Vol. 80 Thursday, 

No. 242 December 17, 2015 

Part II 

Commodity Futures Trading Commission 

17 CFR Parts 1, 38, 40, et al. 

Regulation Automated Trading; Proposed Rule 


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78824 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

1Concept Release on Risk Controls and System 

Safeguards for Automated Trading Environments, 

78 FR 56542 (Sept. 12, 2013). 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 38, 40, and 170 

RIN 3038–AD52 

Regulation Automated Trading 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is proposing a series of 

risk controls, transparency measures, 

and other safeguards to enhance the 

regulatory regime for automated trading 

on U.S. designated contract markets 

(‘‘DCMs’’) (collectively, ‘‘Regulation 

AT’’). The Commission’s proposals 

build on efforts by numerous entities in 

recent years to promote best practices 

and regulatory standards for automated 

trading, including standards and best 

practices for algorithmic trading systems 

(‘‘ATSs’’), electronic trade matching 

engines, and new connectivity methods 

that characterize modern financial 

markets. In 2012 the Commission 

adopted rules requiring futures 

commission merchants (‘‘FCMs’’), swap 

dealers (‘‘SDs’’), and major swap 

participants (‘‘MSPs’’) to use automated 

means to screen orders for compliance 

with certain risk-based limits. It also 

adopted rules requiring certain financial 

risk control requirements for DCMs 

offering direct market access to their 

customers. In 2013 the Commission 

published an extensive Concept Release 

on Risk Controls and System Safeguards 

for Automated Trading Environments 

(‘‘Concept Release’’), compiling in one 

document a comprehensive discussion 

of industry practices, Commission 

regulations, and evolving concerns in 

automated trading.1 Now, through this 

notice of proposed rulemaking 

(‘‘NPRM’’) for Regulation AT, the 

Commission seeks to update 

Commission rules in response to the 

evolution from pit trading to electronic 

trading. In particular, the Commission is 

proposing to adopt a comprehensive 

approach to reducing risk and 

increasing transparency in automated 

trading. Proposed Regulation AT is 

designed to consolidate previous work 

by industry participants, the 

Commission, and fellow regulators into 

a unified body of law addressing 

automation in order placement and 

execution in U.S. derivatives markets. 

The Commission welcomes all public 

comments. 

DATES: Comments must be received on 

or before March 16, 2016. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AD52, by any of 

the following methods: 

• CFTC Web site: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Comments Online process 

on the Web site. 

• Mail: Send to Christopher 

Kirkpatrick, 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 so 

treated 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, Special Counsel, Division of 

Market Oversight, mdahlman@cftc.gov 

or 202–418–5264; Mark Schlegel, 

Special Counsel, Division of Market 

Oversight, mschlegel@cftc.gov or 202– 

418–5055; Michael Penick, Economist, 

Office of the Chief Economist, 

mpenick@cftc.gov or 202–418–5279; 

Richard Haynes, Economist, Office of 

the Chief Economist, rhaynes@cftc.gov 

or 202–418–5063; Andrew Ridenour, 

Senior Trial Attorney, Division of 

Enforcement, aridenour@cftc.gov or 

202–418–5438; or John Dunfee, 

Assistant General Counsel, Office of 

General Counsel, jdunfee@cftc.gov or 

202–418–5396. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Overview—Development of Automated 

Trading Environment 

B. Risks and Potential Benefits Associated 

With Automated Trading 

C. The Proposed Regulations 

1. Overview of NPRM 

2. The Proposed Regulations Under Parts 1, 

38, 40, and 170 

II. Background on Regulatory Responses to 

Automated Trading 

A. The Commission’s Regulatory Response 

to Date 

B. The Commission’s 2013 Concept Release 

C. Other Recent Regulatory Responses 

1. SEC Regulatory Initiatives 

2. FINRA Initiatives 

3. European and Other Regulatory 

Initiatives 

D. Industry and Regulatory Best Practices 

and Recommendations 

1. NFA Compliance Rule 2–9: Supervision 

2. FIA Reports on Automated Trading 

3. IOSCO Reports on Electronic Trading 

4. CFTC TAC Subcommittee 

5. FIX Risk Management Working Group 

6. Senior Supervisors Group (SSG) Briefing 

Note 

7. Treasury Market Practices Group Best 

Practices 

III. Recent Disruptive Events in Automated 

Trading Environments 

IV. Overview of Regulation AT 

A. Concept Release/Regulation AT 

Terminology 

B. Commenter Preference for PrinciplesBased Regulations 

C. Multi-Layered Approach to Pre-Trade 

Risk Controls and Other Measures 

D. Codification of Defined Terms Used 

Throughout Regulation AT 

1. ‘‘Algorithmic Trading’’—§ 1.3(zzzz) 

2. ‘‘Algorithmic Trading Compliance 

Issue’’—§ 1.3(tttt) 

3. ‘‘Algorithmic Trading Disruption’’— 

§ 1.3(uuuu) 

4. ‘‘Algorithmic Trading Event’’— 

§ 1.3(vvvv) 

5. ‘‘AT Order Message’’—§ 1.3(wwww) 

6. ‘‘AT Person’’—§ 1.3(xxxx) 

7. ‘‘Direct Electronic Access’’—§ 1.3(yyyy) 

E. Registration of Certain Persons Not 

Otherwise Registered With 

Commission—§ 1.3(x) 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

F. RFA Standards for Automated Trading 

and Algorithmic Trading Systems— 

§ 170.19 

1. Policy Discussion 

2. Description of Regulation 

3. Request for Comments 

G. AT Persons Must Become Members of 

an RFA—§ 170.18 


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2For example, press reports surrounding the 

initiation of CME’s ‘‘top step’’ rule in the S&P 500 

stock-index pit in 1987 indicated that brokers 

preferred the top step to ‘‘get a panoramic view of 

the trading activity and quickly grab customer order 

sheets being relayed by nearby clerks.’’ They 

described a trading pit where ‘‘[s]ome 400 traders 

are jammed shoulder-to-shoulder in the 

amphitheater-like pit, which accounts for threefourths of the nation’s stock-index futures trading.’’ 

See Jouzaitis, Carol, ‘‘Merc Launches ‘Top-step’ 

Reform,’’ Chicago Tribune (June 22, 1987) available 

at http://articles.chicagotribune.com/1987-06-22/

business/8702160155_1_dual-trading-stock-indexfutures-market-chicago-mercantile-exchange. 

1. Policy Discussion 

2. Description of Regulation 

3. Request for Comments 

H. Pre-Trade and Other Risk Controls for 

AT Persons—§ 1.80 

1. Concept Release Comments on Pre-Trade 

and Other Risk Controls 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

I. Standards for Development, Testing, 

Monitoring, and Compliance of 

Algorithmic Trading Systems—§ 1.81 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

J. Risk Management by Clearing Member 

FCMs—§ 1.82 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Discussion of Persons Subject to 

Proposed §§ 1.80 and 1.82 

5. Request for Comments 

K. Compliance Reports Submitted by AT 

Persons and Clearing FCMs to DCMs; 

Related Recordkeeping Requirements— 

§ 1.83 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

L. Risk Controls for Trading: Direct 

Electronic Access Provided by DCMs— 

§ 38.255(b) and (c) 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

M. Disclosure and Transparency in DCM 

Trade Matching Systems—§ 38.401(a) 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

