances in highspeed communication networks; the 

growth of interconnected automated 

markets; the changed role of humans in 

modern markets; and a discussion of 

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5 In this regard, the Commission emphasized in 

the preamble to its final rules for part 38 that the 

efficacy of risk controls depends in part on the 

proper functioning of electronic systems, and that 

‘‘the Commission may address electronic system 

testing, controls, and supervision-related issues in 

a subsequent proceeding.’’ See Commission, Final 

Rule: Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612, 36638 

n.298, 36648, n.389 (Jun. 19, 2012) [hereinafter, the 

‘‘DCM Final Rules’’]. 

Similarly, the system safeguards contemplated 

herein for ATSs are an outgrowth of the basic 

requirement in § 23.600(d)(9) that SDs and MSPs 

conduct testing and supervision of trading systems. 

There again, the Commission indicated that further 

measures would be forthcoming by stating that it 

‘‘anticipate[d] addressing the related issues of 

testing and supervision of electronic trading 

systems and mitigation of the risks posed by high 

frequency trading.’’ See Commission, Final Rule: 

Swap Dealer and Major Swap Participant 

Recordkeeping, Reporting, and Duties Rules; 

Futures Commission Merchant and Introducing 

Broker Conflicts of Interest Rules; and Chief 

Compliance Officer Rules for Swap Dealers, Major 

Swap Participants, and Futures Commission 

Merchants, 77 FR 20128, 20141 (Apr. 3, 2012). 6See CEA section 3(b); 7 U.S.C. 5(b). 

7While the Commission has no regulatory 

definition of ATS, the term is generally understood 

to mean a computer-driven system that automates 

the generation and routing of orders to one or more 

markets. Other elements of an ATS may also 

include systems for analyzing market data as a 

precursor to order generation, managing orders for 

conformance with establish risk tolerances, 

receiving confirmations of orders placed and trades 

executed, etc. Section III.E.4. of this Concept 

Release seeks public input regarding whether the 

Commission should formally define ATS and if so, 

how ATS should be defined. 

8See IOSCO Report on Regulatory Issues Raised 

by Technological Changes, supra note 4, at 10. 9See John Bates, ‘‘Algorithmic Trading and High 

Frequency Trading Experiences from the Market 

and Thoughts on Regulatory Requirements’’ (July 

2010), available at http://www.cftc.gov/ucm/groups/ 

public/@newsroom/documents/file/tac_071410_

binder.pdf. 

recent disruptive events in automated 

trading environments. The Concept 

Release then addresses these 

developments through a series of (1) 

pre-trade risk controls; (2) post-trade 

reports and other post-trade measures; 

(3) system safeguards; and (4) additional 

protections (collectively, ‘‘risk 

controls’’) that could be implemented by 

one or more categories of Commission 

registrants or other market participants. 

The Commission seeks extensive 

public comment regarding each risk 

control contemplated herein. 

Commenters should address the 

effectiveness of each measure, and the 

degree to which it may already be in use 

by industry participants. Each 

commenter should identify the specific 

risk controls that it already employs. For 

all measures discussed in this Concept 

Release, commenters should also 

address whether there is a need for 

regulatory action to provide more 

uniform risk mitigation across CFTCregulated derivatives markets.5

Comments that address this question 

with respect to each proposed risk 

control and system safeguard 

individually would be particularly 

helpful. In all cases, commenters should 

discuss, and quantify wherever possible, 

the costs and benefits of the pre-trade 

risk controls, post-trade reports and 

other post-trade measures, system 

safeguards, and other protections 

discussed in this Concept Release. 

The Concept Release recognizes that 

orders and trades in automated 

environments pass through multiple 

stages in their lifecycle from order 

generation, to execution, to clearing and 

allocation in proprietary or customer 

accounts, and steps in between. 

Accordingly, the Commission requests 

comment regarding the appropriate 

stage at which risk controls should be 

placed. Potential options include risk 

controls applicable to: (i) ATSs at the 

time of order generation; (ii) clearing 

firms during the order transmission 

process; (iii) trading platforms prior to 

exposing orders to the market; (iv) 

Derivatives Clearing Organizations 

(‘‘DCOs’’); and (v) other risk control 

focal points, including, for example, 

third-party ‘‘hubs’’ through which 

orders or order information could flow 

to uniformly mitigate risks across one or 

more trading platforms. Similarly, the 

Commission requests public comment 

regarding the appropriate focal point for 

system safeguards and testing and 

supervision standards for ATSs. 

Finally, the Commission requests 

comment regarding a series of issues 

central to its improved understanding 

and surveillance of trading in automated 

environments. For example, the 

Commission requests comments 

regarding any surveillance tools that it 

should deploy specifically for the 

surveillance of automated trading and 

areas for academic research to improve 

its understanding of ATSs’ impact on 

market microstructure. Section IV lists 

all questions raised in this Concept 

Release. 

The Commission’s Concept Release 

reflects fundamental statutory objectives 

under the CEA. Such objectives include 

fostering a system of effective selfregulation, deterring and preventing 

disruptions to market integrity, 

protecting market participants and 

‘‘promot[ing] responsible innovation 

and fair competition among boards of 

trade, other markets and market 

participants.’’ 6 Notably, the 

Commission must ensure that U.S. 

derivatives markets continue to serve as 

effective centers of price discovery and 

risk mitigation, regardless of the 

technologies employed by trading 

platforms, market participants, and 

others. The Commission must further 

ensure that its regulatory framework and 

industry practices are fully adapted to 

the automated technologies of modern 

derivatives markets. 

II. Background 

A. Characteristics of Automated Trading 

Environments 

1. Automated Order Generation and 

Execution 

Automated trading environments 

have developed in tandem with 

automated systems for both the 

generation and execution of orders. 

Systems related to the generation of 

orders (‘‘automated trading systems’’ or 

‘‘ATSs’’) 7 operate at the beginning of 

the order and trade lifecycle; they reflect 

a set of rules or instructions (an 

algorithm) and related computer 

systems used to automate the execution 

of a trading strategy.8 ATSs may operate 

as automated execution programs 

designed to minimize the price impact 

of large orders; achieve a benchmarked 

price (e.g., volume-weighted average 

price and time-weighted average price 

algorithms); or otherwise execute 

instructions traditionally provided by a 

human agent.9 They may be employed 

by a range of market participants, with 

varying degrees of sophistication, for 

both proprietary and customer trading. 

For example, buy-side firms (such as 

mutual funds and pension funds) may 

use automated systems and execution 

algorithms to ‘‘shred’’ one or more large 

orders (called ‘‘parent order’’) into a 

series of smaller trades (‘‘child orders’’) 

to be executed over time. Such systems 

can include additional algorithms to 

micro-manage the size, frequency and 

timing (often randomized) of child 

orders. In addition to automated 

execution, ATSs may also operate 

market-making programs; opportunistic, 

cross-asset and cross-market arbitrage 

programs; and a number of other 

strategies. 

In Commission-regulated markets, 

orders generated by ATSs are ultimately 

transmitted to DCMs that have 

themselves become automated systems 

for the matching and execution of 

orders. Broadly, these trading platforms 

consist of a front-end to which market 

participants connect and communicate 

using standardized messaging formats, a 

matching engine that automatically 

matches orders to buy and sell, and a 

back-end that automatically provides all 

market participants with a market feed. 

Trade flows may make use of straightthrough processing, where the entire 

trade execution process occurs without 

intermediation from humans, thereby 

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10This figure represents transactions executed 

competitively on DCM trading platforms and not 

off-exchange transactions such as block trades. 

11See Paul Zubulake & Sang Lee, The High 

Frequency Game Changer at 84, fig. 6.3 (John Wiley 

& Sons, Inc. 2011) (source of data: Aite Group). 

12See Barry Johnson, Algorithmic Trading & 

DMA: An Introduction to Direct Access Trading 

Strategies at 78, fig. 3–11 (4Myeloma Press 2010) 

(source of data: Aite Group). 

13See CME Group, ‘‘Algorithmic Trading and 

Market Dynamics’’ (July 15, 2010) at 2, available at 

http://www.cmegroup.com/education/files/Algo_

and_HFT_Trading_0610.pdf. At the time, the CME 

Group operated four DCMs: the Chicago Mercantile 

Exchange, the Chicago Board of Trade, the New 

York Mercantile Exchange (‘‘NYMEX’’), and the 

Commodity Exchange. 

14See id. 

15See TAC Subcommittee on Automated and 

High Frequency Trading, Working Group 1, 

Presentation to the TAC (Oct. 30, 2012), available 

at http://www.cftc.gov/ucm/groups/public/@

newsroom/documents/file/tac103012_wg1.pdf. In 

addition, the TAC Subcommittee on Automated and 

High Frequency Trading, Working Group 1, 

described high frequency trading as a mechanism 

used by a variety of trading strategies, including, 

but not limited to, liquidity provision and statistical 

arbitrage. 

16See id. 

17 In March 2013, the German parliament 

approved legislation on high frequency trading (the 

‘‘HFT Act’’). See Hans-Edzard Busemann, ‘‘German 

upper house approves rules to clamp down on highfrequency trading,’’ Reuters (March 22, 2013), 

available at http://uk.reuters.com/article/2013/03/

22/uk-germany-trading-idUKBRE92L0L820130322. 

The legislation defines high frequency trading 

generally as follows: The sale or purchase of 

financial instruments for own account as direct or 

indirect participant in a domestic organized market 

or multilateral trading facility by means of a highfrequency algorithmic trading technique which is 

characterized by (i) the usage of infrastructures to 

minimize latency times, (ii) the decision of the 

system regarding the commencement, creation, 

transmission or execution of an order without 

human intervention for single transactions or 

orders, and (iii) a high intraday messaging volume 

in the form of orders, quotes or cancellations. See 

BaFin (Federal Financial Supervisory Authority), 

‘‘High-frequency trading: new rules for trading 

participants’’ (March 26, 2013) (including 

Workshop on High Frequency Trading Act 

Presentations dated April 30, 2013 and Frequently 

Asked Questions Relating to the High Frequency 

Trading Act dated March 22, 2013) [hereinafter, the 

‘‘BaFin HFT Act Materials’’], available at http:// 

www.bafin.de/SharedDocs/Veroeffentlichungen/

EN/Meldung/2013/meldung_130322_hft-gesetz_

en.html?nn=2821494. 

The German HFT Act also defines algorithmic 

trading. The HFT Act’s definition is generally as 

follows: Trading with financial instruments such 

that a computer algorithm determines automatically 

the individual order parameters without being 

merely a system for the transmission of orders to 

one or several trading venues or to confirm orders. 

Order parameters within the meaning of the 

preceding sentence are decisions whether the order 

is given, the timing, price and quantity of an order 

or how the order will be executed with limited or 

no human interference. See id. As explained in 

footnote 103 below, the HFT Act also introduces a 

licensing requirement. 

18Latency means ‘‘the time it takes to learn about 

an event (e.g., a change in the bid), generate a 

Continued 

dramatically reducing the amount of 

time required to execute each 

transaction. The evolution from manual 

trading in open-outcry pits to electronic 

trading platforms is in many cases 

substantially complete. 

An established body of data indicates 

the importance of electronic and 

algorithmic trading in U.S. futures 

markets. In 2012, approximately 91.50% 

of exchange trading volume in U.S. 

futures markets was executed 

electronically.10 Estimates indicate that 

algorithmic trading first accounted for at 

least 50% of orders in 2009,11 and 

accounted for over 40% of total trading 

volume in 2010.12 By the end of the first 

quarter of 2010, ATSs accounted for 

over 50% of trading volume in a number 

of significant product categories at CME 

Group, Inc.’s (‘‘CME Group’’) DCMs.13

For example, ATSs accounted for 

approximately 51% of trade volume in 

E-mini S&P 500 futures and 69% of 

trade volume in EuroFX futures.14

Increased automation in both order 

generation and matching, combined 

with the exponentially faster 

communication networks discussed in 

section II.A.2., below, has in many cases 

reduced the trade lifecycle to as little as 

a few milliseconds. As a result, highfrequency trading (‘‘HFT’’) strategies 

have also become an increasingly 

important component of automated 

trading environments. 

The Commission is working diligently 

to understand and keep pace with the 

growth of ATSs and HFT in its regulated 

markets. The TAC, for example, has 

worked to define HFT and received a 

definition of HFT from its working 

group panel of experts. The attributes of 

HFT, according to the TAC’s working 

group, include: 

(a) Algorithms for decision making, 

order initiation, generation, routing, or 

execution, for each individual 

transaction without human direction; 

(b) low-latency technology that is 

designed to minimize response times, 

including proximity and co-location 

services; 

(c) high speed connections to markets 

for order entry; and 

(d) recurring high message rates 

(orders, quotes or cancellations) 

determined using one or more objective 

forms of measurement, including (i) 

cancel-to-fill ratios; (ii) participant-tomarket message ratios; or (iii) 

participant-to-market trade volume 

ratios.15

In addition, the TAC’s working group 

described automated trading as 

‘‘cover[ing] systems employed in the 

decision-making, routing and/or 

execution of an investment or trading 

decision, which utilizes a range of 

technologies including software, 

hardware, and network components to 

facilitate efficient access to the financial 

markets via electronic trading 

platforms.’’ 16 Effectively, HFT is a form 

of automated trading, but not all 

automated trading is HFT.17

In this regard, the Commission is 

aware that instability in automated 

trading environments may be 

precipitated by ATSs regardless of 

whether they employ high-frequency or 

other trading strategies. Accordingly, 

the risk controls, system safeguards and 

other measures contemplated for ATSs 

in this Concept Release do not 

distinguish on the basis of ATSs’ trading 

strategies. However, the Commission is 

interested in better understanding HFT 

and whether it should receive different 

regulatory attention than ATSs in 

general. The Commission requests 

comment on the following questions 

regarding HFT and related topics: 

1. In any rulemaking arising from this 

Concept Release, should the 

Commission adopt a formal definition of 

HFT? If so, what should that definition 

be, and how should it be applied for 

regulatory purposes? 

2. What are the strengths and 

weaknesses of the TAC working group 

definition of HFT provided above? How 

should that definition be amended, if at 

all? 

3. The definition of HFT provided 

above uses ‘‘recurring high message 

rates (orders, quotes or cancellations)’’ 

as one of the identifying characteristics 

of HFT, and lists three objective 

measures (i) cancel-to-fill ratios; (ii) 

participant-to-market message ratios; or 

(iii) participant-to-market trade volume 

ratios) that could be used to measure 

message rates. Are these criteria 

sufficient to reliably distinguish 

between ATSs in general and ATSs 

using HFT strategies? What threshold 

values are appropriate for each of these 

measures in order to identify ‘‘high 

message rates?’’ Should these threshold 

values vary across exchanges and 

assets? If so, how? 

4. Should the risk controls for systems 

and firms that engage in HFT be 

different from those that apply to ATSs 

in general? If so, how? 

2. Advances in High-Speed 

Communication Networks and 

Reductions in Latency 

Automated trading environments are 

also characterized by connectivity and 

infrastructure solutions that enable 

trading platforms to process orders and 

execute trades at ever increasing speeds, 

and enable market participants 

(including ATSs) to communicate with 

platforms at ever decreasing latencies.18

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56546 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

response, and have the exchange act on the 

response.’’ See Joel Hasbrouck & Gideon Saar, 

‘‘Low-Latency Trading’’ (May 2013) at 1, available 

at http://papers.ssrn.com/sol3/papers.cfm?abstract_

id=1695460. 

19See CME Group, ‘‘Oversight of Automated 

Trading at CME Group’’ (March 29, 2012) at 4, 

available at http://www.cftc.gov/ucm/groups/

public/@aboutcftc/documents/file/tacpresentation

032912_cme.pdf. 

20See IntercontinentalExchange, ‘‘2010 Annual 

Report,’’ at 26, available at http://

files.shareholder.com/downloads/ICE/

1747226327x0x456112/BF6F428C-F8B3-4835- 

B22C-3F350FF13B89/ICE_2010AR.pdf. 

IntercontinentalExchange indicated that it measures 

round trip performance end to end within its data 

center and through its matching engine. 

21See Matthew Philips, ‘‘Stock Trading is About 

to Get 5.2 Milliseconds Faster,’’ 

BloombergBusinessweek (Mar. 29, 2012), available 

at http://www.businessweek.com/articles/2012-03- 

29/trading-at-the-speed-of-light. 

22See Jacob Bunge, ‘‘CME, Nasdaq Plan HighSpeed Network Venture,’’ Wall St. J. (Mar. 28, 

2013), available at http://online.wsj.com/article/

SB100014241278873246851045783883432215

75294.html. 

23See FIA Market Access Working Group, 

‘‘Market Access Risk Management 

Recommendations’’ (April 2010) at 4 [hereinafter, 

‘‘FIA Market Access Recommendations’’], available 

at http://www.futuresindustry.org/downloads/

Market_Access-6.pdf. 

24See Commission, Notice of Proposed 

Rulemaking: Co-Location/Proximity Hosting 

Services, 75 FR 33198 (Jun. 11, 2010). 

25The Commission has taken steps to mitigate the 

risk associated with DMA. Rule 1.73, passed by the 

Commission in April 2012, requires FCMs that are 

clearing members to pre-screen orders of DMA 

clients against risk limits that are established by the 

FCM. See 17 CFR 1.73(a)(2)(i). See additional 

discussion in section II.B. 

26As noted by FIA’s Market Access Working 

Group, for example: ‘‘[p]re-trade risk controls have 

become a point of negotiation between trading firms 

and clearing members because they can add latency 

to a trade.’’ See FIA Market Access 

Recommendations, supra note 23, at 8. 

Similarly, the TAC’s Pre-Trade Functionality 

Subcommittee noted that latency is a key area 

where trading firms and brokers are competing to 

gain an advantage. See TAC Pre-Trade 

Functionality Subcommittee, ‘‘Recommendations 

on Pre-Trade Practices for Trading Firms, Clearing 

Firms, and Exchanges Involved in Direct Market 

Access’’ (March 1, 2011) at 2 [hereinafter, ‘‘TAC 

Pre-Trade Functionality Subcommittee DMA 

Recommendations’’], available at http://

www.cftc.gov/ucm/groups/public/@swaps/

documents/dfsubmission/tacpresentation030111_

ptfs2.pdf. 

27See Scott Patterson, Jenny Strasburg & Liam 

Pleven, ‘‘High-Speed Traders Exploit Loophole,’’ 

Wall St. J. (May 1, 2013), available at http:// 

online.wsj.com/article/SB100014241278873237 

98104578455032466082920.html. 

Notably, however, such capabilities 

require equally sophisticated risk 

management systems whose speeds are 

commensurate with those of low-latency 

order generation and trade execution 

systems. Public data from one exchange 

group, for example, indicates that 

roundtrip trade times on its trading 

platform fell from 127 milliseconds in 

2004 to 4.2 milliseconds in 2011.19

Another exchange group reported in 

2010 that its average blended 

transaction time in futures and OTC 

markets was 1.25 milliseconds.20

Advances in trading speeds are partly 

due to the development of dedicated 

fiber-optic and microwave 

communications networks that have 

dramatically reduced latency across 

large distances. As of 2012, networks 

were being developed to reduce 

roundtrip messaging between New York 

and London from 65 milliseconds to 60 

milliseconds.21 In March 2013, CME 

Group Inc. and Nasdaq OMX Group Inc. 

announced plans to launch a wireless 

network that will provide roundtrip 

messaging between New York and 

Chicago in 8.5 milliseconds.22

Two common methods for reducing 

latency are co-location and proximity 

hosting, defined as the placement of a 

firm’s trading technology in close 

proximity to the trading platform. They 

may be offered directly by an exchange 

or by a third-party service provider. Colocation denotes those connectivity 

solutions hosted by the exchange itself, 

while proximity hosting indicates 

services offered by third parties.23 In 

2010, the Commission published in the 

Federal Register a Notice of Proposed 

Rulemaking to require DCMs and others 

that offer co-location and/or proximity 

hosting to offer such services on an 

equal access basis, ensure that fees are 

uniform and non-discriminatory, and 

provide information about the latency 

for various connectivity options (‘‘colocation rulemaking’’).24 The 

Commission intends to finalize the colocation rulemaking by the end of the 

year. 

Another important latency-reducing 

advance in connectivity is DMA. For 

purposes of this Concept Release, DMA 

is defined as a connection method that 

enables a market participant to transmit 

orders to a trading platform without 

reentry or prior review by systems 

belonging to the market participant’s 

clearing firm. DMA can be provided 

directly by an exchange or through the 

infrastructure of a third-party provider. 

In all cases, however, DMA connectivity 

implies that a market participant’s order 

flow is not routed through its clearing 

firm prior to reaching the trading 

platform.25

Investment in high-speed 

communication networks and other 

technologies to reduce latency reflects 

the premium that some market 

participants place on speed relative to 

their competitors. Reductions in latency 

may be appropriately achieved through 

improvements in a range of technologies 

for the generation, transmission and 

execution of orders or management of 

other data. However, there are also 

incentives for market participants to 

reduce latency by minimizing pre-trade 

risk controls and other safeguards that 

might otherwise introduce unwanted 

delays. While latency-based incentive 

structures have promoted evident 

technological innovation in many 

derivatives markets, they can also lead 

to a competitive race to the bottom—a 

concern already expressed by some 

market participants.26 A separate 

concern is that market participants may 

simply engage in trading at speeds 

greater than the speed of their risk 

management systems. In a trading 

environment where a single algorithm 

can submit hundreds of orders per 

second, risk management systems 

operating at slower speeds could allow 

an algorithm that is operating in 

unexpected ways to disrupt one or more 

markets. 

5. Discussions on latency often focus 

on the how quickly an exchange 

processes orders, the time taken to 

submit orders, and how quickly a firm 

can observe prices of trades transacted 

on the exchange. The Commission is 

interested in understanding whether 

there are other types of messages 

transmitted between exchanges, firms 

and vendors wherein differences in 

latency could provide opportunities for 

informational advantage. Recent press 

reports have highlighted such 

advantages in the transmission of trade 

confirmations by a specific exchange.27

Are there other exchanges and trading 

venues where similar differences in 

latency exist? The Commission is 

interested in understanding whether the 

extent of latency in any such message 

transmission process can have an 

adverse impact on market quality or 

fairness. Should any exchanges, vendors 

and firms be required to audit their 

systems and process on a periodic 

process to identify and then resolve 

such latency? 

3. Rise of Interconnected Automated 

Markets 

In addition to greater automation and 

decreased latency, derivatives markets 

are increasingly characterized by a high 

degree of interconnection. ATSs and 

algorithms deployed to trade particular 

products often interact directly and 

indirectly with ATSs and algorithms 

active in other markets and 

jurisdictions. Increased 

interconnectedness is facilitated by 

electronic access to real-time pricing 

information, automated order execution, 

and some standardization in 

communication protocols at various 

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28For example, FIX language makes it possible for 

ATS to be ‘‘platform independent’’—to incorporate 

interfaces to multiple brokers, ECNs, or exchanges. 

See Irene Aldridge, High-Frequency Trading: A 

Practical Guide to Algorithmic Strategies and 

Trading Systems at 31 (John Wiley & Sons, Inc. 

2010). See also Cliff, Brown, & Treleaven, 

‘‘Technology Trends in the Financial Markets: A 

2020 Vision,’’ United Kingdom Government Office 

for Science—Foresight, at 10, available at http:// 

www.bis.gov.uk/assets/foresight/docs/computertrading/11-1222-dr3-technology-trends-in-financialmarkets.pdf. 

29For example, ‘‘basis trading,’’ and ‘‘futures/

equity arbitrage’’ are statistical arbitrage strategies 

that seek to capitalize on deviations between prices 

on futures contracts and related securities contracts 

after macroeconomic news announcements. See 

Aldridge, supra note 28, at 197–98. 

30See CFTC and SEC Joint Report on the Market 

Events of May 6, 2010, supra note 1, at 1–6; 

‘‘Recommendations Regarding Regulatory 

Responses to the Market Events of May 6, 2010, 

Summary Report of the Joint CFTC-SEC Advisory 

Committee on Emerging Regulatory Issues’’ 

(February 18, 2011), available at http:// 

www.cftc.gov/ucm/groups/public/@aboutcftc/

documents/file/jacreport_021811.pdf. 

