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[Federal Register: November 2, 2010 (Volume 75, Number 211)]
[Proposed Rules]               
[Page 67301-67303]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no10-16]                         

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN Number 3038-AD26

 
Antidisruptive Practices Authority Contained in the Dodd-Frank 
Wall Street Reform and Consumer Protection Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Advance notice of proposed rulemaking; request for comments.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the ``Dodd-Frank Act'') amends section 4c(a) of the Commodity Exchange 
Act (``CEA'') in section 747 to expressly prohibit certain trading 
practices deemed disruptive of fair and equitable trading. The 
Commodity Futures Trading Commission (``Commission'') is issuing this 
advance notice of proposed rulemaking and request for public comment to 
assist the Commission in promulgating such rules and regulations to 
meet the requirements of section 747.

DATES: Comments must be in writing and received by January 3, 2011.

ADDRESSES: You may submit comments, identified by RIN number AD26, by 
any of the following methods:
     Agency Web site, via its Comments Online process: Comments 
may be submitted to: http://comments.cftc.gov. Follow the instructions 
for submitting comments on the Web site.
     Mail: David A. Stawick, 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.
    All comments must be submitted in English, or if not, 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 is exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the established procedures in 
CFTC Regulation 145.9.\1\
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    \1\ 17 CFR 145.9.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, 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 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Robert Pease, Counsel to the Director 
of Enforcement, 202-418-5863, rpease@cftc.gov, or Mark D. Higgins, 
Counsel to the Director of Enforcement, 202-418-5864, 
mhiggins@cftc.gov, Division of Enforcement, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII 
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'') 
\4\ to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight. Section 747 of the Dodd-Frank Act amends 
section 4c(a) of the CEA to add a new section entitled ``Disruptive 
Practices.''
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law No. 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq. (2006).
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II. Solicitation for Comments About Disruptive Practices Pursuant to 
Dodd-Frank Act Section 747

    In section 747 of the Dodd-Frank Act, Congress amended the CEA to 
expressly prohibit certain trading practices that it determined were 
disruptive of fair and equitable trading. Dodd-Frank section 747 amends 
section 4c(a) of the CEA to make it unlawful for any person to engage 
in any trading, practice, or conduct on or subject to the rules of a 
registered entity that--
    (A) violates bids or offers;
    (B) demonstrates intentional or reckless disregard for the orderly 
execution of transactions during the closing period; or
    (C) is, is of the character of, or is commonly known to the trade 
as,

[[Page 67302]]

``spoofing'' (bidding or offering with the intent to cancel the bid or 
offer before execution).
    Dodd-Frank section 747 also amends section 4c(a) by granting the 
Commission authority to promulgate such ``rules and regulations as, in 
the judgment of the Commission, are reasonably necessary to prohibit 
the trading practices'' enumerated in section 747 ``and any other 
trading practice that is disruptive of fair and equitable trading.'' 
The prohibition on the disruptive practices specified in new section 
4c(a) will become effective 360 days after the enactment of the Dodd-
Frank Act.
    The Commission invites comment on all aspects of Dodd-Frank Act 
section 747. In particular, commenters are encouraged to address the 
following questions:

    1. Should the Commission provide additional guidance as to the 
nature of the conduct that is prohibited by the specifically 
enumerated practices in paragraphs (A-C)?
    2. With respect to the practice enumerated in paragraph (A)--
violating bids and offers--how should the provision be applied in 
the context of electronic trading platforms with pre-determined 
order-matching algorithms that preclude a trader from executing an 
order against a quote other than the best one available? In 
particular, should the provision apply to ``buying the board'' in an 
illiquid market? \5\
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    \5\ Specifically, in a sufficiently illiquid market, a trader 
might enter an order for a large quantity at a price that is so far 
beyond the best available resting quote that the order executes 
against all resting quotes. In doing so, the trader would establish 
a new artificial best bid or offer that does not reflect market 
forces. See In re Henner, 30 Agric. Dec. 1151, 1155 (1971) 
(Defendant ``bought the board''--accepted all outstanding offers--
and then bid for a single contract well in excess of the previously 
prevailing price. He was sanctioned for manipulating the price of 
egg futures; the fact that he paid more than necessary for shell egg 
futures was the basis for finding an artificial price).
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    3. How should the Commission distinguish between orderly and 
disorderly trading during the closing period as articulated in 
paragraph (B)? What factors should a factfinder consider in this 
inquiry?
    4. How should ``orderly execution'' be defined? How should the 
closing period be defined? Should the definition of closing period 
include:
    a. Daily settlement periods?
    b. Some period prior to contract expiration?
    c. Trading periods used to establish indices or pricing 
references?
    5. Should the Commission recognize that a trading practice or 
conduct outside of the closing period is actionable so long as it 
``demonstrates intentional or reckless disregard for the execution 
of transactions during the closing period?''
    6. Should (B) extend to order activity as well as consummated 
transactions?
    7. Should executing brokers have an obligation to ensure that 
customer trades are not disruptive trade practices? If so, in what 
circumstances? What pre-trade risk checks should executing brokers 
have in place to ensure customers using their automated trading 
systems, execution systems or access to their trading platforms do 
not engage in disruptive trade practices?
    8. How should the Commission distinguish ``spoofing,'' as 
articulated in paragraph (C), from legitimate trading activity where 
an individual enters an order larger than necessary with the 
intention to cancel part of the order to ensure that his or her 
order is filled?
    9. Should the Commission separately specify and prohibit the 
following practices as distinct from ``spoofing'' as articulated in 
paragraph (C)? Or should these practices be considered a form of 
``spoofing'' that is prohibited by paragraph (C)?
    a. Submitting or cancelling bids or offers to overload the 
quotation system of a registered entity, or delay another person's 
execution of trades;
    b. Submitting or cancelling multiple bids or offers to cause a 
material price movement;
    c. Submitting or cancelling multiple bids or offers to create an 
appearance of market depth that is false.
    10. Does partial fill of an order or series of orders 
necessarily exempt that activity from being defined as ``spoofing''?
    11. Are there ways to more clearly distinguish the practice of 
spoofing from the submission, modification, and cancelation of 
orders that may occur in the normal course of business?
    12. Should the Commission specify an additional disruptive 
trading practice concerning the disorderly execution of particularly 
large orders during periods other than the closing period? If so, at 
what size should this provision become effective and how should the 
Commission distinguish between orderly and disorderly trading?
    13. Should the Commission specify and prohibit other additional 
practices as disruptive of fair and equitable trading?
    14. Should the Commission articulate specific duties of 
supervision relating to the prohibited trading practices articulated 
in paragraphs (A-C) (as well as any other trading practice that the 
Commission determines to be disruptive of fair and equitable 
trading) to supplement the general duty to supervise contained in 
Commission Regulation 166.3? To which entities should these duties 
of supervision apply?
    15. Should the Commission consider promulgating rules to 
regulate the use of algorithmic or automated trading systems to 
prevent disruptive trading practices? If so, what kinds of rules 
should the Commission consider?
    16. Should the Commission consider promulgating rules to 
regulate the design of algorithmic or automated trading systems to 
prevent disruptive trading practices? If so, what kinds of rules 
should the Commission consider?
    17. Should the Commission consider promulgating rules to 
regulate the supervision and monitoring of algorithmic or automated 
trading systems to prevent disruptive trading practices? If so, what 
kinds of rules should the Commission consider?
    18. Should the Commission promulgate additional rules 
specifically applicable to the use of algorithmic trading 
methodologies and programs that are reasonably necessary to prevent 
algorithmic trading systems from disrupting fair and equitable 
markets? If so, what kinds of rules should the Commission consider?
    19. Should algorithmic traders be held accountable if they 
disrupt fair and equitable trading? If so, how?

    When commenting on the above questions, please comment generally 
and specifically, and please include empirical data and other 
information in support of such comments, where appropriate and 
available, regarding any of the comments provided and please also take 
into account the statutory text of Dodd-Frank Act section 747, 
reprinted herein as follows:

Sec. 747. ANTIDISRUPTIVE PRACTICES AUTHORITY

    Section 4c(a) of the Commodity Exchange Act (7 U.S.C. 6c(a)) (as 
amended by section 746) is amended by adding at the end the 
following:
    ``(5) Disruptive practices.--It shall be unlawful for any person 
to engage in any trading, practice, or conduct on or subject to the 
rules of a registered entity that--
    ``(A) violates bids or offers;
    ``(B) demonstrates intentional or reckless disregard for the 
orderly execution of transactions during the closing period; or
    ``(C) is, is of the character of, or is commonly known to the 
trade as, `spoofing' (bidding or offering with the intent to cancel 
the bid or offer before execution).
    ``(6) Rulemaking authority.--The Commission may make and 
promulgate such rules and regulations as, in the judgment of the 
Commission, are reasonably necessary to prohibit the trading 
practices described in paragraph (5) and any other trading practice 
that is disruptive of fair and equitable trading.
    ``(7) Use of swaps to defraud.--It shall be unlawful for any 
person to enter into a swap knowing, or acting in reckless disregard 
of the fact, that its counterparty will use the swap as part of a 
device, scheme, or artifice to defraud any third party.''

    Dated: October 26, 2010.

    By the Commodity Futures Trading Commission.
David A. Stawick,
Secretary of the Commission.

Statement of Chairman Gary Gensler Anti-Disruptive Practices Authority 
Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer 
Protection Act, October 26, 2010

    I support the proposed Advanced Notice of Proposed Rulemaking 
concerning disruptive trading practices. Congress expressly prohibited 
three trading practices that it deemed were disruptive of fair and 
equitable trading. In addition, Congress granted the Commission 
authority to prohibit other

[[Page 67303]]

trading practices that are disruptive of fair and equitable trading. 
Today's advanced notice of proposed rulemaking asks 18 questions, the 
answers to which will inform moving forward with a proposed rule on 
this issue. Commission staff also will lead a roundtable on December 2 
on disruptive trading practices. I am particularly interested in 
hearing from the public on algorithmic trading. In addition to the 
public comments and the December 2 roundtable, we will benefit from the 
input of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory 
Issues.

[FR Doc. 2010-27547 Filed 11-1-10; 8:45 am]
BILLING CODE 6351-01-P
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