N. Pre-Trade and Other Risk Controls at 

DCMs—§ 40.20 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

O. DCM Test Environments for AT 

Persons—§ 40.21 

1. Concept Release Comments 

2. Description of Regulation 

3. Request for Comments 

P. DCM Review of Compliance Reports by 

AT Persons and Clearing FCMs; DCM 

Rules Requiring Certain Books and 

Records; and DCM Review of Such 

Books and Records as Necessary— 

§ 40.22 

1. Concept Release Comments 

2. Description of Regulation 

3. Policy Discussion 

4. Request for Comments 

Q. Self-Trade Prevention Tools—§ 40.23 

1. Concept Release Comments 

2. Commission Analysis of Amount of SelfTrading in the Marketplace 

3. Description of Regulation 

4. Policy Discussion 

5. Request for Comments 

R. DCM Market Maker and Trading 

Incentive Programs—§§ 40.25–40.28 

1. Policy Discussion 

2. Description of Regulations 

3. Request for Comments 

V. Related Matters 

A. Calculation of Number of Persons 

Subject to Regulations 

1. Request for Comments 

B. Calculation of Hourly Wage Rates Used 

in Related Matters 

C. Regulatory Flexibility Act 

1. FCMs and DCMs 

2. AT Persons 

3. Request for Comments 

D. Paperwork Reduction Act 

1. Information Provided by Reporting 

Entities/Persons 

a. § 1.3(x)(3)—Submissions by newly 

registered floor traders 

b. § 1.83(a)—Compliance reports submitted 

by AT Persons to DCMs 

c. § 1.83(b)—Compliance reports submitted 

by clearing member FCMs to DCMs 

d. § 1.83(c)—AT Person retention and 

production of books and records 

e. § 1.83(d)—Clearing member FCM 

retention and production of books and 

records 

f. § 38.401(a) and (c)—Public dissemination 

of information by DCMs pertaining to 

electronic matching platforms 

g. § 40.23—Information publicly 

disseminated by DCMs regarding selftrade prevention 

h. § 40.25—Information in public rule 

filings provided by DCMs regarding 

Market Maker and Trading Incentive 

Programs 

i. § 40.26—Information provided by DCMs 

to the Division of Market Oversight upon 

request regarding Market Maker and 

Trading Incentive Programs 

2. Information Collection Comments 

E. Cost Benefit Considerations 

1. The Statutory Requirement for the 

Commission to Consider the Costs and 

Benefits of its Actions 

2. Concept Release Comments Regarding 

Costs and Benefits 

3. The Commission’s Cost-Benefit 

Consideration of Regulation AT— 

Baseline Point 

4. The Commission’s Cost-Benefit 

Consideration of Regulation AT—CrossBorder Effects 

5. General Request for Comment 

6. The Commission’s Cost-Benefit 

Consideration of Regulation AT— 

Proposed Definitions 

7. Pre-Trade Risk Controls, Testing and 

Supervision of Automated Systems, 

Requirement to Submit Compliance 

Reports, and Other Related Algorithmic 

Trading Requirements 

8. Requirements for Certain Entities to 

Register as Floor Traders 

9. Transparency in Exchange Trade 

Matching Systems 

10. Self-Trade Prevention 

11. Market-Maker and Trading Incentive 

Programs 

VI. Aggregate Estimated Cost of Regulation 

AT 

VII. List of All Questions in the NPRM 

I. Introduction 

A. Overview—Development of 

Automated Trading Environment 

U.S. derivatives markets have 

historically relied on manual processes 

for the origination of orders, 

transmission of information, and 

execution of trades. Trading decisions 

were typically initiated by natural 

persons, and transmitted through 

intermediaries via comparatively simple 

communications networks. Execution 

occurred in open-outcry trading pits 

operated by DCMs. Access to these pits 

was limited to brokers and traders 

granted trading privileges by the 

exchange. A range of other processing 

and risk management services were 

equally reliant on manual processes, 

and the complete trading system could 

move only as fast as its human decisionmakers. Trading information was often 

recorded on paper order tickets and 

trading cards, and time-stamps were 

recorded only to the nearest minute. 

The physical element of trading was 

reflected in exchange or Commission 

rules governing diverse matters such as 

the types of trading permitted from the 

top step of a futures pit,2 as well as 

requirements that certain orders for 

execution in a trading pit be recorded in 

‘‘non-erasable ink.’’ This basic structure 

remained constant for decades, and 

produced a parallel regulatory 

framework also premised on natural 

persons and human decision-making 

speeds. 

Today, derivatives markets have 

transitioned from the manual processes 

described above to highly automated 

trading and trade matching systems. 

Modern DCMs and DCM market 

participants, in particular, are 

characterized by a wide array of 

algorithmic and electronic systems for 

the generation, transmission, 

management, and execution of orders, 

as well as systems used to confirm 

transactions, communicate market data, 

and link markets and market 

participants through high-speed 

networks. Collectively, such DCM and 

market participant trading systems 

constitute the ‘‘automated trading 


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78826 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

3See IOSCO Report on Regulatory Issues Raised 

by Technological Changes, infra note 103 at 10. 

4See CEA Section 3, ‘‘Findings and Purposes,’’ 

noting in Section 3(a) that transactions subject to 

the CEA are ‘‘affected with a national public 

interest’’ and in Section 3(b) that ‘‘[t]o foster these 

public interests, it is further the purpose of this Act 

to deter... any other disruptions to market 

integrity; to ensure the financial integrity of all 

transactions subject to the Act and the avoidance 

of systemic risk;... and to promote responsible 

innovation and fair competition among boards of 

trade... and market participants.’’ 

5Trading on CME Globex was initially limited to 

‘‘after-hours’’ periods when the Exchange’s openoutcry pits were closed. The first products offered 

on Globex in 1992 included German mark and 

Japanese yen futures and options on futures 

contracts, followed by other FX and currency 

products. In 1997, CME launched the E-mini S&P 

500 futures contract, the first CME product 

available exclusively on Globex, including during 

regular (open-outcry) trading hours in other CME 

products. Globex monthly volume exceeded 

100,000 contracts for the first time in 1997. In 1999, 

CME for the first time began offering ‘‘side-by-side’’ 

trading, allowing its Eurodollar contract to be 

traded both on Globex and in open-outcry during 

regular trading hours. Side-by-side trading was 

expanded in the ensuing years, including for 

example to FX products in 2001. Globex average 

daily volume exceeded 1,000,000 contracts for the 

first time in 2002. By 2004, Globex trading volume 

began exceeding open-outcry volume for the first 

time. Through agreements or mergers, CME began 

listing NYMEX products (2006) and CBOT products 

(2007) on Globex as well. See Aldinger, Lori, and 

Labuszewski, John W., ‘‘ELECTRONIC TRADING 

Twenty Years of CME Globex’’ (2012), available at 

http://www.cmegroup.com/education/files/globexretrospective-2012-06-12.pdf. 

6Haynes, Richard & Roberts, John S., ‘‘Automated 

Trading in Futures Markets,’’ CFTC Office of Chief 

Economist (Mar. 13, 2015), available at http://

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

analysis/documents/file/oce_automatedtrading.pdf. 

7See CME Press Release, ‘‘CME Group to Close 

Most Open Outcry Futures Trading in Chicago and 

New York by July; Most Options Markets to Remain 

Open,’’ (Feb. 4, 2014) available at http://

cmegroup.mediaroom.com/2015-02-04-CME-Groupto-Close-Most-Open-Outcry-Futures-Trading-inChicago-and-New-York-by-July-Most-OptionsMarkets-to-Remain-Open?pagetemplate=article. 

8See CME Group, ‘‘The World’s Leading 

Electronic Platform: CME Globex,’’ (2014) at 3, 

available at http://www.cmegroup.com/globex/files/ 

globexbrochure.pdf; IntercontinentalExchange, 

2010 Annual Report, (2011) at 26, available at 

http://ir.theice.com/∼/media/Files/I/Ice-IR/annualreports/2010/ice-2010ar.pdf. 

9See Haynes & Roberts, supra note 6 at 4. 

environment’’ at the center of 

Regulation AT. Automated trading 

environments often make use of 

automated systems for either the 

generation or the execution of orders (in 

many cases, both). Such automated 

systems are based on sets of rules or 

instructions (commonly referred to as 

algorithms) and related computer 

systems used to automate the execution 

of a trading strategy.3 In futures markets, 

orders generated by automated trading 

systems are ultimately transmitted to 

DCMs that accept, manage and match 

orders by automated means. 

While technologies have evolved, the 

underlying functions of derivatives 

markets remain the same, as do the 

Commission’s responsibilities under the 

Commodity Exchange Act (the ‘‘CEA’’ or 

‘‘Act’’). Such markets, typically 

operated by DCMs, provide valuable 

risk mitigation and price discovery 

services for numerous financial and 

physical commodities businesses, 

including producers and consumers of 

energy, foodstuff, metals, and other raw 

materials, as well as natural person 

investors. The Commission is 

committed to the safety and integrity of 

U.S. markets as they continue their 

rapid technological change. Through 

proposed Regulation AT, the 

Commission is taking its next steps in 

ensuring that its regulatory standards 

and industry practices properly address 

current and foreseeable risks arising 

from automated trading, and promote 

responsible innovation and fair 

competition among markets and market 

participants.4

Within U.S. derivatives markets, 

DCMs represent a significant catalyst in 

the transition to automated trading. 