31See SEC, ‘‘Investor Bulletin: New Measures to 

Address Market Volatility’’ (Apr. 9, 2013), available 

at http://www.sec.gov/investor/alerts/

circuitbreakersbulletin.htm. 

32See id. 

33See CME Group, ‘‘Changes to CME and CBOT 

Equity Index Price Limits: Frequently Asked 

Questions,’’ available at http://www.cmegroup.com/ 

education/files/faq-eq-hours-and-limits.pdf. 

34See IntercontinentalExchange, Inc., ‘‘ICE 

Circuit Breakers (IPL) Price Limits’’ (March 2012), 

available at https://www.theice.com/publicdocs/

technology/IPL_Circuit_Breaker.pdf. 

trading platforms.28 ATSs can quickly 

execute strategies across multiple 

markets within very short periods of 

time. Often, cross-market activity is 

driven by latent arbitrage opportunities 

and faster access to multiple markets 

has led to a proliferation of strategies 

that seek to identify and trade on the 

basis of these relationships.29

Increased interconnectedness 

encourages price efficiencies when 

economically identical or related 

contracts are traded on multiple 

exchanges. However, it also increases 

the speed with which a disruption on 

one trading platform, or within one ATS 

or algorithm, can impact related 

markets. For example, a trading 

platform may experience changes in the 

prices, spreads or volatility of one or 

more of its products due to errors in an 

ATS or algorithm active in its markets. 

Even if this algorithm does not trade 

elsewhere, such changes are likely to 

quickly impact the prices, spreads, and 

volatility of related products on other 

platforms, as automated systems attempt 

to arbitrage price differences. The 

potential result is a cascading series of 

market disruptions, brought about by 

the malfunction of a single ATS or 

algorithm trading on a single platform. 

Transmission effects such as this are 

illustrated by events like the May 6, 

2010 ‘‘Flash Crash.’’ On that day, major 

equity indices in both the futures and 

securities markets fell over 5% in 

minutes before recovering almost as 

quickly. After investigation by both the 

Commission and the SEC, it was found 

that a fundamental seller utilized an 

automated execution algorithm to sell 

75,000 E-mini contracts (valued at 

approximately $4.1 billion) over an 

abbreviated time interval. The algorithm 

placed orders based on recent trading 

volume but was not programmed to take 

price or time into account; because of 

this lapse, a feedback loop triggered 

continued orders from the algorithm 

even as prices moved far beyond 

traditional daily ranges. Like the 

hypothetical example provided above, 

these declines in the derivatives market 

quickly filtered over to different, but 

closely related, products on many other 

exchanges.30 Soon after the initial 

moves in the E-mini contract, similar 

extreme volatility was experienced by 

the S&P 500 SPDR exchange traded fund 

and by many of the 500 underlying 

securities which make up the index 

itself. 

In response to the May 2010 flash 

crash, regulatory authorities and market 

participants have taken steps to address 

volatility in U.S. markets, including 

trading pauses and halts that operate as 

‘‘circuit breakers.’’ For example, in May 

2012, the SEC approved a ‘‘limit uplimit down’’ mechanism in which a 

price band is set at a percentage level 

above and below the average price of the 

stock over the immediately preceding 

five-minute trading period.31 If the 

stock’s price does not naturally move 

back within the price bands within 15 

seconds, there will be a five-minute 

trading pause. The limit up-limit down 

mechanism began implementation in 

April 2013, beginning with all stocks in 

the S&P 500 and Russell 1000 and select 

exchange traded products. 

In addition, the SEC approved 

updates to market-wide circuit breaker 

rules that, when triggered, halt trading 

in all exchange-listed securities in U.S. 

markets. Among other things, the new 

rules lower the percentage-decline 

thresholds for triggering a market-wide 

trading halt. The thresholds (Level 1 

(7%), Level 2 (13%), and Level 3 (20%)) 

are set at levels calculated daily based 

on the prior day’s closing price of the 

S&P 500 index.32 To be consistent with 

these circuit breakers, the CME Group, 

effective April 8, 2013, reduced the 

price limit levels for CME and CBOT 

U.S. equity index futures to 7%, 13% 

and 20%.33 When a trading halt is 

declared in the primary securities 

market in accordance with these levels, 

trading in the S&P 500 index futures 

contracts will be halted at the CME. 

When trading in the primary securities 

market resumes after any such halt, 

trading in the S&P index futures 

contracts will resume. Similar rules 

apply to other equity index futures 

contracts listed on CME. In March 2012, 

ICE Futures U.S. introduced a circuit 

breaker functionality called Interval 

Price Limits, in which prices may not 

move more than a pre-determined 

amount away from the current market 

price within a pre-determined period.34

Throughout section III below, the 

Commission seeks public comment on 

the benefits of standardizing various 

risk controls and system safeguards, 

including through the uniform 

application of regulatory standards to 

help ensure an integrated risk 

management infrastructure in regulated 

derivatives markets. The Commission 

draws commenters’ particular attention 

to the joint regulatory and industry 

response to the Flash Crash summarized 

above and seeks public input regarding 

the need for similar joint efforts with 

respect to the pre-trade risk controls, 

post-trade reports, and system 

safeguards contemplated in this Concept 

Release. 

4. Manual Risk Controls and System 

Safeguards in Automated Trading 

Environments 

Orders in automated trading 

environments may be initiated by ATSs 

and algorithms. Multiple other 

automated systems perform other 

processing, communicating, and other 

functions. The speed of such automated 

processes has necessarily shifted risk 

management functions to parallel 

automated risk management systems 

acting with equal speed. 

Within this context, manual risk 

controls, and particularly systems 

safeguards, remain crucial to orderly 

markets. In many cases, manual risk 

controls have shifted ‘‘upstream’’ to 

system design and ‘‘downstream’’ to 

system management. In automated 

trading, humans design and test ATSs, 

establish decision criteria, manage 

implementation, and intervene when 

technology systems fail. ATS designers 

must identify the range of market 

conditions that an ATS could 

reasonably face, and determine the 

range of permissible responses by the 

ATS to each condition. Designers must 

also consider the array of information 

that ATS operators will need to 

effectively monitor their ATSs and the 

markets in which their ATSs operate. 

ATS operators, in turn, must be 

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56548 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

35 17 CFR 1.73(a)(1) and 23.609(a)(1). 

36 17 CFR 1.73(a)(2)(i) and 17 CFR 23.609(a)(2)(i). 

37 17 CFR 23.600(d)(9). 

38See DCM Final Rules, 77 FR 36612. 

39 17 CFR 38.255. 40Part 38, Appendix B, Core Principle 4, section 

(b)(5), provides: Risk controls for trading. An 

acceptable program for preventing market 

disruptions must demonstrate appropriate trade risk 

controls, in addition to pauses and halts. Such 

controls must be adapted to the unique 

characteristics of the markets to which they apply 

and must be designed to avoid market disruptions 

without unduly interfering with that market’s price 

discovery function. The designated contract market 

may choose from among controls that include: Pretrade limits on order size, price collars or bands 

around the current price, message throttles, and 

daily price limits, or design other types of controls. 

Within the specific array of controls that are 

selected, the designated contract market also must 

set the parameters for those controls, so long as the 

types of controls and their specific parameters are 

reasonably likely to serve the purpose of preventing 

market disruptions and price distortions. If a 

contract is linked to, or is a substitute for, other 

contracts, either listed on its market or on other 

trading venues, the designated contract market 

must, to the extent practicable, coordinate its risk 

controls with any similar controls placed on those 

other contracts. If a contract is based on the price 

of an equity security or the level of an equity index, 

such risk controls must, to the extent practicable, 

be coordinated with any similar controls placed on 

national security exchanges. See DCM Final Rules, 

77 FR at 36718. 

41 17 CFR 37.405. 42See 17 CFR 38.607. 43See DCM Final Rules, 77 FR at 36648. 44 Id. 

45See 17 CFR 38.607. 

46See 17 CFR 180.1. 

47See 17 CFR 180.2. 

48See Commission, Interpretive Guidance and 

Policy Statement, 78 FR 31890 (May 28, 2013). 

49See Commission, Press Release No. 6649–13 

(July 22, 2013), available at http://www.cftc.gov/

PressRoom/PressReleases/pr6649-13. 

prepared to intervene when market 

conditions are outside of an ATS’s 

design parameters, when an ATS’s 

trading strategy must be modified, or 

when an ATS appears to be 

malfunctioning and must be shut down. 

Rapid decisions must be made while 

simultaneously digesting large 

quantities of information regarding 

multiple, fast-moving markets. 

Accordingly, this Concept Release 

contemplates a number of risk controls 

and system safeguards that emphasize 

the role and interaction of manual 

processes with automated trading 

environments, particularly ATSs. 

B. The Commission’s Regulatory 

Response to Date 

The Commission has responded to the 

development of automated trading 

environments through a number of 

regulatory measures that address risk 

controls within both new and existing 

categories of registrants, including 

DCMs, SEFs, FCMs, SDs, MSPs and 

others. In April 2012, the Commission 

adopted rules requiring FCMs, SDs and 

MSPs that are clearing members to 

establish risk-based limits based on 

‘‘position size, order size, margin 

requirements, or similar factors’’ for all 

proprietary accounts and customer 

accounts.35 The rules, codified in 

§§ 1.73 and 23.609, also require these 

entities to ‘‘use automated means to 

screen orders for compliance with the 

[risk] limits’’ when such orders are 

subject to automated execution 

(emphasis added).36 Such screening 

must, by definition, occur pre-trade. The 

Commission also adopted rules in April 

2012 requiring SDs and MSPs that are 

clearing members to ensure that their 

‘‘use of trading programs is subject to 

policies and procedures governing the 

use, supervision, maintenance, testing, 

and inspection of the program.’’ 37 The 

specific content of those policies and 

procedures are left up to the SDs and 

MSPs. 

The Commission has also adopted 

relevant rules with respect to exchange 

platforms, including rules with respect 

to DCMs (adopted in June 2012).38

Regulation 38.255, for example, requires 

DCMs to ‘‘establish and maintain risk 

control mechanisms to prevent and 

reduce the potential risk of price 

distortions and market disruptions, 

including, but not limited to, market 

restrictions that pause or halt trading in 

market conditions prescribed by the 

designated contract market.’’ 39 In 

addition, the acceptable practices for 

DCM Core Principle 4 identify pre-trade 

limits on order size, price collars or 

bands, and message throttles as 

responsive measures that a DCM may 

implement to demonstrate compliance 

with elements of the core principle.40

The Commission has adopted trading 

pause and halt requirements for SEFs 

similar to those for DCMs.41

In the DCM final rules, the 

Commission also adopted new risk 

control requirements for exchanges that 

provide DMA to clients. Regulation 

38.607 requires DCMs that permit DMA 

to have effective systems and controls 

reasonably designed to facilitate an 

FCM’s management of financial risk. 

These systems and controls include 

automated pre-trade controls through 

which member FCMs can implement 

financial risk limits.42 As the 

Commission noted in the preamble to 

the DCM final rules, in DMA 

arrangements ‘‘it is impossible for an 

FCM to protect itself without the aid of 

the DCM.’’ 43 The Commission also 

noted in the DCM final rules, however, 

that ‘‘the responsibility to utilize these 

[DCM-provided] controls and 

procedures remains with the FCM. Each 

FCM permitting direct access must use 

DCM-provided controls . . . .’’ 44

Accordingly, regulation 38.607 requires 

DCMs to implement and enforce rules 

requiring member FCMs to use these 

systems and controls.45

In addition to the foregoing, section 

753 of the Dodd-Frank Act amended 

section 6(c) of the CEA to prohibit 

manipulation and fraud in connection 

with any swap, or a contract of sale of 

any commodity in interstate commerce, 

or for future delivery on or subject to the 

rules of any registered entity. In July 

2011, the Commission adopted final 

rules implementing this new authority 

under the CEA. CFTC Regulation 180.1, 

among other things, broadly prohibits 

manipulative and deceptive devices, 

i.e., fraud and fraud-based manipulative 

devices and contrivances employed 

intentionally or recklessly, regardless of 

whether the conduct in question was 

intended to create or did create an 

artificial price.46 CFTC Regulation 180.2 

codifies the Commission’s long-standing 

authority to prohibit price manipulation 

by making it unlawful for any person, 

directly or indirectly, to manipulate or 

attempt to manipulate the price of any 

swap, or of any commodity in interstate 

commerce, or for future delivery on or 

subject to the rules of a registered 

entity.47

Finally, section 747 of the DoddFrank Act amended the CEA to make it 

unlawful for any person to engage in 

disruptive trading practices. Under 

section 4c(a)(5) of the CEA, it is 

unlawful for any person to engage in 

any trading, practice, or conduct on or 

subject to the rules of a registered entity 

that: Violates bids or offers, 

demonstrates intentional or reckless 

disregard for the orderly execution of 

transactions during the closing period, 

or is, is of the character of, or is 

commonly known to the trade as, 

‘‘spoofing.’’ In May 2013, the 

Commission provided guidance on the 

scope and application of these statutory 

prohibitions.48 In July 2013, the 

Commission issued an order filing and 

settling charges against a high-speed 

trading firm for engaging in the 

disruptive practice of ‘‘spoofing’’ by 

utilizing a computer algorithm that was 

designed to illegally place and cancel 

bids and offers in futures contracts.49

C. Recent Disruptive Events in 

Automated Trading Environments 

Recent malfunctions in ATS and 

trading platform systems, in both 

derivatives and securities markets, 

illustrate the technological and 

operational vulnerabilities inherent to 

automated trading environments. ATSs, 

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50See NFA, Case Summary: Infinium Capital 

Management, NYME 10–7565–BC (Nov. 25, 2011), 

available at http://www.nfa.futures.org/basicnet/

Case.aspx?entityid=0338588&case=10-7565-BC+

INFINIUM+CAPITAL+MGMT&contrib=NYME. 

51See NFA, Case Summary: Infinium Capital 

Management, CME 09–06562–BC (Nov. 25, 2011), 

available at http://www.nfa.futures.org/basicnet/

Case.aspx?entityid=0338588&case=09-06562-BC

&contrib=CME. 

52See Strasburg & Bunge, supra note 2. 

53See SEC Roundtable Transcript, supra note 2, 

at 55–56. 

54See CFTC and SEC Joint Report on the Market 

Events of May 6, 2010, supra note 1. 55See Jacob Bunge, Kaitlyn Kiernan & Justin Baer, 

‘‘Bad Trades’ Ripple Effect,’’ W. St. J. (Aug. 21, 

2013), available at http://online.wsj.com/article/

SB1000142412788732416520457902661141

0016876.html. 

56See Securities and Exchange Act Release No. 

65556, In the Matter of EDGX Exchange, Inc., EDGA 

Exchange, Inc. and Direct Edge ECN LLC (Oct. 13, 

2011), available at http://www.sec.gov/litigation/

admin/2011/34-65556.pdf; see also SEC News 

Release, 2011–208, ‘‘SEC Sanctions Direct Edge 

Electronic Exchanges and Orders Remedial 

Measures to Strengthen Systems and Controls’’ 

(Oct. 13, 2011), available at http://www.sec.gov/

news/press/2011/2011-208.htm. 

57See Olivia Oran, Jonathan Spicer, Chuck 

Mikolajczak & Carrick Mollenkamp, ‘‘BATS 

exchange withdraws IPO after stumbles,’’ Reuters 

(Mar. 24, 2012), available at http://uk.reuters.com/ 

article/2012/03/24/us-bats-trading-idUKBRE82

M0W020120324; Michael J. De La Merced & Ben 

Protess, The N.Y. Times Dealbook (Mar. 25, 2012), 

available at http://dealbook.nytimes.com/2012/03/

25/little-fallout-expected-from-bats-trading-error/. 

58See id. 

59See Jenny Strasburg and Jacob Bunge, ‘‘Social 

network’s debut on Nasdaq disrupted by technical 

glitches, trader confusion,’’ Wall St. J. (May 18, 

2012), available at http://online.wsj.com/article/

SB10001424052702303448404577412251723

815184.html?mod=googlenews_wsj; Jenny 

Strasburg, Andrew Ackerman & Aaron Lucchetti, 

‘‘Nasdaq CEO Lost Touch Amid Facebook Chaos,’’ 

Wall St. J. (June 11, 2012), available at http://

online.wsj.com/article/SB1000142405270230

3753904577454611252477238.html. 

60See Chris Dieterich & Jacob Bunge, ‘‘Nasdaq 

Offers Details on Trading Outage,’’ Wall St. J. (Aug. 

23, 2013), available at http://online.wsj.com/article/ 

SB1000142412788732416520457903068167

1164404.html. 

61 In addition, although in some ways distinct 

from the events summarized above, the Commission 

notes the significant impact of Hurricane Sandy in 

October 2012. U.S. stock markets closed for two 

days partially in response to concerns over 

preparedness to trade exclusively on electronic 

venues while trading floors were potentially closed, 

as well as the availability of technology and other 

relevant personnel. See Jenny Strasburg, Jonathan 

Cheng & Jacob Bunge, ‘‘Behind Decision To Close 

Markets,’’ Wall St. J. (Oct. 29, 2012), available at 

http://online.wsj.com/article/SB10001424052

970204789304578087131092892180.html. 

for example, are vulnerable to algorithm 

design flaws, market conditions outside 

of normal operating parameters, the 

failure of built-in risk controls, 

operational failures in the 

communication networks on which 

ATSs depend for market data and 

connectivity with trading platforms, and 

inadequate human supervision. 

Incidents involving an automated 

trading firm active in Commissionregulated markets are illustrative of 

these concerns. For example, in 2011 

NYMEX fined a firm $350,000 for failing 

to adequately supervise, test, and have 

controls in place related to its ATS.50

NYMEX cited a 2010 event where the 

firm launched an ATS after limited 

testing. The firm was also fined a total 

of $500,000 by CME for failure to 

effectively supervise its ATSs on 

multiple occasions.51 A panel of the 

CME Business Conduct Committee 

found that the firm had experienced 

malfunctions with the same ATS 

multiple times, causing it to submit 

error trades. 

In another example, in 2012 a 

securities trading firm, Knight Capital 

Group, launched new software on the 

NYSE that conflicted with already 

existing code.52 At the time, the firm 

was one of the largest participants and 

a market maker on the NYSE. The firm’s 

ATS inadvertently established larger 

positions than intended, resulting in a 

$440 million loss for the firm. The 

malfunction impacted the broader 

market, creating swings in the share 

prices of almost 150 companies, and the 

high volatility linked to the algorithm 

designed by the firm also triggered 

pauses in the trading of five stocks. In 

addition to the software malfunction 

itself, some have reported that there was 

a delay of approximately 40 minutes 

before humans intervened.53

A leading example of ATS 

malfunction that impacted both the 

derivatives and securities markets in the 

Flash Crash of May 2010. As described 

in detail in section II.A.3. above, the 

Flash Crash illustrates the potential 

consequences of ATS design flaws as an 

automated execution algorithm failed to 

take price or time variables into 

account, and feedback loops triggered 

continued orders from the algorithm 

even as prices moved far beyond 

traditional daily ranges.54 Finally, the 

Commission notes the recent systems 

malfunction at Goldman Sachs Group 

Inc. that inadvertently flooded U.S. 

options markets with a large number of 

unintended orders.55

In addition to ATSs, trading platforms 

have also suffered malfunctions and 

illustrate another area in which market 

disruptive events can occur. In 

November 2010, for example, untested 

code changes implemented by a U.S. 

stock exchange operator resulted in 

errors within its trading platforms. As a 

result, the platforms overfilled orders in 

over 1,000 stocks, resulting in $773 

million of unwanted trading activity.56

In March 2012, a software problem on 

BATS Global Markets, whose software 

had undergone testing, led to a 

disruption of the exchange’s own IPO. 

The glitch caused opening orders for 

ticker symbols beginning within a 

certain letter range to become 

inaccessible on the platform.57 Once the 

system failed, circuit breakers were 

triggered and erroneous trades were 

cancelled.58 In May 2012, Facebook’s 

IPO experienced significant problems as 

a result of technical errors on Nasdaq 

OMX Group Inc.’s U.S. exchange.59

Many customer orders from both 

institutional and retail buyers were 

unfilled for hours or were never filled 

at all, while other customers ended up 

buying more shares than they had 

intended. Finally, the Commission notes 

the recent three-hour halt in trading on 

the Nasdaq, which according to reports 

was caused when the exchange 

experienced a disruption in its stock 

quote dissemination systems and a 

disruption in its connectivity with 

another trading platform’s systems.60

Taken together, these events illustrate 

the importance of effective testing, 

circuit breakers, and error trade policies 

as vehicles for reducing the likelihood 

of disruptive events and mitigating their 

impact when they occur.61 A number of 

the risk controls contemplated in this 

Concept Release could help limit the 

extent of market disruption caused by 

ATS or trading platform malfunctions 

similar to those described above. For 

example, an order ‘‘kill switch’’ enables 

a market participant to immediately 

cancel all working orders generated by 

one or more of its ATSs, and prevents 

the submission of additional orders 

until the appropriate natural persons 

allow order placement to resume. Such 

a kill switch could be operated by the 

market participant generating orders, 

the clearing firm guaranteeing its trades, 

or the trading platform on which its 

orders would be executed. As another 

example, ATS monitoring and 

supervision standards, as well as preestablished crisis management 

protocols, could help ensure that human 

supervisors intervene quickly when 

ATSs experience degraded performance, 

and that supervision staff have the both 

the authority and knowledge to 

intervene as required. Further, requiring 

exchanges to calculate and disseminate 

market quality metrics could enable 

both exchanges and market participants 

to better anticipate and mitigate 

destabilizing events. In addition, the 

Commission believes that change 

management standards that are 

beneficial to ATSs could also be applied 

to trading platforms to help prevent 

operational or programming errors in 

that element of the automated trading 

environment. In section III below, the 

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56550 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

62See FIA Principal Traders Group, 

‘‘Recommendations for Risk Controls for Trading 

Firms,’’ (November 2010) at 5 [hereinafter, ‘‘FIA 

Recommendations for Risk Controls’’], available at 

http://www.futuresindustry.org/downloads/

Trading_Best_Pratices.pdf; FIA Market Access 

Recommendations, supra note 23, at 9; TAC PreTrade Functionality Subcommittee DMA 

Recommendations, supra note 26, at 5. 

63See FIA Recommendations for Risk Controls, 

supra note 62, at 3. 

64See FIA Market Access Recommendations, 

supra note 23; ESMA Guidelines on Systems and 

Controls, supra note 4, at 33. 

Commission seeks public comment on 

these and other potential risk controls. 

III. Potential Pre-Trade Risk Controls, 

Post-Trade Reports, System Safeguards, 

and Other Protections 

A. Overview of Existing Industry 

Practices 

The transition to automated trading in 

derivatives markets, as described above, 

has been followed by an evolution in 

what market participants, regulators and 

others understand to be necessary risk 

controls for various points in the order 

and trade lifecycle. Many of the 

measures identified herein are 

consistent with recommendations made 

by industry groups, other regulatory 

authorities, international standard 

setting bodies, and others. Certain 

measures, or variants of them, have been 

discussed within the futures industry 

for some time, or may already be in 

operation at one or more exchanges, 

clearing members, or market 

participants. For example, the system 

safeguards pertaining to the cancellation 

of orders or disconnecting a market 

participant in emergency situations are 

similar to proposals made separately by 

FIA’s Principal Traders Working Group 

and Market Access Working Group in 

2010 and the TAC’s Pre-Trade 

Functionality Subcommittee in 2011.62

The Principal Traders Group also 

addressed the need to properly monitor 

ATSs in its 2010 recommendations by 

noting that ‘‘firms must ensure their 

[ATSs] are supervised at all times while 

operating in the markets. Staff must 

have training, experience and tools that 

enable them to monitor and control the 

trading systems and troubleshoot and 

respond to operational issues in a timely 

and appropriate manner. Firms should 

have processes and procedures to 

ensure trading operations staff is trained 

on the expected operating parameters of 

any [ATS] for which they are 

responsible.’’ 63 ATS design and 

operation was addressed by FIA’s 

Market Access Working Group and by 

ESMA, the latter requiring that market 

participants ‘‘make use of clearly 

delineated development and testing 

methodologies’’ for ATSs prior to their 

deployment or the deployment of 

system updates.64 Among other 

considerations, ESMA emphasized that 

ATS testing should address embedded 

compliance and risk management 

controls and operation during stressed 

market conditions. 