From its beginnings with CME Globex 

in 1992, DCM on-exchange trading now 

occurs almost exclusively on electronic 

matching platforms, using internal 

algorithms to rapidly match incoming 

orders from an array of market 

participants.5 Data available to 

Commission staff indicates that in an 

approximately two-year period through 

October 2014, over 95 percent of all onexchange futures trading occurred on 

DCMs’ electronic trade matching 

platforms.6 In this regard, the 

Commission notes that CME Group, the 

largest U.S. exchange operator, 

announced in February 2015 its 

intention to close all but one of its openoutcry trading floors for futures.7

IntercontinentalExchange, the second 

largest DCM operator, ended all futures 

open-outcry trading in March 2008, and 

ended all options open-outcry trading in 

October 2012. On-exchange trading on 

DCMs other than the CME Group 

exchanges and 

IntercontinentalExchange now occurs 

exclusively on electronic matching 

platforms. Concurrent with their 

transition to electronic trade matching 

platforms, DCMs have taken steps to 

increase the speed of trading in their 

markets. These include offering colocation and proximity hosting services 

to reduce latencies between the DCM 

and market participants, as well as 

measures taken by DCMs to reduce 

processing times within their electronic 

trade matching platform. The two 

largest DCMs, for example, have for 

several years indicated in their public 

materials average or median order entry 

round trip times of less than one 

millisecond.8

The largely complete transition of 

DCMs to electronic trade matching 

platforms has occurred alongside an 

equally important shift in the 

technologies used by market 

participants to place and manage orders. 

Market participants have applied a 

range of sophisticated technological 

tools to their trading. For example, 

market participants are increasingly 

using ATSs, often coupled with highspeed communication networks. Market 

participants are also increasingly relying 

on electronic market and other data 

feeds to inform trading decisions, and 

on multiple computer algorithms to 

generate, manage, or route orders to 

DCMs. Market participants may also 

make use of direct electronic access 

and/or co-location services to minimize 

latencies between an ATS, market data 

systems, and a DCM’s electronic trading 

matching platform. 

Data available to the Commission 

highlights the importance of ATS 

trading on DCMs today. The 

Commission’s analysis of data covering 

the same approximately two-year period 

addressed above (through October 2014) 

indicates that ATSs were present on at 

least one side in almost 80 percent of 

foreign exchange futures volume, 67 

percent of interest rate futures volume, 

and 62 percent of equity futures volume 

analyzed. They were also present on at 

least one side in approximately 47 

percent of metals and energy product 

volumes. Even in agricultural products, 

a category not typically associated with 

automation in recent years, ATSs were 

present in at least 38 percent of futures 

volume analyzed. Finally, in the 

aggregate, ATSs were present in over 60 

percent of all futures volume traded 

across all products in the nearly twoyear period that the Commission 

examined. In highly liquid product 

categories, ATSs represented both sides 

of the transaction over 50 percent of the 

time.9

Market participants using ATSs may 

transact on DCMs through registered 

intermediaries, including their clearing 

members. Such intermediaries 

themselves often rely on extensive 

automation, using ATSs for functions 

ranging from simple order routing to the 

generation of independent trading 

decisions. These registered 

intermediaries include FCMs, 

commodity pool operators (‘‘CPOs’’), 

commodity trading advisors (‘‘CTAs’’), 

introducing brokers (‘‘IBs’’), and floor 

brokers (‘‘FBs’’). In addition, 

Commission-registered SDs and MSPs 


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10See Joint Staff Report: The U.S. Treasury 

Market on October 15, 2014 (July 13, 2015) 

[hereinafter ‘‘October 15 Joint Staff Report’’], 

prepared by the U.S. Department of Treasury, Board 

of Governors of the Federal Reserve System, Federal 

Reserve Bank of New York, U.S. Securities and 

Exchange Commission, and U.S. Commodity 

Futures Trading Commission, available at http://

cftc.wss/OCE/conceptrelease/documentlibrary/

Regulation%20AT/Reg%20AT%20--%20DRAFT

%20PREAMBLE/October%2015%20report/

treasury-market-volatility-10-14-2014-jointreport.pdf. The report discusses the preliminary 

findings regarding the conditions that may have 

contributed to the October 15 volatility, particularly 

in the ‘‘event window’’ that began at 9:33 a.m. ET. 

Among other potential causes of this volatility, the 

October 15 Joint Staff Report states that several 

large transactions occurred between the release of 

certain U.S. retail sales data and the start of the 

event window; that there was a significant 

reduction in market depth following the retail sales 

data release, which appears to have resulted from 

a high volume of transactions and bank-dealers and 

principal trading firms changing their participation 

in the cash and futures order books; that latency 

associated with a significant increase in message 

traffic due to order cancellations increased just 

before the event window; and there was a higher 

incidence of ‘‘self-trading’’ during the event 

window. Id. at 4–6. 

11See, e.g., Hendershott, Jones and Menkveld, 

‘‘Does Algorithmic Trading Improve Liquidity?,’’ 

The Journal of Finance, Vol. LXVI, No. 1 (Feb. 

2011), available at http://faculty.haas.berkeley.edu/ 

hender/algo.pdf. 

12See Hasbrouck and Saar, ‘‘Low-latency 

trading,’’ Journal of Financial Markets 16 (2013) at 

646–679, available at http://people.stern.nyu.edu/

jhasbrou/Research/LowLatencyTradingJFM.pdf. 

13See section IV(Q) below for a discussion of the 

term ‘‘self-trade’’ and proposed regulations with 

respect to self-trade prevention. 

14The requirements on DCMs arising out of 

Regulation AT may ultimately be imposed on SEFs. 

However, an important consideration for the 

Commission is that SEFs and SEF markets are much 

newer and less liquid than the more established and 

liquid DCMs and DCM markets. While SEFs and 

SEF markets are still in this nascent stage, the 

Commission does not want to impose additional 

requirements that may have the effect of decreasing 

the number of SEFs or decreasing liquidity. For 

these reasons, and in light of the lesser degree of 

automation in SEF markets, the policy 

considerations underlying Regulation AT are not as 

critical, at least at this time, in the SEF context. 

15See Concept Release, 78 FR at 56569–73 for a 

summary of measures discussed in the Concept 

Release. 

may use ATSs to conduct trading on 

DCMs. As discussed in more detail 

below, each of these categories of 

Commission registrants may be subject 

to Regulation AT in the event that they 

conduct algorithmic trading on a DCM. 

B. Risks and Potential Benefits 

Associated With Automated Trading 

Regulation AT proposes a series of 

pre-trade risk controls and other 

measures intended to address the risks 

related to automated trading on DCMs. 

The proposed rules primarily address 

operational risk issues, as well as 

related issues such as self-trading and 

market maker and trading incentive 

programs. 

The potential risks of automated 

trading were recently described in a 

report discussing the events of October 

15, 2014, when the market for U.S. 

Treasury securities, futures, and other 

closely related financial markets 

experienced an unusually high level of 

volatility and a very rapid round-trip in 

prices. On July 13, 2015, five regulatory 

agencies issued a joint staff report on 

the unusual market events of October 

15, 2014 (the ‘‘October 15 Joint Staff 

Report’’).10 In addition to discussing the 

events of October 15, the report includes 

an Appendix C that summarizes many 

of the risks of automated trading. These 

risks include the following: Operational 

risks (ranging from malfunctioning and 

incorrectly deployed algorithms to 

algorithms reacting to inaccurate or 

unexpected data); market liquidity risks 

(arising from abrupt changes in trading 

strategies even when a firm executes its 

strategy perfectly); market integrity risks 

(automated trading can provide new 

tools to engage in unlawful conduct); 

transmission risks (shocks based on 

erroneous orders impacting multiple 

markets); clearing and settlement risks 

(as more firms gain access to trading 

platforms, trades may not be subject to 

sufficient settlement risk mitigation 

techniques); and risks to effective risk 

management (the speed of trade 

execution may make critical risk 

mitigation devices less effective). 

Notwithstanding the risks described 

above, several commentators have 

argued that algorithmic trading results 

in a more efficient marketplace. A 

recent study of the equities market 

concluded that algorithmic trading 

narrows spreads, reduces adverse 

selection, and reduces trade-related 

price discovery.11 The study also 

suggested that algorithmic trading 

improves liquidity and enhances the 

information provided in quotes. 

Another recent study of low latency 

activity in the equities market (typically 

associated with high frequency trading) 

concluded that ‘‘an increase in lowlatency activity reduces quoted spreads 

and the total price impact of trades, 

increases depth in the limit order book, 

and lowers short-term volatility.’’ 12

C. The Proposed Regulations 

1. Overview of NPRM 

The Commission is pursuing a 

number of goals in proposed Regulation 

AT. As an overarching goal, the 

Commission seeks to update 

Commission rules in response to the 

evolution from pit trading to electronic 

trading. The risk controls and other 

rules proposed in this NPRM are 

focused on algorithmic order origination 

or routing by market participants, and 

electronic order execution by DCMs. In 

addition to mitigating risks arising from 

algorithmic trading activity, the 

proposed rules are intended to increase 

transparency around DCM electronic 

trade matching platforms and the use of 

self-trade prevention tools on DCMs.13

Furthermore, the proposed rules are 

intended to foster transparency with 

respect to DCM programs and activities, 

including market maker and trading 

incentive programs, that have become 

more prominent as automated trading 

becomes the dominant market model. 

The Commission notes that 

Regulation AT generally does not 

address trading activity on swap 

execution facilities (‘‘SEFs’’). The 

Commission believes that neither 

execution nor order entry on SEF 

markets are sufficiently automated at 

this time to require the degree of 

automated safeguards proposed 

herein.14 In addition, Regulation AT is 

not proposing a number of measures 

discussed in the Concept Release, such 

as the following: Proposals to 

implement various post-trade reports 

(post-order drop copies, post-trade drop 

copies, and post-clearing drop copies), 

‘‘reasonability checks’’ on incoming 

market data used by firms operating 

automated systems, policies and 

procedures for identifying ‘‘related’’ 

contracts, and proposals to standardize 

and simplify order types, each of which 

was discussed in the Concept Release.15

Market participants using automated 

trading include an important population 

of proprietary traders that, while 

responsible for significant trading 

volumes and liquidity in key futures 

products, are not registered with the 

Commission. These unregistered 

proprietary traders include a number of 

traders engaged in high-frequency 

trading (‘‘HFT’’). The Commission 

notes, however, that the risk control 

requirements under proposed 

Regulation AT do not vary in response 

to a market participant’s algorithmic 

trading strategies; the same risk controls 

would be required in connection with 

high-frequency and low-frequency 

algorithmic trading. In particular, HFT 

is not specifically identified under the 

proposed regulations, and is not 

regulated in a different fashion from 

other types of algorithmic trading under 

proposed Regulation AT. Instead, the 

proposed regulations focus on 

automation of order origination, 

transmission and execution, and the 

risks that may arise from such activity. 

As discussed above, nearly universal 

electronic order matching at DCMs is 


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78828 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

16See, e.g., the compliance reports required to be 

submitted by AT Persons and clearing member 

firms of AT Persons under § 1.83, the statistics 

required to be reported by DCMs regarding selftrading that they have both authorized and 

prevented on their platforms under § 40.23, and the 

disclosure required of DCMs with respect to market 

maker and trading incentive programs under 

§ 40.25. 

increasingly complemented by 

algorithmic order origination among 

market participants. Against this 

backdrop, the Commission believes that 

appropriate pre-trade and other risk 

controls are necessary at the level of 

market participants, clearing FCMs, and 

DCMs, in order to ensure the integrity 

of Commission-regulated markets and 

provide market participants with greater 

confidence that intentional, bona fide 

transactions are being executed. 

Principal elements of Regulation AT 

for market participants and clearing 

FCMs include: (i) Codification of 

defined terms used throughout 

Regulation AT; (ii) registration of certain 

entities not otherwise registered with 

the Commission; (iii) new algorithmic 

trading procedures for trading firms and 

clearing firms, including pre-trade and 

other risk controls; (iv) testing, 

monitoring, and supervision 

requirements for ATSs; and (v) 

requirements that certain persons 

submit compliance reports to DCMs 

regarding their ATSs. Principal 

elements for DCMs include: (i) New risk 

controls for Direct Electronic Access 

(‘‘DEA’’) provided by DCMs; (ii) 

transparency in DCM electronic trade 

matching platforms; and (iii) new risk 

control procedures, including pre-trade 

risk controls, compliance report review 

standards, self-trade prevention tool 

requirements, and market-maker and 

trading incentive program disclosure 

and related requirements. 

As mentioned above, Regulation AT is 

not intended to discriminate across 

registration categories, connectivity 

methods, or even ‘‘high-frequency’’ or 

slower trading strategies. Rather, 

Regulation AT is focused on reducing 

risk, increasing transparency and 

disclosure, and related DCM 

procedures.16 In developing Regulation 

AT, the Commission built on the 

Concept Release and relevant comments 

received, which are discussed further in 

section II(B) below. However, interested 

parties will observe that the 

Commission has chosen not to pursue 

certain measures discussed in the 

Concept Release (as discussed above), 

while also proposing a small number of 

new measures not addressed in the 

Concept Release. In addition, Regulation 

AT in certain cases seeks only to clarify 

the scope of existing Commission 

regulations that may be impacted by the 

growth of automated trading 

environments. 

In preparing this NPRM, the 

Commission has reviewed relevant 

industry practices, measures taken by 

other U.S. and foreign regulators, and 

best practices or guidance set forth by 

other informed parties. In these sources 

and comments received in response to 

the Concept Release, the Commission 

has identified an emerging consensus 

around pre-trade risk controls for 

automated trading and supervision 

standards for ATSs. The Commission 

also notes comments received in 

response to the Concept Release that are 

supportive of risk controls placed in 

multiple stages across the life-cycle of 

order generation, transmission, 

management and execution (i.e., similar 

risk controls placed at the levels of 

market participants, clearing member 

FCMs, and DCMs). Proposed Regulation 

AT attempts to balance flexibility in a 

rapidly changing technological 

landscape with the need for a regulatory 

baseline that provides a robust and 

sufficiently clear standard for pre-trade 

risk controls, supervision standards, and 

other safeguards for automated trading 

environments. The specific regulations 

and amendments proposed by 

Regulation AT are discussed in greater 

detail below. 

2. The Proposed Regulations Under 

Parts 1, 38, 40, and 170 

Regulation AT proposes new 

regulations or amendments to existing 

regulations in parts 1, 38, 40, and 170 

of the Commission’s regulations. It 

proposes to amend part 1 by inserting 

the following defined terms: § 1.3(tttt)— 

Algorithmic Trading Compliance Issue; 

§ 1.3(uuuu)—Algorithmic Trading 

Disruption; § 1.3(vvvv)—Algorithmic 

Trading Event; § 1.3(wwww)—AT Order 

Message; § 1.3(xxxx)—AT Person; 

§ 1.3(yyyy)—Direct Electronic Access; 

and § 1.3(zzzz)—Algorithmic Trading. 

Regulation AT also proposes to amend 

existing § 1.3(x), which defines Floor 

Trader. 

In addition, Regulation AT would 

create a new subpart A in part 1 that 

includes the following new regulations 

applicable to AT Persons and their 

clearing FCMs: § 1.80—requiring AT 

Persons to implement pre-trade risk 

controls and other related measures; 

§ 1.81—requiring AT Persons to 

implement standards for the 

development, testing, monitoring, and 

compliance of their ATSs; § 1.82— 

requiring clearing member FCMs to 

implement pre-trade risk controls and 

other related measures for orders from 

their AT Person customers; and § 1.83— 

requiring AT Persons and their clearing 

member FCMs to provide to DCMs 

annual compliance reports, and to keep 

and provide upon request to DCMs 

certain related books and records. 

Regulation AT also proposes to 

amend part 38 of the Commission’s 

regulations. Specifically, it would 

amend existing § 38.255—Risk controls 

for trading, to require DCMs to have in 

place systems reasonably designed to 

facilitate the FCM’s management of the 

risks that may arise from their 

customers’ Algorithmic Trading using 

Direct Electronic Access. Regulation AT 

would also make corresponding changes 

to the discussion of risk controls in 

Appendix B—Guidance on, and 

Acceptable Practices in, Compliance 

with Core Principles (Subsection 

(b)(5)—Acceptable Practices for Risk 

controls for trading). Finally in part 38, 

Regulation AT would amend existing 

§ 38.401(a) to require DCMs to provide 

additional public disclosure regarding 

their electronic matching platforms. 