As with the pre-trade and post-trade 

risk controls, certain system safeguards 

would be applicable to more than one 

entity or would require coordination 

between entities. For example, ATS 

design and operation tests will require 

that trading platform operators provide 

suitable test environments that 

accurately recreate the ‘‘live’’ trading 

platform. Similarly, safeguards that 

provide for the immediate 

disconnection of a market participant in 

the event of emergency or breach of 

tolerances should be available to the 

market participant, its clearing firm, and 

the relevant trading platform so that all 

parties have the capacity to initiate a 

disconnect when necessary. As with 

other overlapping measures 

contemplated in this Concept Release, 

the Commission requests public 

comment regarding the necessity of 

such overlaps and the most efficient 

way to administer them. 

1. Existing DCM Risk Controls 

Risk controls implemented by one or 

more exchanges broadly address market 

stability. One large DCM (‘‘DCM A’’) 

employs price reasonability validation 

controls (aimed at preventing ‘‘fat 

finger’’ type errors) and position 

validation controls (both absolute limits 

and net long/short limits). In addition, 

DCM A has implemented a circuit 

breaker protection against price spikes. 

This control provides floor and ceiling 

price limits within a specific timeframe 

and market, and recalculates new floor 

and ceiling price limits based on current 

market prices for each new timeframe. 

If the floor or ceiling price is exceeded, 

the market is put in a ‘‘hold’’ state, 

although trading will not be halted in 

the opposite direction of the hold. The 

length of the hold varies depending on 

the market and orders submitted during 

the hold state will remain in the order 

book but will not be matched. DCM A 

has also implemented kill switches that 

provide it and risk managers at trading 

firms with the ability to halt trading. 

Similarly, another large DCM (‘‘DCM 

B’’) also employs a limit price to each 

market order and stop order to prevent 

orders from being filled at significantly 

aberrant price levels, and maximum 

order size protection to prevent entry of 

erroneous orders for quantities above a 

designated threshold. DCM B employs a 

functionality that introduces a 5–20 

second market pause when triggered 

stops would cause the market to trade 

outside of predefined values. This is 

designed to prevent excessive price 

movements caused by cascading stop 

orders. DCM B also employs a 

functionality that introduces a 5–20 

second market pause when a subsecond, extreme market move occurs as 

a result of order entry. This 

functionality is designed to detect 

significant price moves of futures 

contracts occurring within a 

predetermined period of time, and 

triggers a pause in matching activity to 

provide time for additional resting 

orders to populate the order book. 

DCM A seeks to optimize message 

flow through both hard limits and 

market incentives. It employs a message 

throttle limit which sets a maximum 

message rate per second for each user 

session and prevents the submission of 

messages in excess of the maximum 

rate. The second form of message 

control used by DCM A is a system of 

fees based on Weighted Volume Ratio 

(‘‘WVR’’) calculations designed to 

discourage inefficient messaging among 

firms with high message volumes. The 

WVR is a ratio between the number of 

messages submitted by a market 

participant and the total volume of 

orders that it executes. The ratio of 

unfilled orders is also weighted based 

on how far away from the best bid or 

offer each unfilled order was when it 

was entered. Orders that are farther 

away from the best bid or offer when 

entered are weighted more heavily. The 

DCM assesses fees against market 

participants when they exceed WVR 

limits. 

DCMs A and B both employ an 

‘‘orders removed upon logout’’ function 

in which all orders are removed upon 

the user’s logout or disconnection, and 

that they maintain error trade policies 

that incorporate a no cancellation range. 

With respect to ATSs, DCMs A and B 

both employ a certification and testing 

process for connecting entities. For 

example, one DCM described this 

process as testing a firm’s messaging 

ability (i.e., that firm’s ability to send 

and receive data). As part of the testing 

process, the DCM will transmit market 

data to the firm and this provides the 

firm with the opportunity to run its own 

algorithms and for that firm to 

determine if its algorithms are 

functioning as it intended. Firms must 

pass additional conformance tests when 

the exchange’s own system functionality 

changes. DCM B indicated that its 

testing process allows customers to test 

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Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 56551 

65See FIA Recommendations for Risk Controls, 

supra note 62, at 2. 

66See Carol Clark & Rajeev Ranjan, ‘‘How Do 

Proprietary Trading Firms Control the Risks of High 

Speed Trading?’’ (March 2012), available at http:// 

www.chicagofed.org/digital_assets/publications/

policy_discussion_papers/2012/PDP2012-1.pdf. 

67The final firm also sets credit limits, but only 

for new traders. See id. at 7. 

68See Carol Clark & Rajeev Ranjan, ‘‘How Do 

Broker-Dealers/Futures Commission Merchants 

Control the Risks of High Speed Trading?’’ (June 

2012), available at http://www.chicagofed.org/

Webpages/publications/policy_discussion_papers/

2012/pdp_3.cfm. 

new products prior to their production 

launch. 

In addition to their internal risk 

mitigation programs, DCMs also provide 

risk mitigation tools to intermediaries 

such as FCMs, allowing the 

intermediaries to set risk control 

parameters on controls that reside at the 

trading platform level. Clearing firms, 

for example, are able to set risk 

tolerance levels for their customers 

based on position size, order activity, 

executions, among other variables. 

2. Existing Trading and Clearing Firm 

Risk Controls 

Risk controls at the level of individual 

market participant firms, whether 

trading firms or clearing firms, are 

necessarily entity specific. Accordingly, 

industry groups have collaborated to 

determine best practices for risk 

controls. As noted previously, other 

entities, including the TAC, have also 

developed best practices or 

recommendations. One goal of this 

Concept Release is to determine how 

consistently these, and other, 

recommendations are today being 

implemented by market participants. As 

noted by FIA, ‘‘all principal traders have 

a vested interest in well-functioning 

markets with effective risk controls, 

clear error trade policies that focus on 

trade certainty, and a strong regulatory 

framework.’’ 65 Comments to this 

Concept Release will allow the 

Commission to best ensure this strong 

framework. Questions about the general 

use of automated risk controls at the 

level of a firm are also informed by two 

reports prepared by authors affiliated 

with the Federal Reserve Bank of 

Chicago. One report details the current 

practices of nine proprietary trading 

firms, with special attention to risk 

mitigating practices currently applied to 

their automated systems.66 Through 

interviews, the authors found that (1) all 

firms have maximum order sizes in 

place and intraday position limits; (2) 

all but one firm has credit limits by 

account, which monitor open positions, 

dollar value of positions and quantity of 

working orders; 67 (3) half of the firms 

have price protection points for orders; 

(4) most firms had message throttles, set 

at order volume per unit of time; and (5) 

all firms had kill buttons. The risk 

controls included in this list, and others 

discussed within the report, are 

expanded upon in the below discussion. 

In its questions for comment, the 

Commission seeks to understand what 

types of risk controls are most 

commonly used throughout the 

industry, and the degree to which those 

risk controls are standardized across the 

industry. 

A second report 68 summarized 

interviews with five Broker/Dealers 

(‘‘B–Ds’’) and FCMs, again detailing 

their current practices in automated risk 

controls. As at the trading level, some 

firms have implemented pre-trade and 

post-trade checks, along with other 

credit related controls to mitigate 

trading losses and resulting burdens on 

the clearing firm. The report details 

categories of risks considered by the B– 

D or FCM when signing on a new client, 

or updating controls as a client enters 

new businesses or expands on old ones. 

These include: Credit risks, market 

risks, counterparty risks, portfolio risks 

and regulatory risks. Through these 

assessments, clearing firms are able to 

determine appropriate risk thresholds 

for a given client, and apply them as 

necessary at multiple points in the 

trading chain. Specific controls come in 

forms quite similar to those outlined 

above in the case of the trading firm. 

Pre-trade risk controls span order size 

limits, intraday position limits, credit 

limits, and message throttles. These can 

vary by asset class, exchange, and other 

market factors, along with coincident 

market dynamics such as volatility 

levels and current positions of the 

trading firm. The monitoring done by 

the clearing firm is aided by post-trade 

measures such as the drop-copy of 

executions, which allows for the 

monitoring of positions and associated 

credit risks. 

B. Overview of Risk Controls Addressed 

in This Concept Release 

The risk controls presented below 

describe specific measures which could 

be taken by exchanges and participants 

in automated trading environments. To 

better understand current industry 

practices, the Commission is interested 

in determining, for each risk control: (1) 

Whether the entity commenting has 

implemented the control; (2) whether 

the entity believes implementation of 

the control within the marketplace is 

consistently applied; and (3) the 

benefits and costs of a regulatory 

mandate of the control. If the 

Commission determines that the types 

of risk controls employed across the 

industry vary widely, the Commission 

would be aided by understanding the 

extent of this variance, the reasons for 

it, and whether regulatory 

standardization can be of benefit. By 

gathering this information, the 

Commission will be better informed 

regarding beneficial future regulation 

surrounding automated systems. 

The Commission emphasizes that this 

Concept Release is intended to serve as 

a high-level enunciation of potential 

measures intended to reduce the 

likelihood of market disrupting events 

and mitigate their impact when they 

occur. Many of the risk controls listed 

below are in effect, in part or in full, 

across multiple entities. Others have 

been included in recommendations by 

industry groups and standard-setting 

bodies, or addressed by foreign 

regulatory authorities. The Commission 

also notes that a number of the measures 

described below offer similar risk 

controls at various stages in the life of 

an order (e.g., a safeguard applicable to 

the ATS generating an order and a 

similar safeguard applicable to the 

trading platform receiving such order). 

Added security through redundancy of 

risk controls is a feature of safeguard 

documents reviewed by the Commission 

in preparing this Concept Release. The 

Commission seeks public comment on 

merits of single versus redundant risk 

control models. Market participants and 

members of the public are encouraged to 

comment on the potential risk controls, 

and the Commission anticipates further 

refinement of the measures described 

herein based on the comments received. 

The discussion of risk controls below 

is followed by a number of general 

questions on which the Commission 

requests comment (see section III.G. 

below). These questions are applicable 

to all the risk controls discussed below. 

C. Pre-Trade Risk Controls 

The Commission includes below a set 

of pre-trade risk controls aimed at 

reducing market disruptions related to 

automated trading due to errors, system 

malfunctions or other events with 

similar effects. In general, pre-trade risk 

controls seek to protect against the 

accumulation of a large volume of 

orders, executions, or positions over an 

abbreviated period of time. Some market 

participants are currently using controls 

which address this accumulation, 

including maximum order size limits, 

message rate limits, and similar 

measures. Pre-trade risk controls can 

also promote fair and orderly markets, 

through the use of circuit breakers, 

execution throttles and self-trade 

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56552 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

69The pre-trade risk controls contemplated herein 

are consistent with general principles or specific 

recommendations (in DMA context) expressed in 

the TAC Pre-Trade Functionality Subcommittee 

DMA Recommendations, supra note 26, at 2–5; 

IOSCO Technical Committee, Final Report on 

Principles for Direct Electronic Access to Markets 

(August 2010) at 20, available at http://

www.iosco.org/library/pubdocs/pdf/

IOSCOPD332.pdf; and the FIA Recommendations 

for Risk Controls, supra note 62, at 4. The pre-trade 

risk controls described herein are also consistent 

with the principles included in the ESMA 

Guidelines on Systems and Controls, supra note 4. 

70 In this regard, the Commission notes that the 

TAC’s Pre-Trade Functionality Subcommittee 

described ‘‘three levels in the electronic trading 

‘supply chain’ where pre-trade risk safeguards 

could happen: Trading firms (as principal or agent), 

clearing firms (as principal or agent), and 

exchanges.’’ The Subcommittee’s recommendations 

to the TAC noted that it ‘‘believe[s] strongly that all 

three levels of the supply chain should institute 

pre-trade risk management measures.’’ See TAC 

Pre-Trade Functionality Subcommittee DMA 

Recommendations, supra note 26, at 1. 

71See FIA Market Access Recommendations, 

supra note 23, at 8. See also TAC Pre-Trade 

Functionality Subcommittee DMA 

Recommendations, supra note 26, at 2. The TAC 

Pre-Trade Functionality Subcommittee called for a 

‘‘realistic view’’ of the incentives under which 

market participants, clearing firms, and exchanges 

operate. The Subcommittee identified these 

incentives as follows: 

• ‘‘Trading firms are competing with one another 

to have the smallest time delays (lowest latency) in 

getting their orders into the exchange’s matching 

engine, and are thus negotiating with brokers to 

reduce latency. At the same time they are trying to 

protect their capital from rogue trading, 

technological deficiencies or other adverse, 

unintended events. 

• Brokers (clearing FCMs) are competing with 

one another to attract the business of these highvolume, speed-seeking trading firms, and are thus 

trying to reduce latency. At the same time, they are 

trying to protect themselves from loss due to 

unauthorized trading by their trading firm clients or 

other adverse, unintended events. 

• Exchanges (Designated Contract Markets, or 

DCMs, and Foreign Boards of Trade, or FBOTs) are 

competing with one another to provide low latency 

execution, and will soon be competing with Swaps 

Execution Facilities (SEFs), to attract the business 

of these trading firms.’’ 

The Subcommittee expressed its concern that risk 

controls should ensure fairness so that one trading 

firm is not disadvantaged relative to another 

‘‘because its clearing firm chose to act more 

responsibly.’’ 

72For example, trading platforms provide a range 

of risk controls, but there is limited standardization 

in the types of risk controls available to customers 

from one exchange to the next. The Commission 

seeks to understand whether diverse risk 

management tools and policies at various exchanges 

complicate risk management for intermediaries and 

traders. 

73The Commission notes that some existing 

regulations address pre-trade risk controls. See 

supra section II.B. 

74The Commission understands that some trading 

firms and several exchanges already have limits on 

the number of orders that can be sent to a trading 

venue during a specified period of time. See Clark 

& Ranjan, ‘‘How Do Proprietary Trading Firms 

Control the Risks of High Speed Trading,’’ supra 

note 66, at 7; Oliver Linton & Maureen O’Hara, 

‘‘Economic impact assessments on MiFID II policy 

measures related to computer trading in financial 

markets,’’ United Kingdom Government Office for 

Science—Foresight (August 2012) at 24–25, 

available at: http://www.futuresindustry.org/epta/

downloads/Economic-Impact-assessments-onMiFID-2-policy-measures_083012.pdf. However, the 

Commission would like to understand whether 

requiring some measure of standardization and the 

use of such tools among exchanges, FCMs, and 

trading firms would provide additional protection 

for the market. 

monitoring. Finally, the pre-trade risk 

controls also include pre-trade credit 

limits designed to protect clearing firms, 

and their clients, with respect to 

customer and proprietary orders.69 Each 

of these groups is discussed below in 

greater detail. 

In order to fully address possible 

disruptions, the pre-trade risk controls 

apply at one or more of three points in 

the execution chain: (1) Individual 

firms; (2) intermediaries of many forms 

(including SDs, MSPs, FCMs, Floor 

Traders, Commodity Pool Operators 

(‘‘CPOs’’) and DCOs); and (3) exchanges 

(including DCMs and SEFs). In many 

cases, the same or similar risk controls 

are implemented at more than one point 

in the execution chain, such as first at 

the firm, then perhaps at the clearing 

firm, and then finally at the DCM. The 

Commission believes that this approach 

offers a number of advantages.70 First, it 

allows individual entities to calibrate 

the relevant risk control in accordance 

with their own objectives and risk 

tolerances. For example, an exchange 

may set a per-product maximum order 

size to ensure orderly trading in its 

markets, with the same limit applying 

equally to all market participants. A 

clearing firm, however, may wish to 

address its customers’ distinct risk 

profiles by setting different maximum 

order sizes for different customers. 

Second, by indicating that some risk 

controls should reside at the exchange 

level in addition to the market 

participant and clearing firm levels, the 

Commission is responding to 

competitive and ‘‘race to the bottom’’ 

concerns raised by several observers. 

FIA’s Market Access Working Group, for 

example, noted that ‘‘[p]re-trade risk 

controls have become a point of 

negotiation between trading firms and 

clearing members because they can add 

latency to a trade. To avoid such 

negotiations, the Market Access 

Working Group believes that certain risk 

controls should reside at the exchange 

level and be required for all trading to 

ensure a level playing field.’’ 71

Third, the risk controls listed below 

acknowledge a variety of industry 

practices with respect to order 

generation, such as whether the order 

passes through intermediaries prior to 

execution. The Commission seeks to 

understand how increased 

standardization in risk controls at the 

level of exchanges or exchange members 

could provide strengthened protection 

for the markets and the public.72

Notably, if the Commission were to 

require the placement of credit controls, 

maximum order size limits, and 

maximum message rate limits at both 

exchanges and clearing members, it 

could address both traditional means of 

order flow (i.e., through a clearing firm) 

and newer DMA practices, which 

require controls at the exchange set by 

the relevant clearing firm. In 

combination, these reasons demonstrate 

the strength, in certain cases, of putting 

into practice standardized risk controls, 

with similar goals, at multiple entity 

types.73

Finally, the Commission notes the 

importance of risk controls designed to 

protect the financial integrity of DCOs, 

and to address risks posed by market 

participants utilizing DMA. Throughout 

the range of pre-trade risk controls 

discussed below, and other measures 

discussed later in this Concept Release, 

the Commission specifically solicits 

public comment regarding the following 

questions: 

6. Are there distinct pre-trade risk 

controls, including measures not listed 

below, or measures in addition to those 

already adopted by the Commission, 

that would be particularly helpful in 

protecting the financial integrity of a 

DCO? 

7. Are there distinct pre-trade risk 

controls, including measures not listed 

below, or measures in addition to those 

already adopted by the Commission, 

that should apply specifically in the 

case of DMA? 

The following sections describe the 

pre-trade risk controls inquired about in 

this Concept Release, and present a 

series of questions to assist the 

Commission in determining the 

effectiveness, adoption rate, and need 

for any additional action with respect to 

these pre-trade risk controls or others 

that commenters may think advisable. 

1. Message and Execution Throttles 

The Commission seeks public 

comment regarding the potential 

benefits and existing use of maximum 

message rate and execution rate throttles 

(‘‘execution throttles’’). The 

Commission also seeks public 

comments regarding the types of 

execution throttles that would be most 

effective at alerting market participants 

to potential algorithm malfunctions and 

limiting the extent of market disruption 

when there is a malfunction.74

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Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 56553 

75See Clark & Ranjan, ‘‘How Do Proprietary 

Trading Firms Control the Risks of High Speed 

Trading,’’ supra note 66, at 7. 

76See Carol Clark & Rajeev Ranjan, ‘‘How Do 

Exchanges Control the Risks of High Speed 

Trading?’’ (November 2011) at 3, available at http:// 

www.chicagofed.org/digital_assets/publications/

policy_discussion_papers/2011/PDP2011–2.pdf. 

77The Commission notes that the Futures and 

Options Association (‘‘FOA’’) expressed the opinion 

that throttles may hinder price formation and 

market integrity if applied dynamically during a 

period of market stress. However, the FOA 

generally supported the use of throttles that are 

‘‘pre-defined, transparent and certain (i.e., the 

member obtains connections with a specified 

bandwidth in terms of maximum messages per 

second).’’ See FOA, ‘‘ESMA’s Consultation Paper: 

Guidelines on Systems and Controls in a highly 

automated trading environment for trading 

platforms, investment firms and competent 

authorities: A response paper by the Futures and 

Options Association’’ (October 2011) at 2, available 

at http://www.esma.europa.eu/system/files/11- 

FOA.pdf. 

78See CME Group, ‘‘CME Globex Self-Match 

Prevention Functionality FAQ’’ (2013), available at 

http://www.cmegroup.com/globex/resources/

smpfaq.html. On July 9, 2013, CME Group 

requested Commission approval to issue a market 

regulation advisory notice intended to provide 

guidance with respect to the types of activity that 

may constitute a violation of the exchange’s wash 

trades rule and to provide additional information 

concerning its self-match prevention technology. 

This notice, which is under review by the 

Commission, is available at http://www.cftc.gov/

Continued 

Execution throttles prevent an 

algorithm from exceeding its expected 

message rate or rate of execution, and 

when tripped, can alert monitors at both 

the exchange and the trading firm. Such 

alerts can facilitate rapid detection of 

malfunctioning algorithms. Depending 

on the nature of the malfunction, 

execution throttles may also reduce the 

damage and monetary losses caused by 

the disruptive algorithm during the time 

when it is being investigated. The 

Commission understands that trading 

firms 75 and exchanges 76 employ 

individual variants of throttles to limit 

the number of orders that can be 

transmitted to or processed by an 

exchange. The Commission requests 

public comment regarding the extent to 

which market participants that already 

utilize execution throttles apply them in 

a static manner (i.e., a fixed threshold, 

beyond which notifications are 

generated), or dynamically (i.e., 

dependent on the time of day or the 

previous activity of the algorithm).77

The Commission also requests public 

comments regarding the extent to which 

throttles are applied by trading firms on 

a per-algorithm basis, calibrated to take 

into account the expected message and 

execution rates of each algorithm for a 

given time period. 

In addition, the Commission asks 

whether maximum message rates and 

execution throttles could be used as a 

mechanism to prevent individual 

entities from submitting messages or 

executing orders at speeds that are 

misaligned with their risk management 

capabilities. Execution throttles of this 

type would be unique to individual 

firms or accounts, and could be set by 

the exchange or clearing firm after 

reviewing the risk management 

capabilities of the entity to which the 

throttle will apply. For some firms, 

there may be a delay before effective 

risk management begins; in these cases, 

execution throttles may mitigate harm to 

the firm or other market participants 

prior to the firm’s response to a 

malfunction. Last, message rate limits 

could be used to mitigate the risk of 

manipulative or disruptive messaging 

strategies such as ‘‘order stuffing,’’ 

where firms use ATSs to submit large 

numbers of orders that are cancelled 

before execution in order to slow down 

the matching engine and create arbitrage 

opportunities in or across products. 

8. If, as contemplated above, 

maximum message rates and execution 

throttles were used as a mechanism to 

prevent individual entities or accounts 

from trading at speeds that are 

misaligned with their risk management 

capabilities, how should this message 

rate be determined? 

9. Message and execution throttles 

may be applied by trading firms (FCMs 

and proprietary trading firms), clearing 

firms, and by exchanges. The 

Commission requests public comment 

regarding the appropriate location for 

message and execution throttles. 

a. If throttles should be implemented 

at the trading firm level, should they be 

applied to all ATSs, only ATSs 

employing HFT strategies, or both? 

b. What role should clearing firms 

play in the operation or calibration of 

throttles on orders submitted by the 

trading firms whose trades they 

guarantee? 

10. Should the message and execution 

throttles be based on market conditions, 

risk parameters, type of entity, or other 

factors? 

11. What thresholds should be used 

for each type of market participant in 

order to determine when a message or 

execution throttle should be used? 

Should these thresholds be set by the 

exchange or the market participant? 

12. Are message and execution 

thresholds typically set by contract, or 

by algorithm? What are the advantages 

and disadvantages to each method? 

13. Who should be charged with 

setting message rates for products and 

when they are activated? 

14. Would message and execution 

throttles provide additional protection 

in mitigating credit risk to DCOs? 

2. Volatility Awareness Alerts 

Automated volatility awareness alerts 

implemented by trading firms are 

another form of risk control 

contemplated in this Concept Release. 

Volatility awareness alerts could be 

triggered when price movements in a 

given product move beyond a certain 

threshold within a previously specified 

time period. Such alerts could assist in 

identifying market conditions that may 

exceed an algorithm’s parameters, or 

may highlight unintended effects of an 

algorithm’s orders. Given an alert, 

human monitors at the trading firm 

could then intervene either by halting 

the relevant algorithms under their 

control, or by conveying the information 

to other relevant parties. Unlike 

exchange trading pauses and halts, 

volatility awareness alerts inform firm 

personnel as to changes in market 

conditions that may disrupt the 

parameters within which their ATSs 

and algorithms were programmed to 

operate, rather than immediately 

triggering a pause in trading. 

15. The Commission is aware that 

alarms can be disruptive or 

counterproductive if ‘‘false alarms’’ 

outnumber accurate ones. How can 

volatility alarms be calibrated in order 

to minimize the risk that false alarms 

could interrupt trading or cause human 

monitors to ignore them over time? 