Regulation AT would also amend part 

40 of the Commission’s regulations. It 

would create the following new 

regulations: § 40.20—requiring DCMs to 

implement pre-trade risk controls and 

other related measures; § 40.21— 

requiring DCMs to provide a test 

environment to AT Persons; § 40.22— 

requiring DCMs to implement a review 

program for compliance reports 

regarding Algorithmic Trading 

submitted by AT Persons and clearing 

member FCMs, require that certain 

books and records be maintained by 

such persons, and review such books 

and records as necessary; § 40.23— 

requiring DCMs to implement self-trade 

prevention tools, mandate their use, and 

publish statistics concerning selftrading; and §§ 40.25–40.28—requiring 

DCMs to provide disclosure and 

implement other controls regarding 

their market maker and trading 

incentive programs. Finally, Regulation 

AT would make changes to the 

definition of Rule in § 40.1(i) in 

response to certain of the changes 

proposed above. 

Finally, Regulation AT proposes to 

amend part 170 of the Commission’s 

regulations. It would require in new 

§ 170.18 that all AT Persons become 

members of at least one registered 

futures association (‘‘RFA’’). Regulation 

AT would create a new subpart D in 

part 170, and require in proposed 

§ 170.19 that RFAs adopt membership 

rules, as deemed appropriate by the 

RFA, requiring pre-trade risk controls 

and other measures for ATSs; standards 

for the development, testing, 

monitoring, and compliance of ATSs; 

designation and training of algorithmic 


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Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78829 

17These measures are discussed in more detail in 

the Concept Release. See Concept Release, 78 FR at 

56548. 

18See Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612, 36703 

(June 19, 2012) [hereinafter ‘‘DCM Final Rules’’]; 

Core Principles and Other Requirements for Swap 

Execution Facilities, 78 FR 33476, 33590 (June 4, 

2013) [hereinafter ‘‘SEF Final Rules’’]. 

19See DCM Final Rules, 77 FR at 36718; SEF 

Final Rules, 78 FR at 33601. 

20See 17 CFR 38.607. 

21 17 CFR 1.73(a)(1) and 23.609(a)(1). 

22 17 CFR 1.73(a)(2)(i) and 23.609(a)(2)(i). 

23 17 CFR 1.11(e)(3)(ii). The Commission notes 

that the requirements of § 1.11(e)(3)(ii) fall within 

an FCM’s broader obligation in § 1.11 to establish 

and maintain a formal ‘‘Risk Management 

Program.’’ Such program must include a risk 

management unit independent of the business unit; 

quarterly risk exposure reports to senior 

management and the governing body of the FCM, 

with copies to the Commission; and other 

substantive requirements. Proposed Regulation AT 

would not require FCMs to subsume applicable 

requirements into their § 1.11 Risk Management 

Programs. However, the Commission is seeking 

public comment in the questions below regarding 

whether, in any final rules arising from this NPRM, 

FCMs should in fact be required to incorporate 

elements of Regulation AT proposed in §§ 1.80, 

1.81, 1.83(a), and 1.83(c) into their § 1.11 Risk 

Management Programs. Such incorporation could 

help improve the interaction between an FCM’s 

operational risk efforts pursuant to § 1.11(e)(3)(ii) 

and its pre-trade risk controls and development, 

monitoring, and compliance efforts pursuant to 

§§ 1.80, 1.81, 1.83(a), and 1.83(c). It could also help 

ensure that an FCM’s §§ 1.80, 1.81, 1.83(a), and 

1.83(c) processes benefit from the same internal 

rigor and independence required by § 1.11. 

24 17 CFR 23.600(d)(9). 

25See 17 CFR 180.1 and 180.2. 

26See Antidisruptive Practices Authority, 78 FR 

31890 (May 28, 2013). 

27Concept Release, 78 FR 56542. 28See id. at 56546–47. 29See CME Group, ‘‘The World’s Leading 

Electronic Platform. CME Globex,’’ (2014) at 3, 

available at http://www.cmegroup.com/globex/files/ 

globexbrochure.pdf. 

trading staff; and clearing FCM risk 

management standards. 

II. Background on Regulatory 

Responses to Automated Trading 

A. 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.17 While focused to a degree on 

financial and related risks, these 

provisions reflect the Commission’s 

ongoing commitment to maintaining the 

safety and soundness of automated 

trading in modern derivatives markets. 

The Commission has adopted 

regulations with respect to DCMs and 

SEFs that require exchanges to establish 

risk control mechanisms to prevent 

market disruptions, including 

mechanisms that pause or halt trading.18

The guidance and acceptable practices 

to the SEF and DCM rules in part 37 and 

38, respectively, provide examples of 

acceptable risk controls.19 In addition, 

in the DCM final rules, the Commission 

adopted new risk control requirements 

for exchanges that provide DEA to 

clients. Regulation 38.607 requires 

DCMs that permit DEA to have effective 

systems and controls reasonably 

designed to facilitate an FCM’s 

management of financial risk.20

The Commission also adopted 

relevant regulations for FCMs, SDs, and 

MSPs. Such firms that are clearing 

members must establish risk-based 

limits based on position size, order size, 

margin requirements, or similar factors 

for all proprietary accounts and 

customer accounts.21 The regulations, 

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.22 In 

addition, § 1.11 requires FCMs to have 

‘‘automated financial risk management 

controls reasonably designed to prevent 

the placing of erroneous orders’’ and 

‘‘policies and procedures governing the 

use, supervision, maintenance, testing, 

and inspection’’ of automated trading 

programs.23 The Commission also 

adopted regulations 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.’’ 24

Finally, the Commission adopted final 

rules implementing new authority 

under the CEA to, among other things, 

broadly prohibit manipulative and 

deceptive devices and price 

manipulation.25 The Commission also 

provided guidance on the scope and 

application of CEA Section 4c(a)(5), 

which makes it 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.’’ 26

B. The Commission’s 2013 Concept 

Release 

Overview of Concept Release. As 

noted above, in 2013 the Commission 

issued a ‘‘Concept Release on Risk 

Controls and System Safeguards for 

Automated Trading Environments,’’ 

which provided an overview of the 

automated trading environment and 

discussed a series of pre-trade risk 

controls, post-trade reports and other 

measures, system safeguards, and 

additional protections that could be 

implemented by Commission registrants 

or other market participants. The 

Concept Release reflects the 

Commission’s ongoing commitment to 

the safety and soundness of U.S. 

derivatives markets in times of 

technological change, including the 

growth of automated trading. 

The Concept Release was published 

in the Federal Register on September 

12, 2013.27 The initial 90-day comment 

period closed on December 11, 2013, 

but was reopened from January 21 

through February 14, 2014, in 

conjunction with a meeting of the 

CFTC’s Technology Advisory 

Committee (‘‘TAC’’). The Concept 

Release requested public comment on 

124 separate questions regarding the 

necessity and operation of potential pretrade risk controls, post-trade reports 

and other measures, system safeguards 

and additional protections (such as 

proposals to identify ‘‘related’’ contracts 

on trading platforms, and proposals to 

standardize and simplify order types). 

The Concept Release served as a vehicle 

to catalogue existing industry practices, 

determine their efficacy and 

implementation to date, and evaluate 

the need for additional measures. The 

Concept Release was not a proposed 

rule, but rather a prior step designed to 

facilitate a public dialogue and educate 

the Commission so that it may make an 

informed determination as to whether 

rulemaking is necessary and, if so, the 

substantive requirements of such a 

rulemaking. 

Topics Discussed in Concept Release. 

The Concept Release highlighted data 

on the increased importance of 

electronic and algorithmic trading 

across a number of U.S. markets 

(including equities, futures and fixed 

income markets). The Concept Release 

also noted that the infrastructure of 

automated trading environments has 

progressively decreased the time 

necessary to process orders and execute 

trades, reducing the communication 

times between market participants and 

trading venues.28 One exchange group 

now indicates that its ‘‘median inbound 

latency for order entry’’ on its trading 

platform is fifty-two (52) microseconds 

within its ‘‘four walls.’’ 29 As discussed 

in the Concept Release, advances in 

trading speeds are partly due to the 

development of dedicated fiber-optic 

and microwave communications 

networks that have dramatically 

reduced transmission times across large 


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78830 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

30See Concept Release, 78 FR at 56546. 