3. Self-Trade Controls 

A trade that results from the matching 

of opposing orders between a firm or a 

single or commonly owned account, 

such as a wash trade, does not shift risk 

between different market participants. 

In addition, such trades may 

inaccurately signal the level of liquidity 

in the market and may result in a nonbona fide price. Risk controls that 

identify and limit self-trading may 

result in more accurate indications of 

the level of market interest on both sides 

of the market and help ensure armslength transactions that promote 

effective price discovery. Some 

regulated exchanges have tools 

specifically designed to identify and 

limit self-trading. The Commission is 

interested in better understanding those 

risk controls and how widespread their 

use may be. 

For example, the Commission 

understands that in June 2013, CME 

Group introduced a voluntary selfmatch prevention functionality that 

allows market participants to prevent 

buy and sell orders for the same account 

(or for an account with common 

beneficial ownership) from matching 

with each other.78 Market participants 

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79The Commission currently estimates that about 

half of the trading firms operating ATS have limits 

that check orders against a specific price range 

before sending them to the exchange. See Clark & 

Ranjan, ‘‘How Do Proprietary Trading Firms Control 

the Risks of High Speed Trading,’’ supra note 66, 

at 7. However, the Commission would like to better 

understand whether standardizing such controls at 

the level of exchanges or requiring such controls at 

the level of trading firms would further promote 

stable and reliable markets. 

80See Carol Clark & Rajeev Ranjan, ‘‘How Do 

Exchanges Control the Risks of High Speed 

Trading?’’ supra note 76, at 3. 

81See, e.g., Carol Clark, Rajeev Ranjan, John 

McPartland, & Richard Heckinger, ‘‘What Tools Do 

Vendors Provide to Control the Risks of High Speed 

Trading?’’ (October 2011) at 2–3, available at http:// 

www.chicagofed.org/digital_assets/publications/

policy_discussion_papers/2011/PDP2011-1.pdf. 

that wish to opt-in to this functionality 

populate a new FIX tag on all orders 

with a ‘‘Self Match Prevention 

Identifier,’’ in addition to an executing 

firm number. When the exchange’s 

matching engine detects buy and sell 

orders at the same executable price level 

in a particular contract and both orders 

have the same Self Match Prevention 

Identifier and the same executing firm 

number, the engine will automatically 

cancel the resting order(s) on one side 

of the market and process the incoming 

order on the other side of the market. 

In addition, the Commission 

understands that ICE Futures U.S. 

(‘‘ICE’’) offers voluntary self-trade 

prevention functionality for preventing 

inter- and intra-company orders from 

matching in the exchange’s matching 

engine. This functionality was initially 

designed to prevent the matching of 

inter- and intra-company trades by 

automatically rejecting the taking order. 

The Commission understands that in 

May 2013, this functionality was 

expanded to allow for the rejection of 

the resting order. 

16. What specific practices or tools 

have been effective in blocking selftrades, and what are the costs associated 

with wide-spread adoption of such 

practices or tools? 

17. Please indicate how widely you 

believe exchange-sponsored self-trading 

controls are being used in the market. 

18. Should self-trade controls cancel 

the resting order(s)? Or, instead, should 

they reject the taking order that would 

have resulted in a self-trade? If 

applicable, please explain why one 

mechanism is more effective than the 

other. 

19. Should exchanges be required to 

implement self-trading controls in their 

matching engines? What benefits or 

challenges would result from such a 

requirement? 

20. Please explain whether regulatory 

standards regarding the use of selftrading control technology would 

provide additional protection to markets 

and market participants. 

21. If you believe that self-trading 

controls are beneficial, please describe 

the level of granularity at which such 

controls should operate (e.g., should the 

controls limit self-trading at the 

executing firm level? At the individual 

trader level?) What levels of granularity 

are practical or achievable? 

22. If you believe that self-trading 

controls are beneficial, please explain 

whether exchanges should require such 

controls for market participants and 

identify the categories of participants 

that should be subject to such controls. 

For example, should exchanges require 

self-trading controls for all participants, 

some types of participants, participants 

trading in certain contracts, or 

participants in market maker and/or 

incentive programs? What benefits or 

challenges would result from imposing 

such controls on each category of 

participant? 

4. Price Collars 

The Commission is also inquiring 

about price collars for both orders and 

executions. Price collars on orders 

prevent orders outside of acceptable 

price ranges from either entering the 

order book or executing at extreme 

levels; in effect, collars prevent market 

or stop orders (which execute as market 

orders) from trading at levels far beyond 

that expected at order entry. Similarly, 

price collars for execution prevent an 

order that is already in the book from 

being executed by the matching engine 

if it is outside of the acceptable range. 

Price collars can be contract specific 

and dynamic, responding to changes in 

market prices and market volatility for 

each contract. Price collars may reduce 

realized volatility by preventing a large, 

aggressive order from sweeping the book 

and matching at prices outside the range 

allowed by the collar, or allowing 

isolated market orders to execute during 

periods when one-sided liquidity is 

extremely low.79

23. The Commission is aware that 

some exchanges already have price 

collars in place for at least a portion of 

the contracts traded in their markets. 

Please comment on whether exchanges 

should utilize price collars on all 

contracts they list. 

24. Would price collars provide 

additional protection in mitigating 

credit risk to DCOs? 

5. Maximum Order Sizes 

Maximum order sizes are intended to 

protect against execution of orders for a 

quantity larger than a predetermined 

‘‘fat finger’’ limit. Like other controls, 

these limits can function at multiple 

levels; for example, at the firm level, in 

which firms prevent the submission of 

orders beyond certain limits, or at the 

clearing level, in which clearing 

members prohibit transmission of 

customer orders in excess of 

predetermined limits. 

The Commission believes that most, if 

not all, exchanges currently have the 

capability to set maximum order sizes, 

but understands that such controls may 

vary among exchanges in their ability to 

set limits by product, product class, 

customer, or clearing member.80 The 

Commission is interested to understand 

the following: 

25. Are such controls typically 

applied to all contracts and customers, 

or on a more limited basis? 

26. Do exchanges allow clearing 

members to use the exchange’s 

technology to set maximum order sizes 

for specific customers or accounts? 

27. Would additional standardization 

in the capabilities of this technology or 

more uniform application of this 

technology to all customers and 

contracts improve the effectiveness of 

such controls? 

The Commission understands that 

some, but perhaps not all clearing firms 

may utilize the exchange’s systems, and 

possibly their own systems, in order to 

conduct pre-trade maximum order size 

screens.81 The Commission is interested 

to understand the following: 

28. To what extent are clearing firms 

and trading firms conducting pre-trade 

maximum order size screens? Please 

explain whether firms are conducting 

such screens by utilizing: (1) Their own 

technology; (2) the exchange’s 

technology, or (3) a combination of both. 

29. Would regulatory standards 

regarding the use of such technology 

provide additional protection to the 

markets? 

6. Trading Pauses 

The Commission wants to better 

understand the existing implementation 

of trading pauses for trading platforms, 

and whether any additional types of 

pause mechanisms would be beneficial. 

A wide range of pause methodologies 

are currently in effect at exchanges, 

such as stop-logic functionality and 

interval price limits. These 

methodologies include market pauses 

when the execution of resting stop 

orders would cause excessive price 

movements, when prices move in excess 

of a dynamic threshold over a given 

time period, or simply when prices have 

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82The Commission understands that some 

triggers leading to a market pause are not 

necessarily best classified as ‘‘pre-trade’’ risk 

controls. Some pauses, as described, may be in 

anticipation of a certain set of executions, and are 

pre-trade, while others may be in response to a 

given execution. The discussion here implicitly 

includes all of the above, and the Commission 

requests comment on the full range of pause types. 

83See CFTC and SEC Joint Report on the Market 

Events of May 6, 2010, supra note 1, at 6 (noting 

that CME’s stop logic functionality that triggered a 

halt in E-Mini trading shows that pausing a market 

can be an effective way of providing time for market 

participants to reassess their strategies, for 

algorithms to reset their parameters, and for an 

orderly market to be re-established). 

84See Commission, Final Rule: Customer 

Clearing Documentation, Timing of Acceptance for 

Clearing, and Clearing Member Risk Management, 

77 FR 21278 (Apr. 9, 2012). 

85See, e.g., ‘‘Managing Credit Lines in a SEF/

Cleared World,’’ a presentation by MarkitServ at the 

March 29, 2012 TAC meeting [hereinafter, the 

‘‘MarkitServ Presentation’’]. Available at: http://

www.cftc.gov/ucm/groups/public/@aboutcftc/

documents/file/tacpresentation032912_

markitse.pdf. 

86See id. The presentation also noted that posttrade checks at the DCO is another form of risk 

control based on end-customer position or credit 

limits. See section III(D) for additional discussion 

of post-trade reports and other post-trade measures. 

moved more than a given amount 

during the trading day.82 Often, the 

market will monitor the order book 

during the pause, and determine when 

it is ‘‘safe’’ to re-open the market to 

further executions or re-open after a 

specified interval. Trading pauses have 

mitigated price movements during 

particularly volatile times in the past.83

The Commission is interested in 

better understanding the relative costs 

and benefits of each type of pause 

functionality and whether certain types 

of pause mechanisms are more effective 

than others with respect to ATS trading. 

The Commission is also interested to 

understand whether additional types of 

pause triggers would be advisable. 

These might cover a wider array of 

adverse states of an automated central 

limit order book, including, for 

example, significant depth imbalance, a 

significant number of aggressive orders, 

or a significant number of cancelled 

orders. 

30. Trading pauses, as currently 

implemented, can be triggered for 

multiple reasons. Are certain triggers 

more or less effective in mitigating the 

effects of market disruptions? 

31. Are there additional triggers for 

which pauses should be implemented? 

If so, what are they? 

32. What factors should the 

Commission or exchanges take into 

account when considering how to 

specify pauses or what thresholds 

should be used? 

33. How should the re-opening of a 

market after a trading pause be effected? 

7. Credit Risk Limits 

Credit risk limits are a valuable 

protection for limiting the activity of 

malfunctioning ATSs. Risk limits are 

most valuable when implemented as a 

pre-execution filter. Alternatively, lowlatency post-trade risk limits may also 

provide some risk mitigation. Credit risk 

controls may be implemented by 

different entities, including the trading 

firms that originate orders, the clearing 

firms that guarantee the orders, the 

trading platforms matching the orders, 

and the DCOs that clear the orders. The 

Commission acknowledges that some 

trading firms and FCMs conduct posttrade credit checks with varying degrees 

of latency and that pre-trade credit risk 

screens are already required pursuant to 

§§ 1.73 and 23.609.84 As noted above, 

however, the Commission seeks public 

comments regarding any additional 

measures that could help protect the 

financial integrity of DCOs, including 

measures discussed in this Concept 

Release or other measures that may be 

recommended by interested parties. 

The TAC has received proposed 

models for implementing certain pretrade risk controls for swaps, 

particularly those pertaining to credit 

risk.85 Relevant solutions for 

implementing credit-based pre-trade 

risk controls include those in which 

credit limits reside at the FCM, at the 

trading platform (based on instruction 

from the clearing firm), or, for example, 

at a ‘‘hub’’ which applies credit controls 

on a per-order basis.86 The Commission 

is interested to understand whether the 

‘‘hub’’ model, one of several proposed 

solutions received by the TAC, could be 

usefully applied to futures markets. 

The Commission is also interested in 

credit risk limits as a mechanism for 

limiting the disruptive activity of a 

malfunctioning ATS. Therefore, the 

Commission requests comment on the 

following: 

34. What positions should be 

included in credit risk limit calculations 

in order to ensure that they are useful 

as a tool for limiting the activity of a 

malfunctioning ATS? Is it adequate for 

such a screen to include only those 

positions entered into by a particular 

ATS or should it include all the firm’s 

positions? 

35. Should pre-trade credit screens 

require a full recalculation of margin 

based on the effect of the order? 

36. In light of your answers to the 

previous two questions, where in the 

lifecycle of an order should the credit 

limits be applied and what entity 

should be responsible for conducting 

such checks? 

37. If credit checks are conducted 

post-trade, what should be done when 

a trade causes a firm to exceed a limit? 

38. Please describe any technological 

limitations that the Commission should 

be aware of with respect to applying 

credit limits. 

39. The Commission is particularly 

interested to receive public comment on 

the ‘‘hub’’ model and its applicability to 

different types of pre-trade risk controls. 

What are the strengths and weaknesses 

of this approach relative to other pretrade or post-trade approaches to 

checking trades against credit limits? 

How would the latency between the 

‘‘hub’’ and the exchanges be managed to 

provide accurate limits for high 

frequency ATS? 

40. If you believe that post-trade 

credit checks would be an effective 

safeguard against malfunctioning ATSs, 

what is the maximum amount of latency 

that should be allowed for conducting 

such checks? What technological or 

information flow challenges would have 

to be addressed in order to implement 

post-trade checks with that degree of 

latency? 

41. With respect to any entity that you 

believe should be responsible for 

applying credit risk limits, please 

describe the technology necessary to 

implement that risk control and the cost 

of such technology. 

The pre-trade risk controls described 

above are summarized in Appendix A. 

D. Post-Trade Reports and Other PostTrade Measures 

The Commission understands that, 

even with the presence of the most 

robust set of pre-trade risk controls, 

unanticipated events occur within a 

complicated marketplace. For example, 

the emergence of unexpected feedback 

loops between multiple algorithms, or 

malfunctioning pre-trade risk controls 

can lead to unintended order 

submissions that adversely impact 

market quality and investor confidence. 

Post-trade reports have the potential to 

mitigate the impact of such events, 

particularly if the post-trade reports are 

made available and utilized on a lowlatency basis, such that market 

participants are quickly aware of any 

malfunction. Other post-trade measures, 

including enhanced error trade policies, 

may help counterparties to errant trades 

to better anticipate and address risk 

associated with trade uncertainty when 

such events occur. The post-trade 

reports and other measures are 

summarized below. 

1. Order, Trade, and Position Drop Copy 

The Commission is inquiring about 

the potential advantages of increased 

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87See Carol Clark & John McPartland, ‘‘How Do 

Clearing Organizations Control the Risks of High 

Speed Trading?’’ (May 2012) at 6–7, available at 

http://www.chicagofed.org/Web pages/publications/ 

policy_discussion_papers/2012/pdp_2.cfm. 

88The Commission notes that error trade policies 

may vary for different exchanges and for different 

products at each exchange. See id. at 7. 

89The Commission notes that the system 

safeguards contemplated herein for DCMs address 

trading-related risks, and are therefore distinct from 

the requirements of DCM Core Principle 20 and SEF 

Core Principle 14, which address business 

continuity and disaster recovery capabilities. 

standardization of real-time order, trade, 

and position reports for use by clearing 

firms and market participants. Real-time 

information is critical to market 

participants managing the risk of their 

own, and their customers’ trades. The 

Commission is inquiring as to the 

advisability of requiring all exchanges 

and DCOs to provide real-time order 

and trade reports to each market 

participant, and the clearing firm 

serving that client for that particular 

trade. This information would give 

clearing firms real-time updates of their 

customers’ order and trading activities. 

These reports could improve the 

effectiveness of automated credit risk 

limits, which require current order and 

trade information in order to calculate 

current positions and monitor credit 

risk effectively. In some cases order 

information may be available to a 

trading platform before it is available to 

the relevant clearing member (e.g., in 

the case of DMA-enabled participants), 

and trade information is always 

available first to the trading platform. 

Therefore, there is a strong 

interdependency between exchanges, 

DCOs and clearing firms as the latter 

seek to manage their credit risk. 

Any time lag in the clearing firm’s 

ability to construct a retrospective view 

of their customers’ positions could 

diminish a clearing firm’s ability to 

assess its customer’s risk profile before 

such customer enters additional orders 

or establishes additional positions and 

accumulates greater risk. 

More generally, widespread use of 

order and trade reports may be 

beneficial in both DMA and non-DMA 

situations to help market participants to 

track all order and trade activity quickly 

and efficiently. The Commission notes 

that some or all DCOs already provide 

post-trade information to clearing 

members, and that some DCOs charge 

for that information and others do not.87

However, the Commission believes that 

the content of the data vary among 

DCOs and that not all market 

participants choose to purchase data 

when it is available. As described above, 

the Commission preliminarily believes 

that more standardized access to realtime data from exchanges and DCOs 

could be valuable to clearing firms, and 

possibly to trading firms, as they 

manage their risks. The Commission 

encourages interested parties to 

comment, again, on the current use of 

real-time reports, the consistency of this 

use, and the potential benefits and 

nature of additional order and trade 

reports. 

42. What order and trade reports are 

currently offered by DCMs and DCOs? 

What aspects of those reports are most 

valuable or necessary for implementing 

risk safeguards? Please also indicate 

whether the report is included as part of 

the exchange or clearing service, or 

whether an extra fee must be paid. 

43. If each order and trade report 

described above were to be 

standardized, please provide a detailed 

list of the appropriate content of the 

report, and how long after order receipt, 

order execution, or clearing the report 

should be delivered from the trading 

platform to the clearing member or other 

market participant. 

2. Trade Cancellation or Adjustment 

Policies 

The Commission is interested to know 

whether it would be beneficial for 

exchanges to develop more uniform and 

objective trade cancellation or 

adjustment policies. These policies 

should apply to cancellation or 

adjustment of individual trades, as well 

as to cancellation or adjustment of a 

large quantity of trades in response to a 

disruptive market event at the direction 

of a regulatory body or in accordance 

with the exchange’s own determination 

that such cancellation or adjustment of 

a large quantity of trades is necessary. 

The policies could include (1) Clear 

principles on when trades will be 

cancelled or adjusted; (2) a requirement 

that traders notify the exchange of error 

trades within a specified number of 

minutes; and (3) a requirement that the 

exchange notify market participants of 

possible adjusted or busted trades 

immediately. Requiring traders to notify 

the exchange quickly and requiring the 

exchange to communicate the situation 

to market participants immediately 

helps to ensure that any market 

participants potentially affected by 

impending adjustment or cancellation 

actions are made aware of the additional 

risk they bear and can take steps to 

mitigate that risk. 

It may be advisable to base 

cancellation and adjustment policies on 

pre-defined, objective criteria in order to 

minimize the time for identification and 

notification. Such criteria may include 

the minimum trade size for which 

cancellation will be considered, the 

minimum and maximum range in which 

a trade will be adjusted, the time a 

market participant has to request the 

cancellation or adjustment, the specific 

circumstances under which trades will 

be adjusted or canceled (e.g., an 

exchange system error, specific types of 

human errors) and factors to be taken 

into account (e.g., market conditions, 

whether other market participants have 

relied on the price). Last, the 

Commission is inquiring as to the 

advisability of policies to favor trade 

adjustment over trade cancellation in 

order to help ensure that market 

participants are able to keep the 

positions they have entered into, even if 

the prices are adjusted. The Commission 

is interested in receiving comments on 

whether additional standardization in 

error trade policies would be beneficial, 

and whether this prioritization scheme 

is appropriate.88

44. Is a measure that would obligate 

exchanges to make error trade decisions 

(i.e., decisions to cancel a trade or to 

adjust its price) within a specified 

amount of time after an error trade is 

reported feasible? If so, what amount of 

time would be sufficient for exchanges, 

but would be sufficiently limited to help 

reduce risk for counterparties to error 

trades? 

45. Should exchanges develop 

detailed, pre-determined criteria 

regarding when they can adjust or 

cancel a trade, or should exchanges be 

able to exercise discretion regarding 

when they can adjust or cancel a trade? 

What circumstances make predetermined criteria more effective or 

necessary than the ability to exercise 

discretion, and vice versa? 

46. Do error trade policies that favor 

price adjustment over trade cancellation 

effectively mitigate risk for market 

participants that are counterparties to 

error trades? Are there certain situations 

where canceling trades would mitigate 

counterparty risk more effectively? If so, 

what are they and how could such 

situations be identified reliably by the 

exchange in a short period of time? 

47. Should error trade policies be 

consistent across exchanges, either in 

whole or in part? If so, how would 

harmonization of error trade policies 

mitigate risks for market participants, or 

contribute to more orderly trading? 

E. System Safeguards 

In this Concept Release, the 

Commission inquires about a range of 

system safeguards for trading 

platforms,89 clearing firms, and market 

participants (including ATSs). Those 

system safeguards are intended to 

address a number of operational, market 

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90 In addition to order cancellation capabilities, 

the Commission is inquiring about various related 

measures that concern connectivity testing, 

including that trading platforms and all entities 

connected to a trading platform for purposes of 

transmitting orders together must test that the 

systems of all such entities are properly connected 

to and communicating with the trading platform, 

and that trading platforms must provide, and 

market participants operating ATSs must utilize, 

heartbeats that indicate proper connectivity 

between the trading platform and an ATS. 

91See MarkitServ Presentation, supra note 85. 

92See FIA Recommendations for Risk Controls, 

supra note 62, at 4. 

abuse and transmission risks, and may 

protect against potential disruptions and 

abuses that are unique to electronic 

trading. The potential system safeguards 

are broadly grouped into those that 

address (1) Controls related to order 

placement; (2) policies and procedures 

for the design, testing and supervision 

of ATSs; (3) self-certifications and 

notifications; (4) ATS or algorithm 

identification; and (5) data reasonability 

checks. Each system safeguard is 

summarized below. 

1. Controls Related to Order Placement 

a. Order Cancellation Capabilities 

The Commission is inquiring about 

various standards related to order 

cancellation capabilities. Auto-cancel 

on disconnect requirements would 

ensure that working orders do not 

remain in the limit order book when a 

firm loses connectivity with the 

exchange, ensuring that unwanted 

trades avoid execution even if the firm 

is unable to cancel them. The speed of 

disconnect notification and the 

cancellation of orders on disconnect can 

be helped by the exchange of 

‘‘heartbeat’’ messages between exchange 

and user which continuously monitor 

the response ability of a given 

algorithm. In addition, by requiring 

exchanges to develop and maintain the 

capacity to selectively cancel working 

orders at the level of individual 

algorithms, individual accounts, or 

individual firms, as deemed necessary 

in an emergency, the trading platform 

would be able to mitigate the risk or 

quantity of error trades due to a 

malfunction.90

The Commission is also inquiring as 

to the advisability of requiring market 

participants operating ATSs, clearing 

members, and exchanges to develop and 

maintain ‘‘kill switch’’ capabilities. A 

market participant’s kill switch could 

immediately cancel all working orders 

from that firm to the exchange and 

could prevent them from submitting 

further orders until natural persons with 

the proper authority at both the firm and 

the exchange allow the firm to resume 

trading. A kill switch at clearing 

members could cancel all working 

orders attributable to the clearing 

member, including both proprietary 

orders and orders placed on behalf of 

their clients, and prevent the clearing 

member from transmitting additional 

orders until natural persons at both the 

clearing firm and the exchange allow 

the clearing member to resume trading. 

An exchange’s kill switch could cancel 

all working orders from an individual 

market participant or clearing firm and 

could prevent additional orders from 

the same market participant or clearing 

firm from being accepted at the 

exchange until authorized natural 

persons at both the exchange and 

affected market participant or clearing 

firm allow trading to resume. 

48. The Commission’s discussion of 

kill switches assumes that certain 

benefits accrue to their use across 

exchanges, trading and clearing firms, 

and DCOs. Please comment on whether 

such redundant use of kill switches is 

necessary for effective risk control. 

49. What processes, policies, and 

procedures should exchanges use to 

govern their use of kill switches? Are 

there any different or additional 

processes, policies and procedures that 

should govern the use of kill switches 

that would specifically apply in the case 

of DMA? 

50. What processes, policies, and 

procedures should clearing firms use to 

govern their use of kill switches when 

using such a safeguard to cancel and 

prevent orders on behalf of one or more 

clients? 

51. What objective criteria regarding 

kill switch triggers, if any, should 

entities incorporate into their policies 

and procedures? 

52. What benefits or problems could 

result from standardizing processes, 

policies, and procedures related to kill 

switches across exchanges and/or 

clearing firms? 

53. Please explain how kill switches 

should be designed to prevent them 

from canceling or preventing the 

submission of orders that are actually 

risk reducing or that offset positions that 

have been entered by a malfunctioning 

ATS. 