31See id. 

32See id. 

33The Commission notes that the term ‘‘direct 

electronic access’’ is also used in existing 

Commission regulation 38.607. Regulation AT does 

not modify § 38.607, and the term ‘‘direct electronic 

access’’ in § 38.607 will continue to have the 

meaning specified in that section. 

34As noted by the Futures Industry Association’s 

Market Access Working Group, for example: ‘‘[p]retrade 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 Risk Management 

Recommendations, infra note 97 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’’ (Mar. 1, 2011) 

at 2 [hereinafter ‘‘CFTC TAC Recommendations’’], 

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

public/@swaps/documents/dfsubmission/

tacpresentation030111_ptfs2.pdf. 

35As explained in section IV(A) below, the 

Concept Release used the term ‘‘ATS’’ or 

‘‘automated trading system’’ to refer to the 

algorithms used to automate the generation and 

execution of a trading strategy. For purposes of this 

NPRM, the Commission has determined to use the 

term ‘‘Algorithmic Trading’’ or ‘‘algorithmic trading 

system’’ (abbreviated as ATS), as opposed to the 

term ‘‘automated trading system.’’ For purposes of 

discussing comments to the Concept Release, the 

Commission may use the terms ATS and automated 

trading system as such terms were used in the 

Concept Release. 

36See Market Access Rule, 75 FR 69792 (Nov. 15, 

2010); see also SEC Press Release No. 2010–210, 

‘‘SEC Adopts New Rule Preventing Unfiltered 

Market Access’’ (Nov. 3, 2010), available at http:// 

www.sec.gov/news/press/2010/2010-210.htm. 

37See Market Access Rule, supra note 36 at 

69825–26; see also SEC, Responses to Frequently 

Asked Questions Concerning Risk Management 

Controls for Brokers or Dealers with Market Access 

(Apr. 15, 2014), available at https://www.sec.gov/

distances.30 On a smaller scale, colocation and proximity hosting are two 

common methods for reducing the 

distance, and thus latency, between 

market participants and the exchanges. 

Co-location services are now provided 

by most large electronic trading 

platforms within the United States. 

Another important latency-reducing 

advance in connectivity discussed in 

the Concept Release is Direct Market 

Access (‘‘DMA’’). For purposes of the 

Concept Release, the Commission 

defined DMA 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.31 DMA can 

be provided directly by an exchange or 

through the infrastructure of a thirdparty provider, but in all cases, DMA 

implies that an order is not routed 

through a clearing firm prior to reaching 

the trading platform.32 For purposes of 

Regulation AT, as discussed in section 

IV(D)(7) below, the Commission 

proposes to define a slightly modified 

term: ‘‘Direct Electronic Access’’ 

(‘‘DEA’’), as opposed to Direct Market 

Access. Despite the slightly modified 

name, the Commission intends that the 

term ‘‘Direct Electronic Access’’ has a 

meaning similar to ‘‘Direct Market 

Access,’’ as such term was used in the 

Concept Release.33

The Concept Release discussed a set 

of risk controls that would be intended 

to operate at the same rapid speed at 

which trading occurs in the automated 

trading environment. As the industry 

reduces latency through improvements 

in technologies for the generation, 

transmission and execution of orders or 

management of other data, there is 

concern that the drive for ever lower 

latencies may lead to a competitive race 

toward progressively less stringent risk 

controls.34 A separate, but related, 

concern is that market participants may 

simply engage in trading at speeds 

beyond the abilities of their risk 

management systems, or those tasked 

with monitoring their activity. Risk 

management systems operating at these 

misaligned speeds could allow an active 

algorithm to breach its prescribed risk 

controls and disrupt one or more 

markets. 

In light of the potential for disruptive 

trading events related to such highspeed algorithmic trading, the Concept 

Release addressed 23 potential risk 

controls and other measures broadly 

grouped into four categories. The first 

includes ‘‘pre-trade risk controls,’’ such 

as controls designed to prevent potential 

errors or disruptions from reaching 

trading platforms, or to minimize their 

impact once they have. A second 

category of safeguards includes ‘‘posttrade reports’’ and ‘‘other post-trade 

measures.’’ Examples in this category 

include reports that promote the flow of 

order, trade and position information; 

uniform trade adjustment or 

cancellation policies; and standardized 

error trade reporting obligations. The 

third category of risk controls discussed 

in the Concept Release is termed 

‘‘system safeguards,’’ including 

safeguards for the design, testing and 

supervision of ATSs, as well as 

measures such as ‘‘kill switches’’ that 

facilitate emergency intervention in the 

case of malfunctioning ATSs.35 Finally, 

the Concept Release presented a fourth 

category of measures focusing on 

various options for improving market 

functioning or structure. 

Comments Received on Concept 

Release and Commission Response. The 

Commission received a total of 43 

public comments on the Concept 

Release, including comments from 

DCMs, an array of trading firms, trade 

associations, public interest groups, 

members of academia, and consulting, 

technology and information service 

providers in the financial industry. All 

comments are available on 

www.cftc.gov. Many of the comments 

received are detailed and thorough, and 

the Futures Industry Association 

(‘‘FIA’’) conducted surveys to gauge 

existing risk-management practices. 

Other commenters provided academic 

papers in support of their points of 

view. 

Staff reviewed all comments received 

and made recommendations to the 

Commission. This NPRM reflects the 

Commission’s decision to propose 

regulations in certain areas addressed by 

the Concept Release, including: 

Registration of certain entities not 

otherwise registered with the 

Commission; enhanced identification of 

orders placed on exchanges; pre-trade 

risk controls at exchanges, trading firms 

and clearing firms; standards for 

development, testing and supervision of 

algorithmic systems; trading firm and 

clearing member FCM compliance 

reports regarding algorithmic trading; 

and self-trade prevention tools. 

Regulation AT also addresses several 

areas not covered in the Concept 

Release, including transparency in 

exchange trade matching systems and 

market-maker protections, and in 

certain cases seeks to clarify the scope 

of existing Commission regulations that 

may be impacted by the growth of 

automated trading environments. 

C. Other Recent Regulatory Responses 

1. SEC Regulatory Initiatives 

The SEC has recently taken regulatory 

steps related to automated trading, 

aimed at preventing instability in the 

equities markets. Most significantly, the 

SEC adopted the Market Access Rule 

and Regulation SCI. 

The Securities Exchange Act Rule 

15c3–5—Risk Management Controls for 

Brokers or Dealers with Market Access 

(the ‘‘Market Access Rule’’), adopted in 

November 2010, requires brokers and 

dealers to have risk controls in place 

before providing their customers with 

access to the market.36 Specifically, the 

Market Access Rule requires risk 

controls that prevent entry of (i) orders 

exceeding appropriate pre-set credit or 

capital thresholds in the aggregate for 

each customer and the broker-dealer; 

and (ii) erroneous orders, by rejecting 

orders that exceed appropriate price or 

size parameters, on an order-by-order 

basis or over a short period of time, or 

those that indicate duplicative orders.37


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divisions/marketreg/faq-15c-5-risk-managementcontrols-bd.htm. 

38See Market Access Rule, supra note 36 at 

69826. 

39See SEC Press Release No. 2013–222, ‘‘SEC 

Charges Knight Capital With Violations of Market 

Access Rule’’ (Oct. 16, 2013), available at http://

www.sec.gov/News/PressRelease/Detail/

PressRelease/1370539879795 [hereinafter ‘‘SEC 

Knight Capital Release’’]. 

40See Reg SCI, 79 FR 72252 (Dec. 5, 2014); see 

also SEC Press Release No. 2014–260, ‘‘SEC Adopts 

Rules to Improve Systems Compliance and 

Integrity’’ (Nov. 19, 2014), available at http://

www.sec.gov/News/PressRelease/Detail/

PressRelease/1370543496356#.VKQS2qxOlaQ. 

41See Reg SCI, supra note 40 at 72437–39. 

42See SEC, Press Release No. 2015–48, ‘‘SEC 

Proposes Rule to Require Broker-Dealers Active in 

Off-Exchange Market to Become Members of 

National Securities Association’’ (Mar. 25, 2015) 

[hereinafter ‘‘SEC Press Release on Broker-Dealer 

Registration’’], available at http://www.sec.gov/

news/pressrelease/2015-48.html#.VSbd9KwpBaQ; 

Exemption for Certain Exchange Members, 80 FR 

18036, 18042–43 (Apr. 2, 2015) [hereinafter ‘‘SEC 

Proposed Rule on Exemption for Certain Exchange 

Members’’]. 