54. The Commission requests 

comment regarding whether kill 

switches used by clearing firms already 

have or should have the following 

capabilities: (a) Distinguish client orders 

from proprietary orders; (b) distinguish 

among orders from individual clients; 

and (c) cancel working orders and 

prevent additional orders from one or 

more of the clearing firm’s clients, or for 

all the clearing firm’s proprietary 

accounts, without cancelling and 

preventing all orders from the clearing 

firm. 

55. The Commission is aware of 

proposals that would enable FCMs to 

establish credit limits for customers that 

are stored at a central ‘‘credit hub’’ for 

the purpose of pre-trade credit checks.91

If such a model were implemented, is it 

possible that it could also be enabled 

with kill switches that cancel existing 

working orders and prevent additional 

orders from being submitted by one or 

more market participants? Should such 

an approach be designed to complement 

kill switches that are controlled by 

exchanges, clearing members, and 

trading firms, or to replace these kill 

switches? What benefits and drawbacks 

would result from each approach? 

b. Repeated Automated Execution 

Throttle 

A further potential risk control of 

interest to the Commission is a 

‘‘Repeated Automated Execution 

Throttle.’’ This risk control was 

highlighted in FIA’s Principal Traders 

Group recommendations regarding risk 

controls.92 For this control, ATSs would 

be required to monitor the number of 

times a strategy is filled and then reenters the market without human 

intervention. After a configurable 

number of repeated executions the 

system should be disabled until a 

human re-enables it. The Commission 

would like to better understand the 

value of this safeguard. The Commission 

understands that it would disable 

automated systems which have 

experienced activity levels far beyond 

that anticipated by its designers, and 

then notify monitors regarding this 

activity. Through this, human review 

would independently verify the 

operation of an ATS at regular intervals, 

and in doing so, could help to ensure 

that an algorithm’s strategy is currently 

acting as anticipated and that it is 

appropriately responding to current 

market conditions. The Commission 

requests comments as to whether there 

could be adverse effects of automatically 

disabling an ATS after a given number 

of order executions, and also requests 

comment regarding the potential value, 

proper use, and limitations of this 

safeguard. 

2. Policies and Procedures for the 

Design, Testing and Supervision of 

ATSs; Exchange Considerations 

Taken as a whole, the ATS monitoring 

and supervision standards, ATS design 

and testing standards, ATS crisis 

management procedures standards, and 

ATS monitoring staff training standards 

inquired about in this Concept Release 

constitute a set of standards related to 

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56558 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

93See 17 CFR 23.600(d)(9). 

94 17 CFR 23.600(b)(4) requires SDs and MSPs to 

‘‘furnish a copy of its written risk management 

policies and procedures to the Commission, or to 

a futures association registered under section 17 of 

the Act, if directed by the Commission, upon 

application for registration and thereafter upon 

request.’’ 

95 It is also possible that SDs and MSPs could fail 

to incorporate emerging industry best practices for 

managing operational risk of ATSs into their 

policies and procedures as effective risk 

management technology and practices are 

introduced to the market. 

96See SEC Roundtable Transcript, supra note 2, 

at 49–51. 

97The Commission would like to better 

understand what sorts of training and policies 

market participants use in order to ensure that 

human monitors have the capability to respond to 

operational issues in a timely way. In particular, the 

Commission is interested in better understanding 

what training monitors receive in the rationale for 

the trading patterns executed by the ATS, the scope 

of intervention authority given to human monitors, 

and the procedures firms use to escalate questions 

or decisions from such human monitors to more 

senior personnel during a crisis. 

policies and procedures for firms 

operating ATSs. Existing rules require 

SDs and MSPs to ensure that their ‘‘use 

of trading programs is subject to policies 

and procedures governing the use, 

supervision, maintenance, testing, and 

inspection of the program,’’ 93 but there 

is no corresponding rule for FCMs or 

other market participants operating 

ATSs. Moreover, even when applied to 

SDs and MSPs, section 23.600(d)(9) 

does not have any prescriptive 

requirements related to supervision and 

testing and does not require formal 

review or approval of each firm’s 

policies and procedures by an informed, 

independent party other than at the time 

of registration.94 As a consequence, 

there is no minimum amount of testing 

that SDs and MSPs or other market 

participants operating ATSs are 

required by the Commission to perform 

before deploying an algorithm or before 

re-deploying an algorithm that has been 

altered. Nor are there any minimum 

standards for training or sophistication 

in the areas of supervision, 

maintenance, and inspection of the 

ATS.95 Because of this, the Commission 

is interested in better understanding 

whether more standardized 

requirements, or clearer minimum 

standards, related to policies and 

procedures for firms operating ATSs 

would benefit the markets and the 

public. The policies and procedures 

relating to the design, testing and 

supervision of ATSs are summarized 

below, and addressed in greater detail in 

Section V, Appendix C. 

a. ATS Development, Change 

Management, and Testing; 

Development, Change Management, and 

Testing of Exchange Systems 

The Commission requests public 

comment regarding the necessity for 

ATS development, change management 

and testing standards in CFTC-regulated 

markets. Potential benefits to such 

standards include ensuring that ATSs 

are designed and modified in an 

environment where there is no risk that 

the ATS could interfere with activity in 

or related to the live market and 

ensuring that appropriate personnel 

have approved changes and verified 

proper testing before a system is moved 

to the production environment. 

Standards concerning the retention and 

control of access to current and 

historical versions of source code may 

help to ensure that changes are only 

made by appropriate personnel and 

reviewable when necessary. Finally, 

audit trail material may assist regulators 

when investigating problems. 

With respect to testing, a firm’s ATS 

testing standards could require it to test 

an ATS on the trading platform(s) where 

it will trade, prior to deploying such 

ATS into the live environment. Such 

testing standards may reduce the 

incidence of technical errors at the level 

of individual algorithms and firms. In 

addition, a firm’s ATS testing standards 

may require it to test an ATS on the 

trading platform(s) after modifying the 

underlying algorithms or other system 

components to a degree subject to 

further definition. ATS testing could 

include tests against historical data, 

especially periods for which the 

relevant algorithm would likely have 

been stressed, or would have been 

active during periods with 

unanticipated market activity. In 

addition, exchanges could also be 

required to provide a test environment 

to simulate production trading so that 

market participants can conduct 

exchange-based conformance testing, 

which would include tests of 

compatibility with the matching engine 

(including initiation and cessation of 

the ATS connection) and verification of 

risk controls required by the trading 

platform. 

The Commission is particularly 

interested to understand when it is most 

beneficial for firms to test an ATS after 

it has been modified. Some have 

asserted that the amount of testing 

should be calibrated to the significance 

of the change and the risk it poses to the 

proper function of the ATS.96 The 

Commission would like to better 

understand how market participants 

estimate the significance of a change 

and the risk that a given change might 

pose to the proper function of an ATS. 

Also, the Commission would like to 

understand what current best practices 

are for testing ATSs and how those 

practices are tailored to the extent of the 

modification. 

56. Please describe the necessary 

elements of an effective ATS testing 

regime, in connection with both the 

initial deployment and the modification 

of an ATS. 

57. With respect to testing of 

modifications, how should the 

Commission and market participants 

distinguish between major 

modifications and minor modifications? 

What are the objective criteria that can 

be used to make such distinctions? 

Should any testing regime applicable to 

ATS modifications distinguish between 

major and minor modifications, and if 

so, how? 

58. What challenges or benefits may 

result from exchanges implementing 

standardized procedures regarding the 

development, change management, and 

testing of exchange systems? Please 

describe, if any, the types of 

standardized procedures that would be 

most effective. 

b. ATS Monitoring and Supervision 

The Commission is aware that many 

exchanges and software design firms 

offer extensive testing platforms to 

validate algorithm functionality before 

deployment in a live trading 

environment. The Commission wants to 

better understand the extent to which 

testing is utilized and would like to 

better understand the methodology 

supporting these test environments. 

Further, the Commission believes that 

many, if not all, firms operating ATSs 

have human monitors supervising ATSs 

when they are operating. However, the 

Commission is uncertain to what degree 

such monitors have been sufficiently 

trained in how to respond to 

unexpected problems, and been given 

the requisite authority to intervene at 

these times.97 A firm’s ATS training 

standards could require that relevant 

staff members be able to understand 

how to identify malfunctions, evaluate 

the risk resulting from those 

malfunctions, and respond 

constructively to those malfunctions, 

including elevating the problem to the 

attention of more senior personnel. The 

Commission would like to better 

understand whether regulatory 

measures or new standards in this area 

would promote more effective ATS 

monitoring and supervision. 

c. Crisis Management Procedures 

Well-designed crisis management 

procedures may help to ensure that 

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Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 56559 

98See SEC Roundtable Transcript, supra note 2, 

at 133–34. 

99The SEC is presently considering a set of rules 

that would require self-regulatory organizations, 

significant alternative trading systems, certain 

disseminators of market data, and exempt clearing 

agencies to notify SEC staff of events including 

systems disruptions, compliance issues, or 

intrusions. See SEC, Notice of Proposed 

Rulemaking: Regulation Systems Compliance and 

Integrity, 78 FR 18084 (Mar. 25, 2013). Under the 

proposed rules, these entities would be required to 

notify and provide the SEC with detailed 

information when such systems issues occur as well 

as when there are material changes in its systems. 

Id. The Commission notes that it may consider 

distinctive aspects of the SEC’s proposed rules, and 

public comments with respect to it, when 

developing any future proposals arising from this 

Concept Release. Commenters with respect to this 

Concept Release are encouraged to indicate in their 

comments any elements of the SEC’s proposed rules 

that they believe are relevant. 

firms are prepared to conduct rapid 

triage in the event of a problem, 

including the ability to escalate 

decisions quickly to the proper 

individuals or provide notification to 

their clearing firms, exchanges, or the 

Commission.98 Such procedures may 

promote common expectations among 

monitoring staff, firm leadership, and 

exchange leadership about basic 

procedures in the event of market 

destabilizing events, facilitating more 

rapid intervention and mitigating the 

effects of an individual disruption. 

59. Should basic crisis management 

procedures be standardized across 

market participants? If so, what 

elements should be addressed in an 

industry-wide standard? 

60. Are there specific, core 

requirements that should be included in 

any crisis management procedures? 

Similarly, are there specific types of 

crisis events that should be addressed in 

any crisis management procedures? If 

so, please identify such requirements 

and/or crisis events and the level of 

granularity or specificity that the 

procedures should have with respect to 

each. 

3. Self-Certifications and Notifications 

a. Self-Certification and Clearing Firm 

Certification 

To ensure that market participants 

employ the pre-trade risk controls, posttrade reports and other measures, and 

system safeguards described herein, the 

Commission is inquiring whether it 

would be appropriate to require a 

periodic self-certification program for 

all market participants operating ATSs 

and for clearing firms providing services 

to those market participants. These 

certifications could refer to the extent of 

implementation of those risk control 

mechanisms discussed in the other 

sections of this Concept Release. With 

respect to ATSs, an acceptable 

certification might attest that: (1) The 

ATS contains structural safeguards to 

provide reasonable assurance that the 

trading system will not be disruptive to 

fair and equitable trading; (2) the market 

participant’s ATSs have been designed 

to avoid violations of the CEA, 

Commission regulations, or exchange 

rules related to fraud, disruptive trading 

practices, manipulation and trade 

practice violations; and (3) such systems 

have been sufficiently tested and 

documented in a manner that is 

appropriate to the intended design and 

use of that system. Additionally, the 

Commission asks whether the chief 

executive officer, chief compliance 

officer, or similar ranking official of 

each market participant should attest to 

the certification. The Commission is 

interested in receiving comment on the 

costs and benefits of a certification 

program, what elements should be 

included in the program, and whether 

that program should be self-executed, 

or, if not, overseen by what authority. 

61. How often should a market 

participant certify that their pre-trade 

risk controls, post-trade reports and 

other measures, and system safeguards 

meet the necessary standards? 

62. Which representative of the 

market participant should be required to 

attest that the certification standards 

have been met? Should it be the market 

participant’s chief executive officer, 

chief compliance officer, or similar 

high-ranking corporate official, or some 

other individual? 

63. Which entity(ies) should receive 

certifications from market participants? 

For example, should it be the market 

participant’s clearing firm, its 

designated self-regulatory organization 

(if applicable), one or more trading 

platforms, a registered futures 

association, the Commission, or other 

entity? 

64. Should DCMs, SEFs or clearing 

member firms be required to audit 

market participant certifications? What 

would be covered in an audit and how 

often should these audits occur? Should 

the same entity that receives the 

certification be required to perform the 

audit? 

b. Risk Event Notification Requirements 

The Commission also seeks 

information as to whether it would be 

beneficial for market participants 

operating ATSs to notify one or more of 

trading platforms, their clearing firms, 

the Commission, or others of risk 

events.99 Entities receiving notifications 

could, when they deem it appropriate 

based on the magnitude of a single event 

or a pattern of smaller related events, 

review further with the market 

participant to remedy the underlying 

cause(s) of the risk event. Such reviews 

would allow market participants, 

clearing firms, trading platforms, and 

the Commission to respond and 

proactively reduce risk in automated 

trading environments. 

The Commission seeks comment on 

the types of risk events that should be 

reported. For example, reportable risk 

events generally could include any 

instances where design parameters of an 

ATS are violated and where risk control 

processes or technologies do not 

function as anticipated, regardless of 

whether these events lead to error trades 

or market destabilization. Violated 

design parameters and unanticipated 

lapse of risk management processes and 

technology create conditions that may 

presage future malfunctions, even 

absent a current disruption. 

65. Do commenters believe that risk 

event notifications would help to better 

understand and ultimately reduce 

sources of risk in automated trading 

environments? What information should 

be contained in a risk event notification 

to maximize its value? 

66. What types of risk events should 

trigger reporting requirements, and what 

entities should receive risk event 

notifications from market participants 

operating ATSs? 

67. Which entities should receive risk 

event notifications? 

4. ATS or Algorithm Identification 

The Commission is considering 

measures to improve the identification 

of ATS or their underlying algorithms in 

messages generated by ATSs. The 

Commission believes that identification 

of ATSs or underlying algorithms could 

help both firms and trading platforms to 

more quickly identify malfunctioning 

systems that could disrupt markets. 

Fuller identification of automated 

systems may also improve oversight by 

the Commission, including the ex post 

analysis of disruptive events aimed at 

preventing or mitigating similar 

recurrences. 

The Commission is aware of the 

inherent complexity in any ATS or 

algorithm identification system and 

seeks public comment on this potential 

measure. Specific questions of interest 

to the Commission include: 

68. Should the Commission define 

ATS or algorithm for purposes of any 

ATS identification system that may 

arise from this Concept Release? If so, 

how should ATS or algorithm be 

defined? Should a separate designation 

be reserved for high frequency trading 

algorithms and if so, what is the 

threshold difference? 

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56560 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

100See FIA Recommendations for Risk Controls, 

supra note 62, at 4. 

101See Brody Mullins, Michael Rothfeld, Tom 

McGinty & Jenny Strasburg, ‘‘Traders Pay for Early 

Peek at Key Data,’’ Wall St. J. (June 12, 2013), 

available at http://online.wsj.com/article/SB100

01424127887324682204578515963191421602.html. 

102See CEA section 1a(23), as amended by section 

721 of the Dodd-Frank Act; 7 U.S.C. 1a(23) 

(emphasis added). 

103 In March 2013, the German parliament 

approved the HFT Act, which requires any firm 

using HFT strategies to become licensed as a 

financial services institution subject to the 

supervision of BaFin (Germany’s banking regulator) 

or to passport an existing license granted by another 

member state of the European Economic Area. The 

licensing requirement includes ‘‘indirect’’ trading, 

meaning that it applies to foreign firms that are 

trading through a direct exchange member on a 

German-regulated market or a German multilateral 

trading facility. As a result of becoming licensed, 

HFT firms become subject to a general regulatory 

framework applicable to investment firms under 

German statutes, and specific organizational 

requirements applicable to HFT firms imposed by 

the HFT Act. See BaFin HFT Act Materials, supra 

note 17. 

69. What are the existing practices 

within trading firms for internally 

identifying ATSs or algorithms and for 

tracking their performance, including 

profit and loss? What elements of 

existing practices could be leveraged in 

any ATS or algorithm identification 

system proposed by the Commission in 

the future? 

70. The Commission understands that 

an ATS may consist of numerous 

algorithms, each of which contributes to 

a trading decision. If an algorithm-based 

identification system is proposed, 

which of the potentially multiple 

algorithms that constitute an ATS 

should carry the ID? In addition, what 

degree of change to an algorithm should 

necessitate the use of a new ID, and how 

often does this change typically occur? 

What is the appropriate definition of 

‘‘algorithm’’ for purposes of an 

algorithm identification system? 

71. If the identification system resides 

at the ATS level, how should such IDs 

be structured to ensure that they are 

nonetheless sufficiently granular to 

identify components that may be 

leading or have led to unstable market 

conditions? 

72. What message traffic between an 

ATS and a trading platform should 

include the ATS or algorithm ID (all 

messages, orders only, etc.)? 

73. What relationship should this 

ATS ID have to the legal entity identifier 

(LEI)? 

5. Data Reasonability Checks 

The Commission is interested in the 

range of information sources used by 

ATSs to inform their trading decisions, 

and in how market participants form 

reasonable beliefs as to the accuracy of 

such data. For example, following 

recent media reports regarding the 

adverse market impact of false 

information distributed through 

unauthorized use of a social media 

outlet used by the Associated Press, the 

Commission is asking questions to 

broaden its understanding of the extent 

to which ATSs in derivatives markets 

use social media to inform their trading 

decisions, and the extent to which 

information derived from social media 

is verified by the ATS prior to its use. 

One potential risk control of interest to 

the Commission is the ‘‘market data 

reasonability check,’’ which was 

included in FIA’s Principal Traders 

Group recommendations regarding risk 

controls.100 In those recommendations, 

the FIA recommended that trading 

firms’ systems have ‘‘reasonability 

checks’’ on incoming market data. 

74. Please describe existing practices 

in the industry concerning how and the 

extent to which ATSs use (1) market 

data; and (2) news and information 

providers, including social media, to 

inform trading decisions. 

75. The Commission requests 

comment regarding any risk controls, 

including reasonability checks, 

currently being used by market 

participants operating ATSs to review 

market data and news and information 

providers, including social media. 

Please describe the risk control, 

including the purpose of the control, the 

extent of its use among derivatives 

market participants, and any other 

aspects of the risk control that you 

believe would be helpful for the 

Commission to understand. 

In addition, the data analyzed by 

trading algorithms can include 

government economic reports (e.g., 

GDP, unemployment, and inflation 

data), as well as economic reports from 

non-governmental organizations such as 

universities, trade groups, and other 

sources. While government reports are 

released pursuant to a lock-up process 

that is intended to ensure that no entity 

receives them ahead of others, it has 

been reported that early access to some 

non-government economic reports is 

available for a fee. For example, 

according to recent reports, the 

University of Michigan’s consumer 

report was available to certain investors 

two seconds ahead of the rest of the 

market.101

76. The Commission requests public 

comment concerning the lock-up 

process for government economic 

reports, and any additional measures 

that might be taken to protect against 

inappropriate disclosure. 

77. Please describe the extent to 

which potentially market-moving data 

from non-governmental economic 

reports can be obtained prior to its 

public release for a fee. Are there 

specific reports or types of reports for 

which early disclosure should not be 

permitted? What process should be used 

for identifying non-governmental 

economic reports whose early release 

should not be permitted? Should the 

data release process for such reports be 

similar to the data lock-up process 

implemented for the release of 

government economic data? 

The system safeguards described 

above are also listed in Appendix C. 

F. Other Protections 

1. Registration of Firms Operating ATSs 

Although the Commission can 

currently take several actions to seek 

information from firms, such as the 

issuance of subpoenas to investigate a 

firm’s trading activities on a registered 

exchange or to compel a firm to provide 

books and records, some have suggested 

that a registration requirement for firms 

operating ATSs and not otherwise 

registered with the Commission would 

enhance the Commission’s oversight 

capabilities. Additionally, a registration 

requirement may allow for wider 

implementation of some or all of the 

pre-trade controls and risk management 

tools discussed in this Concept Release 

and currently deployed in various 

degrees in the market today. 

In considering the registration of 

specific entities using ATSs and not 

otherwise registered with the 

Commission, the ‘‘floor broker’’ 

definition in CEA 1a(23), in pertinent 

part, states that, in general, the term 

‘‘floor trader’’ means any person who, in 

or surrounding any pit, ring, post or 

other place provided by a contract 

market for the meeting of person 

similarly engaged, purchases, or sells 

solely for such person’s own account.102

In addition to seeking input on 

whether it would be beneficial to 

require registration, the Commission 

also requests specific public comments 

in response to the following 

questions:103

78. Should firms operating ATSs in 

CFTC-regulated markets, but not 

otherwise registered with the 

Commission, be required to register 

with the CFTC? If so, please explain. 

79. Please identify the firm 

characteristics, trading practices, or 

technologies that could be used to 

trigger a registration requirement. 

80. Should all firms deploying ATS be 

required to register, and should there be 

different standards for firms deploying 

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104The size of the price change that would occur 

if specific sizes of market orders were executed at 

that instant. 

105Average length of time that orders for a 

specific instrument remain in the book before being 

modified, filled, or cancelled. 

106Notional value executed vs. notional value 

entered or modified. 

107See CFTC Net Position Changes Data, available 

at http://www.cftc.gov/MarketReports/

NetPositionChangesData/index.htm. 

108See Vladimir Filimonov, David Bicchetti, 

Nicolas Maystre, & Didier Sornette, ‘‘Quantification 

of the High Level of Endogeneity and of Structural 

Regime Shifts in Commodity Markets’’ (Mar. 20, 

2013), available at http://papers.ssrn.com/sol3/

papers.cfm?abstract_id=2237392. 

109See David Easley, Marcos M. Lopez de Prado 

& Maureen O’Hara, ‘‘Flow Toxicity and Liquidity in 

a High Frequency World’’ (Feb. 20, 2012), available 

at http://papers.ssrn.com/sol3/papers.cfm?abstract_

id=1695596. 

110For a given market, such metrics would be 

calculated by identifying the relevant category of 

trader on trades that result in a price move from a 

previous trade and determining the percentage of 

those trades where an ATS was on one or both sides 

of the trade. 

111SEC Rules 605 (Disclosure of Order Execution 

Information) and 606 (Disclosure of Order Routing 

Information) of Regulation NMS respectively 

require market centers (as defined in the rules) to 

make publicly available standardized, monthly 

reports of statistical information concerning their 

order executions and broker-dealers to make 

publicly available quarterly reports that, among 

other things, identify the venues to which customer 

orders are routed for execution. See 17 CFR 242.605 

(formerly Securities Exchange Act Rule 11Ac1–5) 

and 17 CFR 242.606 (formerly Securities Exchange 

Act Rule 11Ac1–6). 

HFT strategies? What are the 

appropriate thresholds levels below 

which registration would not be 

required? 

81. Since the floor trader distinction 

only addresses proprietary traders, 

please explain whether there is any 

other category of market participant, 

such as those deploying ATS or HFT 

strategies and trading on behalf of 

clients (aside from market participants 

already subject to Commission 

jurisdiction, such as Introducing 

Brokers and FCMs) that the Commission 

should consider with respect to 

potential registration requirements. 

82. Should software firms providing 

algorithms be required to register, and 

under what authority? What standards 

should apply to such firms? 

83. Please identify the functionalities 

discussed in this Concept Release that 

could be applied to floor brokers that 

operate ATSs. Are there any other 

controls not mentioned in this Concept 

Release that should be under 

consideration? 

84. Please supply any information or 

data that would help the Commission in 

deciding whether firms may or may not 

meet the definition of ‘‘floor trader’’ in 

§ 1a(23) of the Act. 

85. Do you believe that the 

registration of such firms as ‘‘floor 

traders’’ would effectuate the purposes 

of the CEA to deter and detect price 

manipulation or any other disruptions 

to market integrity? 

86. Considering the broad deployment 

of automated trading systems across 

both equities and derivatives markets, 

the Commission seeks to understand the 

appropriate level of coordination 

between itself and the SEC in defining 

and applying possible standards to the 

ATS and HFT trading space. How 

closely should the CFTC and SEC 

coordinate on possible rules and 

requirements for trading firms? The 

Commission also seeks public comment 

on the appropriate level of coordinated 

oversight between itself and relevant 

Self-Regulatory Organizations such as 

National Futures Association and 

FINRA. 

87. Using the Flash Crash as an 

example, is it important to have 

identical definitions and remedies in 

the case of ATS and HFT registration 

requirements or do the existing market 

controls, such as circuit breakers, 

provide the necessary market 

protections in both the equities and 

derivatives markets? If the rules are not 

coordinated, what impact would this 

have on market interaction and 

oversight? 

88. If trading venues apply mandatory 

functionalities to access derivatives 

markets, what benefit would a 

registration requirement provide to the 

Commission? 

2. Market Quality Data 

The Commission is inquiring as to the 

advisability of requiring each trading 

platform to provide market quality 

indicators for each product traded on its 

platform at a regular frequency. Some 

metrics of the type below are currently 

calculated by exchanges, often at an 

account level, and provided to market 

participants. Some metrics are currently 

used in aid of various exchange 

programs (such as order efficiency 

programs). Other metrics are not 

currently used but may, nonetheless, 

provide the Commission and the public 

potentially useful information. 

The Commission envisions that 

increased transparency through the 

regular disclosure of market quality 

indicators will allow the Commission 

and market participants to better 

understand, among other things (1) The 

stability and efficiency of each market, 

(2) the degree of informed versus 

uninformed order flow, and (3) the 

nature and degree of liquidity in each 

market. In addition, the transparency 

provided by these metrics may better 

enable market participants to manage 

their ATSs in ways that further promote 

market stability and integrity. 

The Commission is interested in 

receiving comment on the usefulness of 

various market indicators that could be 

prepared for each contract. The list of 

indicators would, for a given product 

and tenor, include measures of: (1) 

Effective spreads; (2) order-to-fill ratios; 

(3) execution speeds by order type and 

order size; (4) average aggressiveness 

imbalances; (5) price impact for given 

trade sizes; 104 (6) average order 

duration; 105 (7) order efficiency; 106 (8) 

rejection order ratios; (9) net position 

changes versus volume; 107 (10) 

branching ratios; 108 (11) volume 

imbalance and trade intensity; 109 (12) 

Herfindahl-Hirschman Indexes based on 

market share of open positions under 

common control; and (13) metrics on 

the number of price changing trades 

involving ATSs.110 Calculation 

methodologies for each of the measures 

would be consistent across exchanges in 

order to ensure compatibility and 

comparability across market venues.111

Several of the measures described in 

this Concept Release would provide 

additional information about market 

quality that market participants cannot 

derive exclusively from real-time order 

book information provided by each 

exchange. The Commission expects that 

market participants could use this 

additional information, together with 

information currently available in the 

order book, in order to better inform 

their trading efficiency and strategies 

and to mitigate adverse effects of their 

actions and other market participants’ 

on the market. Further, the Commission 

expects that these measures could be 

used to help understand changes in 

market quality. In addition, the 

Commission believes that providing 

consistent measures of market quality 

across exchanges would promote market 

efficiency through transparency and 

market competition. 

To clarify what costs and benefits 

these market metrics may provide to 

participants, the Commission requests 

comment to the questions below, 

including that, if these metrics are 

beneficial, the appropriate frequency of 

publication. 

89. What market quality indicators are 

in place today? Please describe the 

metrics, how and where they are 

deployed, and how market participants 

access these indicators and at what cost. 

90. What value would each of the 

market quality metrics described above 

provide to market participants receiving 

them? If possible, please be specific 

about how each market quality measure 

could be used to enhance reliability and 

risk management of ATSs. 

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112Meaning, behaviors that, while not strictly 

illegal, are used to advantage one’s own orders in 

ways that do not contribute to efficient price 

discovery. 

113See Jonathan Brogaard, Terrence Hendershott 

& Ryan Riordan, ‘‘High Frequency Trading and 

Price Discovery’’ (Apr. 22, 2013), available at 

http://papers.ssrn.com/sol3/papers.cfm?abstract_

id=1928510; Hasbrouck & Saar, supra note 18; 

Terrence Hendershott, Charles Jones & Albert 

Menkveld, ‘‘Does Algorithmic Trading Improve 

Liquidity?’’ Journal of Finance, Vol. 66 at 1–33 

(August 30, 2010), available at http://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=1100635. 

114See J. Doyne Farmer & Spyros Skouras, ‘‘An 

Ecological Perspective on the Future of Computer 

Trading,’’ Quantitative Finance (2013); IOSCO 

Report on Regulatory Issues Raised by 

Technological Changes, supra note 4; William 

Barker & Anna Pomeranets, ‘‘The Growth of HighFrequency Trading: Implications for Financial 

Stability,’’ Bank of Canada Financial System 

Review (June 2011), available at http://

www.bankofcanada.ca/2012/01/publications/

periodicals/fsr-article/the-growth-of-high-frequencytrading/. 

115See Farmer & Skouras, supra note 114; Eric 

Budish, Peter Cramton & John Shim, ‘‘The HighFrequency Trading Arms Race: Frequent Batch 

Auctions as a Market Design Response’’ (July 7, 

2013), available at http://faculty.chicagobooth.edu/ 

eric.budish/research/HFTFrequentBatchAuctions.pdf; John McPartland, 

‘‘Recommendations for Equitable Allocation of 

Trades in High Frequency Trading Environments’’ 

(July 25, 2013), available at http://

www.chicagofed.org/Webpages/publications/

policy_discussion_papers/2013/pdp_1.cfm. 

116See McPartland, supra note 115. 

117See Budish, supra note 115; J. Doyne Farmer 

& Spyros Skouras, ‘‘Review of the Benefits of a 

Continuous Market vs. Randomised Stop Auctions 

and of Alternative Priority Rules (Policy Options 7 

and 12),’’ Foresight U.K. Government Office for 

Science, Economic Impact Assessment (2013), 

available at http://www.bis.gov.uk/assets/foresight/

docs/computer-trading/12-1072-eia11-continuousmarket-vs-randomised-stop-auctions.pdf. 

91. Conversely, could any of the 

market quality metrics described above 

be used by market participants to 

manipulate the order book,112 to 

identify competitors’ trading strategies, 

or to engage in other trading activities 

that do not contribute to effective risk 

management and efficient discovery the 

traded asset’s economic value? If so, 

please provide specific information 

regarding how such information could 

be misused. If possible, please provide 

recommendations regarding steps the 

Commission could take to prevent 

misuse. 

92. Are there additional market 

quality metrics that the Commission 

should contemplate requiring exchanges 

to provide? If so, what value would they 

provide and how would they be used? 

93. If the Commission determines that 

measures should be calculated in the 

same way by various exchanges in order 

to provide comparable measures of 

market quality, then how, specifically, 

should each of the above mentioned 

metrics be calculated in order to ensure 

that they are most valuable to market 

participants? 

94. What timing and mode of 

dissemination is appropriate for each 

metric? For example, should measures 

be provided as daily averages? 

95. Does the liquidity of a given 

market impact which market quality 

metrics would be reliable and useful 

when calculated for that market? If so, 

which metrics are inapplicable in less 

liquid markets, and why? What liquidity 

measures and thresholds are relevant to 

determining which metrics should 

apply to a given market? 

3. Market Quality Incentives 

The impact of ATSs, and particularly 

those implementing HFT strategies, is a 

topic of ongoing interest among 

researchers, market participants and 

others. Several studies have found that 

increases in automated trading are 

associated with improved market 

quality.113 Some researchers and market 

participants, however, have also noted 

that the presence of HFT has the 

potential to shape the types of liquidity 

providers available in a market,114 may 

discourage ATSs from submitting 

resting orders that remain in the order 

book long enough for humans to react, 

and may also be associated with 

undesirable trading practices that are 

more easily implemented by automated 

systems.115 Various recommendations 

have been advanced to promote the 

benefits of HFT while simultaneously 

disincentivizing trading strategies that 

do not contribute to efficient price 

discovery.116

Those recommendations include for 

example, utilizing a trade allocation 

formula that is an intermediate between 

a cardinal ranking (time-weighted), Pro 

Rata allocation formula and a Price/

Time allocation formula. This would be 

intended to reward market makers for 

leaving resting orders in the order book 

for a longer period of time, rather than 

simply for being first in the order book 

at a given price. Second, create a new 

limit order type that would prioritize 

orders that remain resting in the order 

book for some minimum amount of 

time. Third, require orders that are not 

fully visible in the order book (e.g., 

iceberg orders) to go to the end of the 

queue (within limit price) with respect 

to trade allocation. Fourth, aggregate 

multiple, small orders from the same 

legal entity entered contemporaneously 

at the same price level and assign them 

the lowest priority time stamp of all 

such. Fifth, require exchanges to use 

batch auctions once per half second at 

random times rather than use 

continuous trade matching.117 Lastly, 

limit visibility into the order book to 

aggregate size available at a limit price. 

This would help to ensure that 

automated traders are placing orders 

based on their knowledge of the 

economic value of the asset being traded 

rather than their knowledge of order 

book dynamics or of other market 

participants’ trading patterns. 

96. Should exchanges impose a 

minimum time period for which orders 

must remain on the order book before 

they can be withdrawn? If so, should 

this minimum resting time requirement 

apply to orders of all sizes or be 

restricted to orders smaller than a 

specific threshold? If there should be a 

specific threshold, how should that 

threshold be determined? 

97. The Commission seeks to 

understand where time-weighted Pro 

Rata trade allocation is currently being 

utilized and what the effects have been. 

Please note examples from exchanges 

and, to the extent possible, please 

comment on the impact that such 

matching algorithms have had on the 

amount of time resting orders are left in 

the order book, as well as on other 

aspects of market quality. 

98. If exchanges aggregated multiple, 

small orders entered by the same entity 

with the intent of abusing rounding 

conventions to gain a disproportionate 

share of allocations, what criteria 

should exchanges use to distinguish 

such orders from those that are entered 

by the same legal entity for legitimate 

trading purposes? Are there empirical 

patterns that could be used to reliably 

identify such manipulative intent? 

99. Would batched order processing 

increase the number of milliseconds 

that are necessary for correlations 

among related securities to be 

established? If so, what specific costs 

would result from this change and how 

do those costs compare to the potential 

benefits described in recent research? 

100. What costs and benefits result 

from providing market participants with 

real-time access to information about 

the order book that extends beyond 

aggregate size available at a limit price? 

Is there a legitimate economic benefit 

that results from market participants 

(both human participants, and ATSs) 

accessing such information? Is it 

possible for market participants to use 

such information to manipulate the 

order book? 

101. The Commission seeks to 

understand whether any of the 

recommendations above are 

inapplicable or irrelevant to markets 

subject to the CEA. If so, please indicate 

which recommendation(s) and what 

makes it inapplicable or irrelevant to 

those markets. 

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118See 17 CFR 38.255. 

119See DCM Final Rules, 77 FR at 36718. 

120See id. 

121See Peter Chapman, ‘‘Too Many Order Types, 

Traders Fret,’’ Traders Magazine (Nov. 2012), 

available at http://www.tradersmagazine.com/

issues/25_344/order-types-equities-structure110515-1.html. 

122The SEC is currently in the process of 

reviewing order types within securities markets. 

See Scott Patterson & Jean Eaglesham, ‘‘Exchanges 

Retreat on Trading Tools,’’ Wall St. J. (Oct. 24, 

2012) (quoting former Chairwoman of the SEC, 

Mary Schapiro: ‘‘I worry about the complexity in 

the market, I worry about the profusion of order 

types, I worry about the fragmentation.’’), available 

at http://online.wsj.com/article/SB100014240

52970203400604578074963881803302.html. See 

also SEC Roundtable Transcript, supra note 2, at 

96–99. 

123See SEC Roundtable Transcript, supra note 2, 

at 96 (‘‘It is the proliferation of all these order types 

and the complexity of these order types that is 

adding unnecessary complexity to the market, 

which is already an extremely complex system as 

it is . . . when you have complex order types, it 

leads to extremely complex testing scenarios, and 

you are not going to pick up all the things you 

could or should because you don’t know what that 

actual matching engine logic is in general.’’). 

4. Policies and Procedures To Identify 

‘‘Related Contracts’’ 

Rule 38.255 of the Commission’s 

regulations require DCMs to establish 

and maintain risk controls for 

trading.118 Appendix B to the Part 38 

regulations provides the following 

guidance on such risk controls: If a 

contract is linked to, or is a substitute 

for, other contracts, either listed on [the 

DCM’s] market or on other trading 

venues, the designated contract market 

must, to the extent practicable, 

coordinate its risk controls with any 

similar controls placed on those other 

contracts.119 The guidance contained in 

the appendix further provides that, to 

the extent practicable, DCMs should 

coordinate not only with other DCMs, 

but national security exchanges as 

well.120 These measures could protect 

against market disruptions cascading 

from one trading platform to the next. 

102. If you are a DCM, please address 

whether you have (i) identified all 

contracts that are linked to, or are a 

substitute for, other contracts either 

listed on your market or on other 

trading venues; and, if so, (ii) 

coordinated your risk controls with any 

similar controls placed on those other 

contracts. If you have not identified 

such contracts and coordinated risk 

controls on such contracts, please 

address any other means by which you 

are addressing risk controls applicable 

to contracts that are linked to, or are a 

substitute for, other contracts listed on 

your exchange or on other trading 

venues. 

103. Please explain whether it would 

be beneficial for exchanges to develop 

and document policies and procedures 

for regularly reviewing contracts on 

other exchanges in order to identify 

those that are ‘‘linked to’’ or that are ‘‘a 

substitute for’’ contracts listed on its 

own market. 

5. Standardize and Simplify Order 

Types 

This Concept Release inquires about 

the possible standardization and 

simplification of order types that have 

complex logic embedded within them. 

A proliferation of order types, both 

within and across exchanges, can result 

in a similar increase in both the 

expected and unexpected responses of 

automated systems to order and trade 

signals. As of November 2012, for 

example, it was reported that BATS 

Global Markets alone listed more than 

2,000 order types.121 A review of 

current and proposed order types could 

be performed with the goal of 

consolidating and simplifying order 

types.122 A proliferation of complex 

order types leads to complex testing 

scenarios. Therefore, it is possible that 

consolidation of order types could 

reduce the potential for instability 

resulting from unexpected interactions 

of multiple ATSs using multiple means 

of execution within the order book.123

104. Please explain whether the 

standardization and simplification of 

order types that have complex logic 

embedded within them would reduce 

the potential for instability and other 

market disruptions. If not, what other 

measures could achieve the same effect? 

105. If the Commission were to 

consider the standardization and 

simplification of order types in a future 

rulemaking, please identify who should 

conduct this review (i.e., the 

Commission, trading platforms, or other 

parties). 

G. General Questions Regarding All Risk 

Controls Discussed Above 

Finally, the Commission requests 

comment on the following general 

questions, with respect to each of the 

risk controls discussed above: 

106. For each of the specified controls 

described above [see sections III.C–F], 

please indicate whether you are already 

using the control on customer and/or 

proprietary orders. If applicable, please 

also indicate how widely you believe 

the control is currently being used in 

the market, and how consistent the 

application of the control is among 

firms. 

107. If possible, please indicate 

specific costs associated with 

implementing each of the risk controls 

described above [see sections III.C–F]. 

Please include detailed estimates, 

distinguishing between the cost of 

developing the functionality, the cost of 

implementation, and the cost of ongoing 

operations. 

108. Please describe the specific 

benefits associated with each of the risk 

controls. Where possible, please 

indicate the market participant 

category(ies) to which the benefit would 

accrue. 

109. Please comment on the 

appropriate order of implementation 

and timeline for each risk control, 

including any distinctions that should 

be made based on the category of 

registrant or market participant 

implementing the same or similar 

control, whether the market participant 

is using DMA, and whether 

implementation is already in place for 

certain categories. 

110. Are any of the risk controls 

unnecessary, impractical for commercial 

or technological reasons, or inadvisable? 

If so, please note the control and 

provide reasons why. 

111. A number of the pre-trade risk 

controls contemplated above are similar 

protections at distinct points in the life 

of an order. 

a. Please comment on the utility of 

redundant pre-trade risk controls and 

the desirability of risk control systems 

in which controls are placed at one or 

more than one focal points. 

b. If pre-trade risk controls should 

reside at one or more than one focal 

point, then please identify, for each risk 

control, what that focal point should be? 

112. Are there risk controls that 

should be implemented across multiple 

entity types? If so, which controls and 

for which types of entities should they 

apply? Also, please comment generally 

on the factors the Commission should 

consider when determining the 

appropriate entity(ies) upon which to 

place a risk control requirement that 

could pertain to more than one entity. 

113. Are there controls that should 

not be considered for overlapping 

implementation across exchanges, 

clearing members and market 

participants? If so, please explain which 

ones and why. 

114. Each of the risk controls is 

described in general, principles-based 

terms. Should the Commission specify 

more granular or specific requirements 

with respect to any of the controls to 

improve their effectiveness or provide 

greater clarity to industry participants? 

If so, please identify the relevant control 

and the additional granularity or 

specificity that the Commission should 

provide. Are any of the controls, as 

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56564 Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 

currently drafted, inadequate to achieve 

the desired risk-reduction? 

115. To the extent that there is any 

need to standardize or provide greater 

specificity regarding any measures 

discussed in this Concept Release, 

including those that reflect industry best 

practices, please describe the best 

approach to achieve such 

standardization (i.e., through 

Commission regulation, Commissionsponsored committee or working group, 

or some other method). 

116. How should risk control 

monitoring be implemented? Should 

compliance be audited by internal and 

external parties? For each control, 

please identify the appropriate 

entity(ies) to monitor compliance with 

the control. Also, please describe what 

an acceptable compliance audit would 

entail for each control. 

117. Are there additional controls that 

should be considered, or other methods 

that could serve as alternatives to those 

described above [see sections III.C–F]? If 

so, please describe the control, its costs 

and benefits, the appropriate entity(ies) 

to implement such control, and whether 

there is any distinction to be drawn in 

the case of DMA. 

118. Would any of the risk safeguards 

create a disincentive to innovate or 

create incentives to innovate in an 

irresponsible manner? If so, please 

identify the control, the concern raised, 

and how the control should be amended 

to address the concern. Responses 

should indicate how an amended risk 

control would still meet the 

Commission’s objectives. 

119. Should the Commission consider 

any pre-trade risk controls, post-trade 

reports, or system safeguards 

appropriate exclusively to market 

makers or to ATSs used by market 

makers? If so, please describe such 

controls or safeguards. 

120. Should the Commission or 

Congress revisit its approach to issuing 

civil monetary penalties for violations of 

the Act, particularly as they relate to 

automated trading environments? 

Currently, the maximum civil monetary 

penalty the Commission may issue is 

capped at $140,000 ‘‘per violation.’’ Is 

such a civil monetary penalty sufficient 

to deter acts that constitute violations of 

the Act, given that an individual 

violation could impose costs to the 

market and the public well in excess of 

$140,000? 

121. Please describe the 

documentation (or categories of 

documents) that would demonstrate that 

a market participant operating an ATS 

has implemented each risk control 

addressed in this Concept Release, 

including, for example, computer code, 

system testing results, certification 

processes and results, and calculations. 

122. Would a fee (collected by, for 

example, the DCM or SEF) on numbers 

of messages exceeding a certain limit be 

more appropriate than a hard limit on 

the number or rate of messages? 

123. Should such a penalty be based 

on a specified number or rate of 

messages or on the ratio of messages to 

orders filled over a specified time 

period? 

124. Recent disruptive events in 

securities markets illustrate the 

importance of effective communication 

between exchanges’ information 

technology systems. The Commission 

requests public comments regarding 

relevant systems in its regulated 

markets, including both DCMs and 

SEFs. What data transfers or other 

communications between exchanges are 

necessary for safe, orderly, and wellfunctioning derivatives markets? What 

additional measures, if any, would help 

promote the soundness of such systems 

(e.g., testing requirements, redundancy 

standards, etc.)? 

IV. List of All Questions in the Concept 

Release 

Listed below are all questions raised 

in the preceding sections of this 

Concept Release. 

High Frequency Trading 

1. In any rulemaking arising from this 

Concept Release, should the 

Commission adopt a formal definition of 

HFT? If so, what should that definition 

be, and how should it be applied for 

regulatory purposes? 

2. What are the strengths and 

weaknesses of the TAC working group 

definition of HFT provided above [see 

section II.A.1]? How should that 

definition be amended, if at all? 

3. The definition of HFT provided 

above uses ‘‘recurring high message 

rates (orders, quotes or cancellations)’’ 

as one of the identifying characteristics 

of HFT, and lists three objective 

measures ((i) cancel-to-fill ratios; (ii) 

participant-to-market message ratios; or 

(iii) participant-to-market trade volume 

ratios) that could be used to measure 

message rates. Are these criteria 

sufficient to reliably distinguish 

between ATSs in general and ATSs 

using HFT strategies? What threshold 

values are appropriate for each of these 

measures in order to identify ‘‘high 

message rates?’’ Should these threshold 

values vary across exchanges and 

assets? If so, how? 

4. Should the risk controls for systems 

and firms that engage in HFT be 

different from those that apply to ATSs 

in general systems? If so, how? 

Reductions in Latency 

5. Discussions on latency often focus 

on the how quickly an exchange 

processes orders, the time taken to 

submit orders, and how quickly a firm 

can observe prices of trades transacted 

on the exchange. The Commission is 

interested in understanding whether 

there are other types of messages 

transmitted between exchanges, firms 

and vendors wherein differences in 

latency could provide opportunities for 

informational advantage. Recent press 

reports have highlighted such 

advantages in the transmission of trade 

confirmations by a specific exchange. 

Are there other exchanges and trading 

venues where similar differences in 

latency exist? The Commission is 

interested in understanding whether the 

extent of latency in any such message 

transmission process can have an 

adverse impact on market quality or 

fairness. Should any exchanges, vendors 

and firms be required to audit their 

systems and process on a periodic 

process to identify and then resolve 

such latency? 

Financial Integrity of the DCO 

6. Are there distinct pre-trade risk 

controls, including measures not listed 

below, or measures in addition to those 

already adopted by the Commission, 

that would be particularly helpful in 

protecting the financial integrity of a 

DCO? 

Risk Controls Applicable in the Case of 

DMA 

7. Are there distinct pre-trade risk 

controls, including measures not listed 

below [see section III.C.], or measures in 

addition to those already adopted by the 

Commission, that should apply 

specifically in the case of DMA? 

Message and Execution Throttles 

8. If, as contemplated above [see 

section III.C.1], maximum message rates 

and execution throttles were used as a 

mechanism to prevent individual 

entities or accounts from trading at 

speeds that are misaligned with their 

risk management capabilities, how 

should this message rate be determined? 

9. Message and execution throttles 

may be applied by trading firms (FCMs 

and proprietary trading firms), clearing 

firms, and by exchanges. The 

Commission requests public comment 

regarding the appropriate location for 

message and execution throttles. 

a. If throttles should be implemented 

at the trading firm level, should they be 

applied to all ATSs, only ATSs 

employing HFT strategies, or both? 

b. What role should clearing firms 

play in the operation or calibration of 

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Federal Register / Vol. 78, No. 177 / Thursday, September 12, 2013 / Proposed Rules 56565 

throttles on orders submitted by the 

trading firms whose trades they 

guarantee? 

10. Should the message and execution 

throttles be based on market conditions, 

risk parameters, type of entity, or other 

factors? 

11. What thresholds should be used 

for each type of market participant in 

order to determine when a message or 

execution throttle should be used? 

Should these thresholds be set by the 

exchange or the market participant? 

12. Are message and execution 

thresholds typically set by contract, or 

by algorithm? What are the advantages 

and disadvantages to each method? 

13. Who should be charged with 

setting message rates for products and 

when they are activated? 

14. Would message and execution 

throttles provide additional protection 

in mitigating credit risk to DCOs? 

Volatility Awareness Alerts 

15. The Commission is aware that 

alarms can be disruptive or 

counterproductive if ‘‘false alarms’’ 

outnumber accurate ones. How can 

volatility alarms be calibrated in order 

to minimize the risk that false alarms 

could interrupt trading or cause human 

monitors to ignore them over time? 