43See SEC Press Release on Broker-Dealer 

Registration, supra note 42. 

44See id. The SEC estimates that there are 

approximately 125 firms exempt from association 

membership, which includes some of the most 

active cross-market proprietary trading firms. See 

SEC Proposed Rule on Exemption for Certain 

Exchange Members, 80 FR at 18042. 

45See SEC Press Release on Broker-Dealer 

Registration, supra note 42. 

46See id. 

47SEC Proposed Rule on Exemption for Certain 

Exchange Members, 80 FR at 18042–43. 

48See id. at 18041–45. 

49See SEC Press Release No. 2012–134, ‘‘SEC 

Approves New Rule Requiring Consolidated Audit 

Trail to Monitor and Analyze Trading Activity’’ 

(July 11, 2012), available at http://www.sec.gov/

News/PressRelease/Detail/PressRelease/1365

171483188#.VKQkAqxOlaQ. 

50See SEC, ‘‘Rule 613 (Consolidated Audit 

Trail),’’ available at http://www.sec.gov/divisions/

marketreg/rule613-info.htm. 

51See Mary Jo White, Chairman, Securities and 

Exchange Commission, Enhancing Our Equity 

Market Structure (June 5, 2014), available at http:// 

www.sec.gov/News/Speech/Detail/Speech/1370542

004312#.VKP_o6xOlaS. 

52See id. 

53See id. 

54See id. 

55See id. 

These risk controls must be under the 

direct and exclusive control of the 

broker-dealer (subject to certain 

exceptions) and regularly reviewed for 

effectiveness.38 In October 2013, the 

SEC brought its first enforcement action 

under the Market Access Rule, securing 

a $12 million settlement with Knight 

Capital in connection with the firm’s 

August 2012 trading incident that 

disrupted the markets.39

On November 19, 2014, the SEC 

adopted Regulation Systems 

Compliance and Integrity (‘‘Reg SCI’’).40

Reg SCI applies to alternative trading 

systems, certain self-regulatory 

organizations (including registered 

clearing agencies), plan processors, and 

exempt clearing agencies (collectively, 

‘‘SCI entities’’). Under Reg SCI, SCI 

entities are required to have 

comprehensive policies and procedures 

in place for their technological systems. 

The SCI entities must, among other 

things, take appropriate corrective 

action when systems issues occur; 

provide notifications and reports to the 

SEC regarding systems problems and 

systems changes; inform members and 

participants about systems issues; 

conduct business continuity testing; 

implement standards that result in SCI 

systems being designed, developed, 

tested, maintained, operated, and 

surveilled in a manner that facilitates 

the successful collection, processing, 

and dissemination of market data; and 

conduct annual reviews of their 

automated systems, which must be 

summarized in a report that is provided 

to the SEC.41

The SEC has also taken action in the 

area of enhancing oversight of 

proprietary trading firms. In March 

2015, the SEC proposed a rule that 

would narrow an exemption that 

currently exempts certain broker-dealers 

from membership in a national 

securities association.42 The exemption 

was originally designed to accommodate 

exchange specialists and other floor 

members that might need to conduct 

limited hedging or other off-exchange 

activities ancillary to their business.43

Over time, proprietary trading firms 

were able to take advantage of this 

exemption.44 The SEC’s proposed rules 

would amend the exemption to target 

those broker-dealers for which it was 

originally designed, and require brokerdealers trading in off-exchange venues 

to become members of a national 

securities association. In the securities 

markets, this association is the Financial 

Industry Regulatory Authority 

(‘‘FINRA’’).45

The SEC’s Chair explained that the 

proposed rule ‘‘embodies a simple but 

powerful principle of the federal 

securities laws—the protection of 

investors and the stability of our 

markets require that trading is overseen 

by both the Commission and a strong 

self-regulatory organization.’’ 46 In its 

preamble to the proposed rule, the SEC 

explained that, in the event that a 

broker-dealer trades electronically 

across a range of exchange and offexchange venues, an individual 

exchange of which the broker-dealer is 

a member may be unable to effectively 

regulate the off-exchange activity of the 

broker-dealer, because the exchange 

may lack the resources or expertise to 

oversee such off-exchange activity.47

The SEC viewed FINRA, the selfregulatory organization (‘‘SRO’’) to 

which off-exchange trades are reported, 

as being in the best position to regulate 

cross-market activity by brokerdealers.48

The SEC has taken additional 

regulatory initiatives in this area. On 

July 11, 2012, the SEC adopted Rule 613 

under Regulation NMS, requiring SROs 

to submit a plan to the SEC to create, 

implement, and maintain a consolidated 

audit trail (‘‘CAT’’). This audit trail is 

intended to increase the data available 

to regulators investigating illegal 

activities such as insider trading and 

market manipulation, and improve the 

ability to reconstruct broad-based 

market events in an accurate and timely 

manner.49 The SROs submitted the plan 

on September 30, 2014.50 In addition, in 

response to policy recommendations 

resulting from the Flash Crash events of 

May 6, 2010, the SEC and the securities 

industry implemented market-wide 

circuit breakers as well as a ‘‘limit uplimit down’’ mechanism in order to 

moderate price volatility in individual 

securities.51 The SEC is also working to 

update its regulatory regime to improve 

firms’ risk management of trading 

algorithms and to enhance regulatory 

oversight over their use.52 The SEC is 

also developing an anti-disruptive 

trading rule to address the use of 

aggressive, potentially destabilizing 

trading strategies during vulnerable 

market periods.53

Finally, while not directly relevant to 

Commission-regulated markets, the SEC 

is working with equities exchanges and 

FINRA to minimize latency between 

different market feeds. Specifically, 

exchanges must not transmit data 

directly to customers any sooner than 

they transmit data to a securities 

information processor (‘‘SIP’’), the 

system that consolidates market feeds 

from all platforms and publishes the 

public price ticker. In addition, the 

technology used for transmitting data to 

the SIP must be on a par with what is 

used for transmitting data to direct 

feeds.54 Finally, the SEC is working to 

address concerns associated with the 

fragmentation of trading venues, dark 

trading venues, and broker conflicts.55

2. FINRA Initiatives 

In addition to the SEC, FINRA is 

developing rules focused on automated 

trading and transparency in the equities 

markets. In March 2015, FINRA 

published a Request for Comment 

proposing to require registration (as a 

‘‘Limited Representative—Equity 

Trader’’) persons that are (1) primarily 

responsible for the design, development 


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56See FINRA, Regulatory Notice 15–06, 

‘‘Registration of Associated Persons Who Develop 

Algorithmic Trading Strategies’’ (Mar. 2015), 

available at http://www.finra.org/sites/default/files/ 

notice_doc_file_ref/Notice_Regulatory_15-06.pdf. 

57See id. at 3. 

58See id. 

59See FINRA, Regulatory Notice 15–09, ‘‘Equity 

Trading Initiatives: Supervision and Control 

Practices for Algorithmic Trading Strategies’’ (Mar. 

2015) [hereinafter ‘‘FINRA Notice 15–09’’], 

available at https://www.finra.org/industry/notices/ 

15-09. 

60See id. 

61See ESMA, ‘‘Systems and controls in an 

automated trading environment for trading 

platforms, investment firms and competent 

authorities’’ (Feb. 24, 2012) [hereinafter ‘‘ESMA 

Guidelines’’], available at http://

www.esma.europa.eu/system/files/esma_2012_122_

en.pdf and accompanying public statement, 

available at http://www.esma.europa.eu/system/

files/2012-128.pdf. 

62See id. at 3. 

63See id. at 13. 

64See id. at 16–17. 

65See id. at 10. 

66See id. at 14–15. 

67See id. at 21–23. 

68ESMA, Automated Trading Guidelines: ESMA 

Peer Review Among National Competent 

Authorities (Mar. 18, 2015), available at http://

www.esma.europa.eu/system/files/esma-2015-592- 

automated_trading_peer_review_report_

publication.final_.pdf. 

69See id. at 9–10. 

70See European Commission, ‘‘Updated rules for 

markets in financial instruments: MiFID 2’’ (June 

12, 2014) [hereinafter ‘‘MiFID II’’], available at 

http://ec.europa.eu/finance/securities/isd/mifid2/

index_en.htm. 