Self-Trade Controls 

16. What specific practices or tools 

have been effective in blocking selftrades, and what are the costs associated 

with wide-spread adoption of such 

practices or tools? 

17. Please indicate how widely you 

believe exchange-sponsored self-trading 

controls are being used in the market. 

18. Should self-trade controls cancel 

the resting order(s)? Or, instead, should 

they reject the taking order that would 

have resulted in a self-trade? If 

applicable, please explain why one 

mechanism is more effective than the 

other. 

19. Should exchanges be required to 

implement self-trading controls in their 

matching engines? What benefits or 

challenges would result from such a 

requirement? 

20. Please explain whether regulatory 

standards regarding the use of selftrading control technology would 

provide additional protection to markets 

and market participants. 

21. If you believe that self-trading 

controls are beneficial, please describe 

the level of granularity at which such 

controls should operate (e.g., should the 

controls limit self-trading at the 

executing firm level? At the individual 

trader level?) What levels of granularity 

are practical or achievable? 

22. If you believe that self-trading 

controls are beneficial, please explain 

whether exchanges should require such 

controls for market participants and 

identify the categories of participants 

that should be subject to such controls. 

For example, should exchanges require 

self-trading controls for all participants, 

some types of participants, participants 

trading in certain contracts, or 

participants in market maker and/or 

incentive programs? What benefits or 

challenges would result from imposing 

such controls on each category of 

participant? 

Price Collars 

23. The Commission is aware that 

some exchanges already have price 

collars in place for at least a portion of 

the contracts traded in their markets. 

Please comment on whether exchanges 

should utilize price collars on all 

contracts they list. 

24. Would price collars provide 

additional protection in mitigating 

credit risk to DCOs? 

Maximum Order Sizes 

25. Are such controls typically 

applied to all contracts and customers, 

or on a more limited basis? 

26. Do exchanges allow clearing 

members to use the exchange’s 

technology to set maximum order sizes 

for specific customers or accounts? 

27. Would additional standardization 

in the capabilities of this technology or 

more uniform application of this 

technology to all customers and 

contracts improve the effectiveness of 

such controls? 

28. To what extent are clearing firms 

and trading firms conducting pre-trade 

maximum order size screens? Please 

explain whether firms are conducting 

such screens by utilizing: (1) Their own 

technology; (2) the exchange’s 

technology, or (3) a combination of both. 

29. Would regulatory standards 

regarding the use of such technology 

provide additional protection to the 

markets? 

Trading Pauses 

30. Trading pauses, as currently 

implemented, can be triggered for 

multiple reasons. Are certain triggers 

more or less effective in mitigating the 

effects of market disruptions? 

31. Are there additional triggers for 

which pauses should be implemented? 

If so, what are they? 

32. What factors should the 

Commission or exchanges take into 

account when considering how to 

specify pauses or what thresholds 

should be used? 

33. How should the re-opening of a 

market after a trading pause be effected? 

Credit Risk Limits 

34. What positions should be 

included in credit risk limit calculations 

in order to ensure that they are useful 

as a tool for limiting the activity of a 

malfunctioning ATS? Is it adequate for 

such a screen to include only those 

positions entered into by a particular 

ATS or should it include all the firm’s 

positions? 

35. Should pre-trade credit screens 

require a full recalculation of margin 

based on the effect of the order? 

36. In light of your answers to the 

previous two questions, where in the 

lifecycle of an order should the credit 

limits be applied and what entity 

should be responsible for conducting 

such checks? 

37. If credit checks are conducted 

post-trade, what should be done when 

a trade causes a firm to exceed a limit? 

38. Please describe any technological 

limitations that the Commission should 

be aware of with respect to applying 

credit limits. 

39. The Commission is particularly 

interested to receive public comment on 

the ‘‘hub’’ model and its applicability to 

different types of pre-trade risk controls. 

What are the strengths and weaknesses 

of this approach relative to other pretrade or post-trade approaches to 

checking trades against credit limits? 

How would the latency between the 

‘‘hub’’ and the exchanges be managed to 

provide accurate limits for high 

frequency ATS? 

40. If you believe that post-trade 

credit checks would be an effective 

safeguard against malfunctioning ATSs, 

what is the maximum amount of latency 

that should be allowed for conducting 

such checks? What technological or 

information flow challenges would have 

to be addressed in order to implement 

post-trade checks with that degree of 

latency? 

41. With respect to any entity that you 

believe should be responsible for 

applying credit risk limits, please 

describe the technology necessary to 

implement that risk control and the cost 

of such technology. 

Order, Trade and Position Drop Copy 

42. What order and trade reports are 

currently offered by DCMs and DCOs? 

What aspects of those reports are most 

valuable or necessary for implementing 

risk safeguards? Please also indicate 

whether the report is included as part of 

the exchange or clearing service, or 

whether an extra fee must be paid. 

43. If each order and trade report 

described above were to be 

standardized, please provide a detailed 

list of the appropriate content of the 

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report, and how long after order receipt, 

order execution, or clearing the report 

should be delivered from the trading 

platform to the clearing member or other 

market participant. 

Trade Cancellation or Adjustment 

Policies 

44. Is a measure that would obligate 

exchanges to make error trade decisions 

(i.e., decisions to cancel a trade or to 

adjust its price) within a specified 

amount of time after an error trade is 

reported feasible? If so, what amount of 

time would be sufficient for exchanges, 

but would be sufficiently limited to help 

reduce risk for counterparties to error 

trades? 

45. Should exchanges develop 

detailed, pre-determined criteria 

regarding when they can adjust or 

cancel a trade, or should exchanges be 

able to exercise discretion regarding 

when they can adjust or cancel a trade? 

What circumstances make predetermined criteria more effective or 

necessary than the ability to exercise 

discretion, and vice versa? 

46. Do error trade policies that favor 

price adjustment over trade cancellation 

effectively mitigate risk for market 

participants that are counterparties to 

error trades? Are there certain situations 

where canceling trades would mitigate 

counterparty risk more effectively? If so, 

what are they and how could such 

situations be identified reliably by the 

exchange in a short period of time? 

47. Should error trade policies be 

consistent across exchanges, either in 

whole or in part? If so, how would 

harmonization of error trade policies 

mitigate risks for market participants, or 

contribute to more orderly trading? 

Order Cancellation Capabilities 

48. The Commission’s discussion of 

kill switches assumes that certain 

benefits accrue to their use across 

exchanges, trading and clearing firms, 

and DCOs. Please comment on whether 

such redundant use of kill switches is 

necessary for effective risk control. 

49. What processes, policies, and 

procedures should exchanges use to 

govern their use of kill switches? Are 

there any different or additional 

processes, policies and procedures that 

should govern the use of kill switches 

that would specifically apply in the case 

of DMA? 

50. What processes, policies, and 

procedures should clearing firms use to 

govern their use of kill switches when 

using such a safeguard to cancel and 

prevent orders on behalf of one or more 

clients? 

51. What objective criteria regarding 

kill switch triggers, if any, should 

entities incorporate into their policies 

and procedures? 

52. What benefits or problems could 

result from standardizing processes, 

policies, and procedures related to kill 

switches across exchanges and/or 

clearing firms? 

53. Please explain how kill switches 

should be designed to prevent them 

from canceling or preventing the 

submission of orders that are actually 

risk reducing or that offset positions that 

have been entered by a malfunctioning 

ATS. 

54. The Commission requests 

comment regarding whether kill 

switches used by clearing firms already 

have or should have the following 

capabilities: (a) Distinguish client orders 

from proprietary orders; (b) distinguish 

among orders from individual clients; 

and (c) cancel working orders and 

prevent additional orders from one or 

more of the clearing firm’s clients, or for 

all the clearing firm’s proprietary 

accounts, without cancelling and 

preventing all orders from the clearing 

firm. 

55. The Commission is aware of 

proposals that would enable FCMs to 

establish credit limits for customers that 

are stored at a central ‘‘credit hub’’ for 

the purpose of pre-trade credit checks. 

If such a model were implemented, is it 

possible that it could also be enabled 

with kill switches that cancel existing 

working orders and prevent additional 

orders from being submitted by one or 

more market participants? Should such 

an approach be designed to complement 

kill switches that are controlled by 

exchanges, clearing members, and 

trading firms, or to replace these kill 

switches? What benefits and drawbacks 

would result from each approach? 

ATS Testing 

56. Please describe the necessary 

elements of an effective ATS testing 

regime, in connection with both the 

initial deployment and the modification 

of an ATS. 

57. With respect to testing of 

modifications, how should the 

Commission and market participants 

distinguish between major 

modifications and minor modifications? 

What are the objective criteria that can 

be used to make such distinctions? 

Should any testing regime applicable to 

ATS modifications distinguish between 

major and minor modifications, and if 

so, how? 

58. What challenges or benefits may 

result from exchanges implementing 

standardized procedures regarding the 

development, change management and 

testing of exchange systems? Please 

describe, if any, the types of 

standardized procedures that would be 

most effective. 

Crisis Management Procedures 

59. Should basic crisis management 

procedures be standardized across 

market participants? If so, what 

elements should be addressed in an 

industry-wide standard? 

60. Are there specific, core 

requirements that should be included in 

any crisis management procedures? 

Similarly, are there specific types of 

crisis events that should be addressed in 

any crisis management procedures? If 

so, please identify such requirements 

and/or crisis events and the level of 

granularity or specificity that the 

procedures should have with respect to 

each. 

Self-Certification and Clearing Firm 

Certification 

61. How often should a market 

participant certify that their pre-trade 

risk controls, post-trade reports and 

other measures, and system safeguards 

meet the necessary standards? 

62. Which representative of the 

market participant should be required to 

attest that the certification standards 

have been met? Should it be the market 

participant’s chief executive officer, 

chief compliance officer, or similar 

high-ranking corporate official, or some 

other individual? 

63. Which entity(ies) should receive 

certifications from market participants? 

For example, should it be the market 

participant’s clearing firm, its 

designated self-regulatory organization 

(if applicable), one or more trading 

platforms, a registered futures 

association, the Commission, or other 

entity? 

64. Should DCMs, SEFs or clearing 

member firms be required to audit 

market participant certifications? What 

would be covered in an audit and how 

often should these audits occur? Should 

the same entity that receives the 

certification be required to perform the 

audit? 

Risk Event Notification Requirements 

65. Do commenters believe that risk 

event notifications would help to better 

understand and ultimately reduce 

sources of risk in automated trading 

environments? What information should 

be contained in a risk event notification 

to maximize its value? 

66. What types of risk events should 

trigger reporting requirements, and what 

entities should receive risk event 

notifications from market participants 

operating ATSs? 

67. Which entities should receive risk 

event notifications? 

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ATS or Algorithm Identification 

68. Should the Commission define 

ATS or algorithm for purposes of any 

ATS identification system that may 

arise from this Concept Release? If so, 

how should ATS or algorithm be 

defined? Should a separate designation 

be reserved for high frequency trading 

algorithms and if so, what is the 

threshold difference? 

69. What are the existing practices 

within trading firms for internally 

identifying ATSs or algorithms and for 

tracking their performance, including 

profit and loss? What elements of 

existing practices could be leveraged in 

any ATS or algorithm identification 

system proposed by the Commission in 

the future? 

70. The Commission understands that 

an ATS may consist of numerous 

algorithms, each of which contributes to 

a trading decision. If an algorithm-based 

identification system is proposed, 

which of the potentially multiple 

algorithms that constitute an ATS 

should carry the ID? In addition, what 

degree of change to an algorithm should 

necessitate the use of a new ID, and how 

often does this change typically occur? 

What is the appropriate definition of 

‘‘algorithm’’ for purposes of an 

algorithm identification system? 

71. If the identification system resides 

at the ATS level, how should such IDs 

be structured to ensure that they are 

nonetheless sufficiently granular to 

identify components that may be 

leading or have led to unstable market 

conditions? 

72. What message traffic between an 

ATS and a trading platform should 

include the ATS or algorithm ID (all 

messages, orders only, etc.)? 

73. What relationship should this 

ATS ID have to the legal entity identifier 

(LEI)? 

Data Reasonability Checks 

74. Please describe existing practices 

in the industry concerning how and the 

extent to which ATSs use (1) market 

data; and (2) news and information 

providers, including social media, to 

inform trading decisions. 

75. The Commission requests 

comment regarding any risk controls, 

including reasonability checks, 

currently being used by market 

participants operating ATSs to review 

market data and news and information 

providers, including social media. 

Please describe the risk control, 

including the purpose of the control, the 

extent of its use among derivatives 

market participants, and any other 

aspects of the risk control that you 

believe would be helpful for the 

Commission to understand. 

76. The Commission requests public 

comment concerning the lock-up 

process for government economic 

reports, and any additional measures 

that might be taken to protect against 

inappropriate disclosure. 

77. Please describe the extent to 

which potentially market-moving data 

from non-governmental economic 

reports can be obtained prior to its 

public release for a fee. Are there 

specific reports or types of reports for 

which early disclosure should not be 

permitted? What process should be used 

for identifying non-governmental 

economic reports whose early release 

should not be permitted? Should the 

data release process for such reports be 

similar to the data lock-up process 

implemented for the release of 

government economic data? 

Registration of Firms Operating ATSs 

78. Should firms operating ATSs in 

CFTC-regulated markets, but not 

otherwise registered with the 

Commission, be required to register 

with the CFTC? If so, please explain. 

79. Please identify the firm 

characteristics, trading practices, or 

technologies that could be used to 

trigger a registration requirement. 

80. Should all firms deploying ATS be 

required to register, and should there be 

different standards for firms deploying 

HFT strategies? What are the 

appropriate thresholds levels below 

which registration would not be 

required? 

81. Since the floor trader distinction 

only addresses proprietary traders, 

please explain whether there is any 

other category of market participant, 

such as those deploying ATS or HFT 

strategies and trading on behalf of 

clients (aside from market participants 

already subject to Commission 

jurisdiction, such as Introducing 

Brokers and FCMs) that the Commission 

should consider with respect to 

potential registration requirements. 

82. Should software firms providing 

algorithms be required to register, and 

under what authority? What standards 

should apply to such firms? 

83. Please identify the functionalities 

discussed in this Concept Release that 

could be applied to floor brokers that 

operate ATSs. Are there any other 

controls not mentioned in this Concept 

Release that should be under 

consideration? 

84. Please supply any information or 

data that would help the Commission in 

deciding whether firms may or may not 

meet the definition of ‘‘floor trader’’ in 

§ 1a(23) of the Act. 

85. Do you believe that the 

registration of such firms as ‘‘floor 

traders’’ would effectuate the purposes 

of the CEA to deter and detect price 

manipulation or any other disruptions 

to market integrity? 

86. Considering the broad deployment 

of automated trading systems across 

both equities and derivatives markets, 

the Commission seeks to understand the 

appropriate level of coordination 

between itself and the SEC in defining 

and applying possible standards to the 

ATS and HFT trading space. How 

closely should the CFTC and SEC 

coordinate on possible rules and 

requirements for trading firms? The 

Commission also seeks public comment 

on the appropriate level of coordinated 

oversight between itself and relevant 

Self-Regulatory Organizations such as 

National Futures Association and 

FINRA. 

87. Using the Flash Crash as an 

example, is it important to have 

identical definitions and remedies in 

the case of ATS and HFT registration 

requirements or do the existing market 

controls, such as circuit breakers, 

provide the necessary market 

protections in both the equities and 

derivatives markets? If the rules are not 

coordinated, what impact would this 

have on market interaction and 

oversight? 

88. If trading venues apply mandatory 

functionalities to access derivatives 

markets, what benefit would a 

registration requirement provide to the 

Commission? 

Market Quality Data 

89. What market quality indicators are 

in place today? Please describe the 

metrics, how and where they are 

deployed, and how market participants 

access these indicators and at what cost. 

90. What value would each of the 

market quality metrics described above 

[see section III.F.2] provide to market 

participants receiving them? If possible, 

please be specific about how each 

market quality measure could be used to 

enhance reliability and risk 

management of ATSs. 

91. Conversely, could any of the 

market quality metrics described above 

[see section III.F.2] be used by market 

participants to manipulate the order 

book, to identify competitors’ trading 

strategies, or to engage in other trading 

activities that do not contribute to 

effective risk management and efficient 

discovery the traded asset’s economic 

value? If so, please provide specific 

information regarding how such 

information could be misused. If 

possible, please provide 

recommendations regarding steps the 

Commission could take to prevent 

misuse. 

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92. Are there additional market 

quality metrics that the Commission 

should contemplate requiring exchanges 

to provide? If so, what value would they 

provide and how would they be used? 

93. If the Commission determines that 

measures should be calculated in the 

same way by various exchanges in order 

to provide comparable measures of 

market quality, then how, specifically, 

should each of the above mentioned 

metrics be calculated in order to ensure 

that they are most valuable to market 

participants? 

94. What timing and mode of 

dissemination is appropriate for each 

metric? For example, should measures 

be provided as daily averages? 

95. Does the liquidity of a given 

market impact which market quality 

metrics would be reliable and useful 

when calculated for that market? If so, 

which metrics are inapplicable in less 

liquid markets, and why? What liquidity 

measures and thresholds are relevant to 

determining which metrics should 

apply to a given market? 

Market Quality Incentives 

96. Should exchanges impose a 

minimum time period for which orders 

must remain on the order book before 

they can be withdrawn? If so, should 

this minimum resting time requirement 

apply to orders of all sizes or be 

restricted to orders smaller than a 

specific threshold? If there should be a 

specific threshold, how should that 

threshold be determined? 

97. The Commission seeks to 

understand where time-weighted Pro 

Rata trade allocation is currently being 

utilized and what the effects have been. 

Please note examples from exchanges 

and, to the extent possible, please 

comment on the impact that such 

matching algorithms have had on the 

amount of time resting orders are left in 

the order book, as well as on other 

aspects of market quality. 

98. If exchanges aggregated multiple, 

small orders entered by the same entity 

with the intent of abusing rounding 

conventions to gain a disproportionate 

share of allocations, what criteria 

should exchanges use to distinguish 

such orders from those that are entered 

by the same legal entity for legitimate 

trading purposes? Are there empirical 

patterns that could be used to reliably 

identify such manipulative intent? 

99. Would batched order processing 

increase the number of milliseconds 

that are necessary for correlations 

among related securities to be 

established? If so, what specific costs 

would result from this change and how 

do those costs compare to the potential 

benefits described in recent research? 

100. What costs and benefits result 

from providing market participants with 

real-time access to information about 

the order book that extends beyond 

aggregate size available at a limit price? 

Is there a legitimate economic benefit 

that results from market participants 

(both human participants, and ATSs) 

accessing such information? Is it 

possible for market participants to use 

such information to manipulate the 

order book? 

101. The Commission seeks to 

understand whether any of the 

recommendations above [see section 

III.F.3] are inapplicable or irrelevant to 

markets subject to the CEA. If so, please 

indicate which recommendation(s) and 

what makes it inapplicable or irrelevant 

to those markets. 

Policies and Procedures To Identify 

‘‘Related Contracts’’ 

102. If you are a DCM, please address 

whether you have (i) identified all 

contracts that are linked to, or are a 

substitute for, other contracts either 

listed on your market or on other 

trading venues; and, if so, (ii) 

coordinated your risk controls with any 

similar controls placed on those other 

contracts. If you have not identified 

such contracts and coordinated risk 

controls on such contracts, please 

address any other means by which you 

are addressing risk controls applicable 

to contracts that are linked to, or are a 

substitute for, other contracts listed on 

your exchange or on other trading 

venues. 

103. Please explain whether it would 

be beneficial for exchanges to develop 

and document policies and procedures 

for regularly reviewing contracts on 

other exchanges in order to identify 

those that are ‘‘linked to’’ or that are ‘‘a 

substitute for’’ contracts listed on its 

own market. 

Standardize and Simplify Order Types 

104. Please explain whether the 

standardization and simplification of 

order types that have complex logic 

embedded within them would reduce 

the potential for instability and other 

market disruptions. If not, what other 

measures could achieve the same effect? 

105. If the Commission were to 

consider the standardization and 

simplification of order types in a future 

rulemaking, please identify who should 

conduct this review (i.e., the 

Commission, trading platforms, or other 

parties). 

General Questions Regarding All Risk 

Controls 

106. For each of the specified controls 

described above [see sections III.C–F], 

please indicate whether you are already 

using the control on customer and/or 

proprietary orders. If applicable, please 

also indicate how widely you believe 

the control is currently being used in 

the market, and how consistent the 

application of the control is among 

firms. 

107. If possible, please indicate 

specific costs associated with 

implementing each of the risk controls 

described above [see sections III.C–F]. 

Please include detailed estimates, 

distinguishing between the cost of 

developing the functionality, the cost of 

implementation, and the cost of ongoing 

operations. 

108. Please describe the specific 

benefits associated with each of the risk 

controls. Where possible, please 

indicate the market participant 

category(ies) to which the benefit would 

accrue. 

109. Please comment on the 

appropriate order of implementation 

and timeline for each risk control, 

including any distinctions that should 

be made based on the category of 

registrant or market participant 

implementing the same or similar 

control, whether the market participant 

is using DMA, and whether 

implementation is already in place for 

certain categories. 

110. Are any of the risk controls 

unnecessary, impractical for commercial 

or technological reasons, or inadvisable? 

If so, please note the control and 

provide reasons why. 

111. A number of the pre-trade risk 

controls contemplated above are similar 

protections at distinct points in the life 

of an order. 

a. Please comment on the utility of 

redundant pre-trade risk controls and 

the desirability of risk control systems 

in which controls are placed at one or 

more than one focal points. 

b. If pre-trade risk controls should 

reside at one or more than one focal 

point, then please identify, for each risk 

control, what that focal point should be? 

112. Are there risk controls that 

should be implemented across multiple 

entity types? If so, which controls and 

for which types of entities should they 

apply? Also, please comment generally 

on the factors the Commission should 

consider when determining the 

appropriate entity(ies) upon which to 

place a risk control requirement that 

could pertain to more than one entity. 

113. Are there controls that should 

not be considered for overlapping 

implementation across exchanges, 

clearing members and market 

participants? If so, please explain which 

ones and why. 

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114. Each of the risk controls is 

described in general, principles-based 

terms. Should the Commission specify 

more granular or specific requirements 

with respect to any of the controls to 

improve their effectiveness or provide 

greater clarity to industry participants? 

If so, please identify the relevant control 

and the additional granularity or 

specificity that the Commission should 

provide. Are any of the controls, as 

currently drafted, inadequate to achieve 

the desired risk-reduction? 

115. To the extent that there is any 

need to standardize or provide greater 

specificity regarding any measures 

discussed in this Concept Release, 

including those that reflect industry best 

practices, please describe the best 

approach to achieve such 

standardization (i.e., through 

Commission regulation, Commissionsponsored committee or working group, 

or some other method). 

116. How should risk control 

monitoring be implemented? Should 

compliance be audited by internal and 

external parties? For each control, 

please identify the appropriate 

entity(ies) to monitor compliance with 

the control. Also, please describe what 

an acceptable compliance audit would 

entail for each control. 

117. Are there additional controls that 

should be considered, or other methods 

that could serve as alternatives to those 

described above [see sections III.C–F]? If 

so, please describe the control, its costs 

and benefits, the appropriate entity(ies) 

to implement such control, and whether 

there is any distinction to be drawn in 

the case of DMA. 

118. Would any of the risk safeguards 

create a disincentive to innovate or 

create incentives to innovate in an 

irresponsible manner? If so, please 

identify the control, the concern raised, 

and how the control should be amended 

to address the concern. Responses 

should indicate how an amended risk 

control would still meet the 

Commission’s objectives. 

119. Should the Commission consider 

any pre-trade risk controls, post-trade 

reports, or system safeguards 

appropriate exclusively to market 

makers or to ATSs used by market 

makers? If so, please describe such 

controls or safeguards. 

120. Should the Commission or 

Congress revisit its approach to issuing 

civil monetary penalties for violations of 

the Act, particularly as they relate to 

automated trading environments? 

Currently, the maximum civil monetary 

penalty the Commission may issue is 

capped at $140,000 ‘‘per violation.’’ Is 

such a civil monetary penalty sufficient 

to deter acts that constitute violations of 

the Act, given that an individual 

violation could impose costs to the 

market and the public well in excess of 

$140,000? 

121. Please describe the 

documentation (or categories of 

documents) that would demonstrate that 

a market participant operating an ATS 

has implemented each risk control 

addressed in this Concept Release, 

including, for example, computer code, 

system testing results, certification 

processes and results, and calculations. 

122. Would a fee (collected by, for 

example, the DCM or SEF) on numbers 

of messages exceeding a certain limit be 

more appropriate than a hard limit on 

the number or rate of messages? 

123. Should such a penalty be based 

on a specified number or rate of 

messages or on the ratio of messages to 

orders filled over a specified time 

period? 

124. Recent disruptive events in 

securities markets illustrate the 

importance of effective communication 

between exchanges’ information 

technology systems. The Commission 

requests public comments regarding 

relevant systems in its regulated 

markets, including both DCMs and 

SEFs. What data transfers or other 

communications between exchanges are 

necessary for safe, orderly, and wellfunctioning derivatives markets? What 

additional measures, if any, would help 

promote the soundness of such systems 

(e.g., testing requirements, redundancy 

standards, etc.)? 

V. Appendices (Specific Measures in 

Bold Font) 

A. Pre-Trade Risk Controls 

Potential pre-trade risk 

control 

Party(s) to implement risk 

control Substance of control 

1a. Maximum Message 

Rate (Message Throttle).

Market Participants Operating ATSs, Trading Platforms, and Clearing 

Firms.

1a. Market participants operating ATSs must establish a maximum message rate 

per unit time for each ATS. This control should be calibrated to address the potential for unintended message flow (including orders) from a malfunctioning 

ATS. Market participants’ systems must prevent the submission of messages in 

excess of the specified rate. 

Trading platforms’ systems must prevent the acceptance of messages in excess of 

their own specified rates and must log instances when each ATS attempted to 

exceed such limits. 

Separately, trading platforms must establish systems enabling clearing firms to set 

rate limits directly at the trading platform. Trading platforms, clearing firms and 

market participants may set rates independently of each other. 

In all cases, human monitors must be alerted when limits are breached. 

1b. Maximum Execution 

Rate (Execution Throttle).

Market Participants Operating ATSs, Trading Platforms, and Clearing 

Firms.

1b. Market participants operating ATSs must establish a limit on the maximum 

number of orders that each of their ATSs can execute in a given direction per 

unit time. The limit should be unique to each ATS and should be calibrated to 

address the potential for unintended executions arising from a malfunctioning 

ATS. Additional orders in excess of the limit should not be submitted or executed. 

Trading platforms must establish a maximum number of orders in the same direction they will execute per unit time from a uniquely identified ATS, and must prevent execution of trades that would violate this limit. 

Separately, trading platforms must establish systems enabling clearing firms to set 

per-customer message rate limits directly at the trading platform. Trading platforms, clearing firms and market participants may set rates independently of 

each other. 

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Potential pre-trade risk 

control 

Party(s) to implement risk 

control Substance of control 

2. Volatility Awareness 

Alerts.

Market Participants Operating ATSs.Market participants operating ATSs must implement automated solutions to immediately notify system supervisors when the prices of individual or groups of assets relevant to an ATS’s trading strategies move either up or down by a given 

percentage within a predetermined period of time, or when the volume of individual or groups of assets relevant to an ATSs trading strategies over a specific 

period of time increase or decrease beyond a predetermined threshold. This control should help system supervisors identify market conditions which are not appropriate to the continued operation of a particular ATS or algorithm. The alert 

should be configurable by contract. 

3. Self-Trade Controls ....... Trading Platforms and All 

Market Participants.

Trading platforms must provide, and all market participants must apply, technologies to identify and limit the transmission of orders from their systems to a 

trading platform that would result in self-trades. 

4. Price Collars ................... Trading Platforms and All 

Market Participants.

Trading platforms must assign a range of acceptable order and execution prices for 

each of their products. All orders outside of this range would be automatically rejected, and orders already in the order book but outside of the acceptable range 

should not be elected by the matching engine. 

All market participants must establish similar product-specific price collars and 

should implement systems to ensure that orders outside of the collar are not 

transmitted to the relevant trading platform. 

5. Maximum Order Size ..... Trading Platforms, Clearing 

Firms, and All Market 

Participants.

Trading platforms, clearing firms, and all market participants must each establish 

default maximum order sizes for orders submitted, transmitted, or processed by 

their systems. 

A market participant’s systems must prevent the submission of orders in excess of 

its internally-specified limits. A clearing firm’s systems must prevent the transmission of customer orders in excess of its limits for that customer. Trading platforms must prevent their systems from processing or executing orders in excess 

of the limit specified by the trading platform. 

In addition, for DMA customers, trading platforms must establish similar systems 

enabling clearing firms to set per-customer order size limits directly at the trading 

platform. 

Limits set by market participants, clearing firms, and trading platforms may be different from, and operate independently, of each other. 

6. Trading Pauses .............. Trading Platforms ............... Trading platforms would be required to institute trading pauses, similar in nature to 

stop-logic functionality, but covering a wider array of adverse states of an automated central limit order book. 

7. Credit Risk Limits .......... Trading Platforms, Clearing 

Firms and/or Market Participants Operating ATSs.

While some trading firms and FCMs conduct post-trade credit checks with varying 

degrees of latency and pre-trade credit risk screens are already required pursuant to Commission regulations, the Commission seeks public comments regarding any additional measures that could help protect the financial integrity of 

DCOs, as well as additional input from the public regarding the appropriate location and timing in the order lifecycle for credit checks. 

B. Post-Trade Reports and Other PostTrade Measures 

Potential post-trade report or 

measure 

Party(s) to implement report 

or measure Substance of report or measure 

8. Order Report (Postorder drop copy).Trading platforms ............... Trading platforms must provide a duplicate copy of each order to the originating 

market participant and to the market participant’s clearing firm(s) simultaneously 

with such order’s receipt by the trading platform. 

9. Trade Report (Posttrade drop copy).Trading platforms ............... Trading platforms must provide a duplicate copy of each executed trade to the originating market participant and to the market participant’s clearing firm(s) simultaneously with such trade’s execution by the trading platform. 

10. Position Report (Postclearing drop copy).DCOs .................................. DCOs must provide net position per maturity per contract to the originating market 

participant and the market participant’s clearing firm(s) as soon as the contract is 

matched at the clearinghouse. 

11a. Uniform Adjust or 

Bust Error Trade Policies.

Trading platforms and All 

Market Participants.

11a. Trading platforms must establish policies for adjusting the price of trades or 

breaking trades that have been executed due to an error. 

Policies must favor price adjustments rather than trade cancellation. To the extent 

possible, policies must require decisions by the trading platform to be made on 

the basis of readily available objective criteria in order to facilitate rapid or immediate decisions. 

11b. Standardized Reporting Window for Error 

Trades.

............................................. 11b. Market participants must report error trades to the trading platform within five 

minutes after the trades are executed. 

Trading platforms must notify market participants of a potential adjust-or-bust situation immediately. 

Trading platforms must make a decision and notify market participants of that decision within a specified period of time. 

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C. System Safeguards 

Potential system safeguard Party(s) to implement 

safeguard Substance of safeguard 

CONTROLS OVER ORDER 

PLACEMENT.

Trading Platforms, Clearing 

Firms, and All Market 

Participants.

Trading platforms, clearing members, and market participants must have systems 

and processes in place to: 

Order Cancellation 

Capabilities 

12a. Auto-cancel on disconnect.............................................. 12a. Exchanges should implement a flexible system that allows a user to determine 

whether their orders should be left in the market upon disconnection. This should 

only be implemented if the clearing firm’s risk manager has the ability to cancel 

working orders for the trader if the trading system is disconnected. The exchange 

should establish a policy whether the default setting for all market participants 

should be to maintain or to cancel all working orders. 

12b. Selective working 

order cancellation.

............................................. 12b. Immediately cancel one, multiple, or all resting orders from a market participant as deemed necessary in an emergency situation. 

12c. Kill switch ................... ............................................. 12c. Immediately cancel all working orders, and the ability to prevent submission 

(market participant), transmittal (clearing member), or acceptance (trading platform) of any new orders from a market participant, or particular trader or ATS of 

such market participant. 

13. Repeated Automated 

Execution Throttle.

............................................. 13. Market participants operating ATSs must establish a limit on the maximum 

number of orders that each ATS can submit. When an ATS reaches that maximum it must be automatically disabled until a human re-enables it. 

14. System heartbeats (see 

section III.E.1.a and footnote 90).

............................................. 14. Trading platforms must provide, and market participants operating ATSs must 

utilize, heartbeats that indicate proper connectivity between the trading platform 

and the ATS. Such heartbeats must also indicate the status of connectivity between an ATS and any systems used by the trading platform to provide the ATS 

with market data. 

If connectivity to any system is lost, the ATS should be disabled, and resting orders 

should be maintained or cancelled based on the pre-determined preferences of 

the firm that lost connectivity. 

POLICIES AND PROCEDURES FOR THE DESIGN, TESTING, AND 

SUPERVISION OF ATSs 

15a. ATS Design 

Market Participants Operating ATSs.15a. Market participants operating ATSs must properly design their systems to 

avoid violations of the CEA, Commission regulations, or DCM and SEF rules related to fraud, disruptive trading practices, manipulation and trade practice violations. They must also ensure that their ATSs include all applicable pretrade risk 

controls and system safeguards as described herein. 

15b. ATS Development 

and Change Management.

Trading Platforms and Market Participants Operating ATSs.15b. Trading platforms and market participants operating ATSs must maintain a development environment that is adequately isolated from the production trading 

environment. The development environment may include computers, networks, 

and databases, and should be used by software engineers while developing, 

modifying, and testing source code. 

Firms must maintain a source code repository to manage source code access, persistence, and changes. 

Firms must establish and document procedures for communicating the functionality 

and requirements of, and changes to, their proprietary software. These procedures must include an audit trail of material changes that would allow them to 

determine, for each change: Who made it, when they made it, and what the purpose was for the change. 

Firms must have documented policies and procedures that allow representatives 

from trading, risk, and software management to approve changes and to verify 

internal testing before a new or modified trading system can be enable in production. 

15c. ATS Testing ................ Trading Platforms and Market Participants Operating ATSs.15c. Market participants operating ATSs must test each ATS both internally and on 

each trading platform on which an ATS will operate. Relevant tests include, but 

are not limited to, unit testing, functional testing (both integration and regression 

testing), non-functional testing, and acceptance testing. Functional testing must 

include all applicable pre-trade risk controls, post-trade reports and other measures and system safeguards. Non-functional testing must include testing under 

stressed market conditions. 

Market participants must perform such testing on each algorithm prior to initial deployment, and prior to re-deployment, after certain modifications to the algorithm. 

Trading Platforms must provide test environments that simulate the production trading environment so that market participants may conduct exchange-based conformance testing on their ATSs once they have completed internal testing. Conformance testing must include tests for all ATS risk mitigation controls that are 

able to be tested by the exchange. 

Exchange-based conformance testing must be done after certain modifications to 

the operating code. 

15d. ATS Monitoring and 

Supervision.

Market Participants Operating ATSs.15d. Market participants operating ATSs must ensure that their ATSs are subject to 

continuous real-time monitoring and supervision by trained and qualified staff at 

all times while engaged in trading. 

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Potential system safeguard Party(s) to implement 

safeguard Substance of safeguard 

Appropriate supervision includes automated alerts when ATS order behavior 

breaches design parameters or when market conditions diverge from program 

expectations. It also includes automated alerts upon loss of network connectivity 

or data feeds. 

Monitoring and supervision staff must have the ability and authority to disengage 

the ATS and to cancel resting orders when system or market conditions require 

it, including the ability to contact trading platform staff to seek information and 

cancel orders. They must also have acceptable dashboards and control panels to 

monitor and interact with the ATS. 

Monitoring and supervision staff must record the time when they assume responsibility for an ATS and the time when they relinquish control to others. Recording 

must be achieved through distinct log-ins to the required control panel by each 

staff person. Log-in must also be subject to access controls that ensure the correct staff person is identified. 

15e. Training for ATS Monitoring Staff (see section 

III(E)(2)(b) and footnote 

97).

Market Participants Operating ATSs.15e. Firms operating ATSs must develop training for all staff involved in monitoring 

or designing ATSs. Training must, at a minimum, cover design standards, event 

communication procedures, and requirements for notifying exchange and commission staff when risk events occur. 

Additionally, each firm must develop, document, and implement training policies 

that ensure human monitors are adequately trained for each new algorithm that 

is implemented. Training must include, at a minimum, the economic rationale for 

the algorithm and mechanics of the underlying process, as well as the automated 

and non-automated risk controls that are applicable to the algorithm. 

15f. Crisis Management 

Procedures.

Trading Platforms and Market Participants Operating ATSs.15f. Trading platforms and market participants operating ATSs must develop and 

document procedures that direct the actions of ATS supervisors, exchange trading monitors, and support staff in the event that an algorithm malfunctions or responds to market signals in an unanticipated manner. 

Procedures should direct the process for evaluating, managing, and mitigating market disruption and firm risk. The procedures should also specify people to be notified in the event of an error that results in violations of risk profiles or potential 

violations of exchange or Commission rules. 

SELF-CERTIFICATIONS 

AND NOTIFICATIONS 

16a. Self-Certification and 

Clearing Firm Certification.

Market Participants Operating ATSs.16a. All firms operating ATSs must certify annually that their ATSs individually and 

collectively (i.e. at the algorithm, account, and firm levels) comply with all Commission and trading platform requirements regarding pre-trade risk controls and 

post-trade reports and other measures, as well as all applicable risk controls. 

Clearing firms must institute reasonable measures to confirm that their client trading firms implement the pre-trade risk controls that are required. 

16b. Risk Event Notification Requirements.Market Participants Operating ATSs, Trading platforms.16b. Market participants operating ATSs must notify the exchange, and the exchange must notify the Commission whenever an algorithm violates its design 

parameters or whenever risk control technologies or processes do not function 

as planned even if they do not result in destabilization of the markets. The exchange must also notify the Commission whenever any of its own risk management technologies or processes violate design parameters or do not function as 

planned. 

17. ATS or Algorithm Identification.Market Participants Operating ATSs.A unique identifier would be assigned to each ATS or algorithm, and all orders submitted by that ATS or algorithm would be tagged with the identifier. 

18. Data Reasonability 

Checks.

Market Participants Operating ATSs.All firms operating ATSs must have ‘‘reasonability checks’’ on incoming market 

data and other data (including social media). 

D. Other Protections 

Potential additional 

protection 

Party(s) to implement 

protection Substance of protection 

19. Registration of All 

Firms Operating ATSs.

Market Participants Operating ATSs.All firms operating ATSs to trade solely for their own account and not otherwise 

registered with the Commission must register with the Commission. 

20. Market Quality Data ..... Trading Platforms ............... Trading platforms must provide to all market participants a daily summary of market 

quality for each product traded on its platform. 

The feeds would include measures of execution quality including: (1) Effective 

spreads; (2) order to fill ratios; (3) execution speed for different types of orders 

and different order sizes; (4) aggressiveness imbalance; (5) price impact for 

given trade sizes; (6) average order duration; (7) order efficiency; (8) rejection 

order ratio; (9) net position changes versus volume; (10) branching ratios; (11) 

volume imbalance and trade intensity; (12) Herfindahl-Hirschman Indexes based 

on market share of open positions under common control; and (13) metrics on 

the number of price changing trades involving ATSs. 

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Potential additional 

protection 

Party(s) to implement 

protection Substance of protection 

21. Market Quality Incentives.Trading Platforms ............... Trading platforms must implement changes that will limit market participants’ abilities to improperly advantage their own orders in ways that do not contribute to 

efficient price discovery, including, for example: (1) Utilize a trade allocation formula that is an intermediate between a cardinal ranking (time-weighted), Pro 

Rata allocation formula and a Price/Time allocation formula; (2) Create a new 

limit order type that would prioritize orders that remain resting in the order book 

for some minimum amount of time; (3) Require orders not fully visible in the 

order book to go to the end of the queue (within limit price) with respect to trade 

allocation; (4) Aggregate multiple, small orders from the same legal entity entered contemporaneously at the same price level and assign them the lowest priority time stamp of all the orders so aggregated; (5) Require exchanges to use 

batch auctions once per half second at random times rather than use continuous 

trade matching; and (6) Limit visibility into the order book to aggregate size available at a limit price. 

22. Policies and Procedures for identifying 

‘‘related’’ contracts.

Trading Platforms ............... Trading platforms must develop and implement policies and procedures for identifying securities or products listed on other exchanges that would constitute ‘‘related’’ contracts to those that are listed on their own exchange. 

23. Standardize and Simplify Order Types.Trading Platforms ............... Trading platforms must work with the Commission to standardize order types 

across exchanges, and to reduce the overall number of order types that have 

complex logic embedded within them. 

Issued in Washington, DC, on September 9, 

2013, by the Commission. 

Christopher J. Kirkpatrick, 

Deputy Secretary of the Commission. 

Appendices to Concept Release on Risk 

Controls and System Safeguards for 

Automated Trading Environments 

Appendix 1—Commission Voting 

Summary 

On this matter, the following 

Commissioners voted in the affirmative: 

Chairman Gensler, Commissioner Chilton 

(with the concurrence set out below in 

Appendix 3), Commissioner O’Malia (with 

the concurrence set out below in Appendix 

4), and Commissioner Wetjen. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Support of 

Chairman Gary Gensler 

We have witnessed a fundamental shift in 

markets from human-based trading to highly 

automated electronic trading. Automated 

trading systems, including high frequency 

traders, enter the market and execute trades 

in a matter of milliseconds without human 

involvement. Electronic trading makes up 

over 91 percent of the futures market. The 

swaps market also is moving toward 

electronic trading. 

In our oversight of U.S. derivatives 

markets, both futures and swaps, the 

Commodity Futures Trading Commission 

(CFTC) must look to continually adapt our 

regulations in these changing times. Our 

mission to promote transparency, ensure for 

market integrity and prohibit abuses is just as 

important in the fast-moving world of 

electronic trading as it was when people 

traded over the phone, in a pit or on a floor. 

The CFTC already has taken a number of 

important steps to keep pace with rapidly 

evolving 21st-century markets. We have 

adopted rules to implement pre-trade risk 

filters for futures commission merchants, 

swap dealers, designated contract markets 

and swap execution facilities. We also have 

new rules to prohibit disruptive trading 

practices and other market abuses. 

In publishing this Concept Release, we are 

seeking public input on what additional risk 

controls and system safeguards are 

appropriate given this ever-changing 

technological environment. Traditional risk 

controls and system safeguards, many of 

which were developed according to human 

speed and floor-based trading, must be 

evaluated in light of new market realities. 

Further, as sure as computers and 

programs have had technical glitches in the 

past, we must look to risk controls and 

system safeguards to protect markets when 

such glitches inevitably occur again. This 

Concept Release is intended to stir public 

discussion and debate on how best to protect 

the functioning of markets for the benefit of 

farmers, ranchers, merchants and other end 

users who rely on markets to hedge risk— 

particularly in light of the reality that the 

majority of the market is using automated 

trading systems. 

Appendix 3—Concurrence of 

Commissioner Bart Chilton 

While I concur in the concept release, am 

most appreciative of the staff work, and am 

largely pleased at the result, this has taken 

far too long to come to fruition. 

In general, those involved in financial 

markets seem to have blindly accepted that 

technology is almost always a good thing. Yet 

we continue to see major technology 

problems, like NASDAQ shutting down twice 

in as many weeks. Last year it was NYSE. In 

the futures world, we see technology glitches 

that simply should not occur. I acknowledge 

that, with the staggering volume of trading, 

some might simply be astounded that—in the 

main—it works so well. But it doesn’t work 

well enough if we continue to see 

aberrations—particularly if they are market 

missteps that could have been avoided. 

That’s to say nothing of the high frequency 

cheetah traders who have, some I am 

convinced intentionally, contorted markets 

in a manipulative fashion. In addition, there 

are a shocking number of transactions that 

appear to be wash trades—that also has the 

possibility of impairing the fair and effective 

functioning of financial markets. 

I’m pleased we are moving this concept 

release forward, but given this environment 

it has taken way too long. If we continue at 

this pace, Rip Van Winkle could keep up 

with any possible action we might take. We 

need to understand that some of these issues 

are urgent and need action now. They can’t 

wait another year or more. 

At the same time, there is one thing that 

can be done now. In fact, I suggested this 

policy shift be included in the concept 

release, but since it is a larger issue than just 

a technology-related matter, it was decided to 

omit it. That’s fine, because my suggestion is 

really an action for the Congress. 

As long as we have a puny penalty regime 

at the CFTC, we are going to see traders risk 

getting caught because the potential profits 

are so great. We can only impose a civil 

monetary penalty (CMP) of $140,000 per 

violation. That’s the law. Furthermore, the 

case history suggests that a ‘‘violation’’ may 

be only once per day. In these millisecond 

markets where we have seen a million 

change hands in a minute, $140k is a joke— 

and it’s not very funny. 

This Agency is hampered by staffing needs 

due to a lack of funding. We have hundreds 

of cases being investigated right now. The 

least Congress can do, so that we can try and 

keep up—and if need be, cage the cheetahs 

and others who violate the Commodity 

Exchange Act—is to increase the CMPs. 

Specifically, I’ve suggested increasing the 

maximum penalty levels to $1 million per 

violation for individuals and $10 million for 

firms. That would be a deterrent. That would 

stop some of the cheetahs and others out 

there who are tempted to use powerful 

technologies in unlawful ways. 

I look forward to receiving comments, and 

hope that we let no moss grow on this matter. 

Appendix 4—Statement of Concurrence 

by Commissioner Scott D. O’Malia 

During my time at the Commodity Futures 

Trading Commission (‘‘Commission’’), I have 

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124This document is available at http://

www.cftc.gov/ucm/groups/public/@newsroom/

documents/file/tac103012_reference.pdf. 

consistently emphasized that the 

Commission must have a strong 

understanding of today’s highly automated 

and interconnected trading environments in 

order to oversee its markets effectively. As 

head of the Commission’s Technology 

Advisory Committee (‘‘TAC’’), I have 

committed considerable TAC time and 

resources to strengthening our understanding 

of automated markets. I am grateful for all the 

hard work of the TAC members as well as the 

efforts of the members of the Subcommittee 

on Data Standardization and the 

Subcommittee on Automated and High 

Frequency Trading, who have devoted hours 

of work on issues related to automated 

trading systems and pre-trade functionality. I 

hope that this Concept Release, and in 

particular the public comments the 

Commission receives in response, will build 

on this work. 

The Concept Release asks over a hundred 

questions, which is appropriate given the 

importance of hearing from all sectors of the 

industry and benefiting from their knowledge 

and views of automated trading. I would like 

to highlight a few questions that I believe it 

would be particularly constructive to receive 

feedback from the public on. The first is to 

establish what current protections are in the 

market today and the extent to which the 

technology is deployed, as well as its 

effectiveness. The second is an overarching 

question: Whether there is a need for 

regulatory action with regard to any of the 

measures currently in the market. In other 

words, should the Commission federalize any 

current industry practices/standards? Third, 

it would be helpful to receive public 

feedback on the definitions for highfrequency trading and automated trading 

systems that the TAC, after extensive effort 

by its Subcommittee on Automated and High 

Frequency Trading, has proposed. Finally, it 

would be beneficial to receive feedback on 

the possibility of a registration requirement 

for firms operating automated trading 

systems and not otherwise registered with 

the Commission. The Concept Release cites 

the definition of ‘‘floor broker’’ as the 

potential basis for such a requirement; I am 

interested to get public input on whether 

this, or any other provision in the 

Commission’s statute or regulations, can 

serve as a valid foundation for registration. 

The Concept Release is far from perfect. 

For example, it could have provided a more 

thorough and clear cataloguing of existing 

industry practices and recommendations; a 

recent TAC reference document is more clear 

and concise in compiling existing standards 

and recommendations in the market today.124

Nevertheless, I support today’s issuance of 

the Concept Release in order to receive input 

from market participants on all of the issues 

contained herein. I look forward to reviewing 

the comments submitted in response to the 

Concept Release. 

[FR Doc. 2013–22185 Filed 9–10–13; 8:45 am] 

BILLING CODE 6351–01–P 

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