71See id. at Article 17(1). 

or significant modification of an 

algorithmic strategy; or (2) responsible 

for supervising such functions.56 FINRA 

explained that given today’s highly 

automated environment (according to 

FINRA, where firms trade using 

automated systems that initiate preprogrammed trading instructions based 

on specified variables, referred to as 

algorithmic trading strategies), it is 

concerned that persons involved in 

preparing or supervising algorithmic 

trading may lack adequate knowledge of 

securities rules and regulations, which 

could result in algorithms that do not 

comply with applicable rules.57

Accordingly, FINRA believes such 

persons should meet the same minimum 

competency standards for knowledge of 

securities regulations that apply to 

individual traders.58

In March 2015, FINRA published a 

regulatory notice (15–09) providing 

guidance on supervision and control 

practices for algorithmic trading 

strategies in the equities markets.59 The 

notice offered guidance on practices in 

five general areas: General risk 

assessment and response; software/code 

development and implementation; 

software testing and system validation; 

trading systems; and compliance. 

Among other practices, the notice 

recommended that firms should 

consider: Implementing a development 

and change management process that 

tracks the development of new trading 

code or material changes to existing 

code; implementing a basic summary 

description of algorithmic trading 

strategies that enables supervisory and 

compliance staff to understand the 

intended function of an algorithm; 

conducting testing to confirm that core 

code components operate as intended 

and do not produce unintended 

consequences; implementing controls, 

monitors, alerts and reconciliation 

processes that enable the firm to quickly 

identify whether an algorithmic is 

experiencing unexpected results; and 

providing for adequate communication 

between supervisory and compliance 

staff related to the function and control 

of algorithms such that the firm meets 

its regulatory obligations.60

3. European and Other Regulatory 

Initiatives 

a. ESMA 

The European Securities and Markets 

Authority (‘‘ESMA’’) is an independent 

EU Authority established in January 

2011. ESMA published guidelines on 

automated trading in February 2012, 

which became effective across the 

European Union on May 1, 2012.61 The 

ESMA guidelines addressed the 

operation of an electronic trading 

system by a regulated market or a 

multilateral trading facility; the use of 

an electronic trading system, including 

a trading algorithm, by an investment 

firm for dealing on its own account or 

for the execution of orders on behalf of 

clients; and the provision of direct 

market access or sponsored access by an 

investment firm as part of the service of 

the execution of orders on behalf of 

clients.62

Among other elements, the ESMA 

guidelines recommended that trading 

platforms should have: Arrangements to 

prevent the excessive flooding of the 

order book; arrangements (such as 

throttling) to prevent capacity limits on 

messaging from being breached; and 

arrangements (for example, volatility 

interruptions or automatic rejection of 

orders which are outside of certain set 

volume and price thresholds) to 

constrain trading or to halt trading in 

individual or multiple financial 

instruments when necessary.63 The 

ESMA guidelines also recommended 

that trading platforms should have 

procedures in place to identify potential 

market abuse in an automated trading 

environment, such as ping orders, quote 

stuffing, momentum ignition, and 

layering and spoofing.64

In addition, the ESMA guidelines 

recommended that investment firms 

should make use of clearly delineated 

development and testing methodologies 

prior to deploying an electronic trading 

system or a trading algorithm, and 

should monitor their electronic trading 

systems, including trading algorithms, 

in real-time.65 ESMA also recommended 

that investment firms implement price 

and size parameters, systems that 

control messaging traffic to individual 

trading platforms, financial risk 

controls, and controls that block a 

trader’s orders if they are for a financial 

instrument that the trader does not have 

permission to trade.66 As to orders 

submitted via direct market access and 

sponsored access, ESMA recommended, 

among other things, that such orders be 

submitted to the same pre-trade risk 

controls that it recommends for 

investment firms (including, for 

example, price and size parameters).67

On March 18, 2015, ESMA released a 

report finding that all 30 participating 

European Economic Area members have 

incorporated the Guidelines into their 

legal framework, and all except three 

have incorporated it into their 

supervisory framework.68 The report 

went on to identify challenges to further 

enhancing compliance including: 

Market complexity, IT-knowledge, 

additional on-site inspections of 

markets, testing of trading halts, and 

setting up ring-defense against cyberattacks.69

As discussed below, ESMA has 

performed additional work in the area of 

automated trading, such as developing 

technical standards for the requirements 

of MiFID II. 

b. MiFID II 

The European Commission published 

a new Directive on markets in financial 

instruments (‘‘MiFID II’’) on June 12, 

2014.70 The Directive contains a 

definition of both ‘algorithmic trading’ 

and ‘high-frequency algorithmic trading 

technique,’ which is defined as a 

specific type of algorithmic trading. 

Among other requirements, the 

Directive requires that an investment 

firm engaged in algorithmic trading 

must have effective systems and risk 

controls to ensure that its trading 

systems are resilient and have sufficient 

capacity, are subject to appropriate 

trading thresholds and limits, and 

prevent the sending of erroneous orders 

or other system activity that may create 

or contribute to a disorderly market.71

Such a firm must also have effective 

business continuity arrangements to 

deal with any failure of its trading 


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72See id. 

73See id. at Article 17(2). 

74See id. at Article 48(5). 

75See id. at Article 48(6). 

76ESMA, ‘‘Consultation Paper,’’ (May 22, 2014), 

available at http://www.esma.europa.eu/system/

files/2014-549_-_consultation_paper_mifid_ii_-_

mifir.pdf. 

77ESMA, ‘‘Consultation Paper,’’ (Dec. 19, 2014) 

and accompanying Annexes A and B, available at 

http://www.esma.europa.eu/system/files/2014-1570

_cp_mifid_ii.pdf. 

78ESMA, ‘‘ESMA’s Technical Advice to the 

Commission on MiFID II and MiFIR,’’ (Dec. 19, 

2014) [hereinafter ‘‘ESMA Technical Advice Final 

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

system/files/2014-1569_final_report_-_esmas_

technical_advice_to_the_commission_on_mifid_ii_

and_mifir.pdf. 

79ESMA, Final Report: MiFID II/MiFIR draft 

Technical Standards on authorization, passporting, 

registration of third country firms and cooperation 

between competent authorities, Art. 6(g) (June 29, 

2015), available at http://www.esma.europa.eu/

system/files/2015-esma-1006_-_mifid_ii_final_

report_on_mifid_ip_technical_standards.pdf. 

80ESMA, Final Report: Draft Regulatory and 

Implementing Technical Standards MiFID II/MiFIR 

(Sept. 28, 2015) [hereinafter, the ‘‘ESMA September 

2015 Final Draft Standards Report’’], available at 

https://www.esma.europa.eu/system/files/2015- 

esma-1464_-_final_report_-_draft_rts_and_its_on_

mifid_ii_and_mifir.pdf; ESMA, Regulatory technical 

and implementing standards—Annex 1 (Sept. 28, 

2015) [hereinafter, the ‘‘ESMA September 2015 

Final Draft Standards Report Annex 1’’], available 

at https://www.esma.europa.eu/system/files/2015- 

esma-1464_annex_i_-_draft_rts_and_its_on_mifid_ii

_and_mifir.pdf; ESMA, Cost-Benefit Analysis— 

Annex II, Draft Regulatory and Implementing 

Technical Standards MiFID II/MiFIR (Sept. 28, 

2015), [hereinafter, the ‘‘ESMA September 2015 

Cost-Benefit Annex II’’], available at https://

www.esma.europa.eu/system/files/2015-esma-1464

_annex_ii_-_cba_-_draft_rts_and_its_on_mifid_ii_

and_mifir.pdf. 

81See online summaries of High-frequency 

Trading Act (2013), available at http://

www.bafin.de/SharedDocs/Veranstaltungen/EN/

WA11_20130430_hft_workshop_en.html. 

82See id.; see also Morgan, Megan, Tabb Forum, 

‘‘Decoding the German HFT Act: A Guide to 

Regulating Electronic Markets’’ (Oct. 17, 2014), 

available at http://tabbforum.com/opinions/

decoding-the-german-hft-act-how-to-regulateelectronic-markets. 

83See id. 

84See id. 

85See id. 

86See Bailey, Andrew, Bank of England, 

‘‘Financial Markets: Identifying risks and 

appropriate responses,’’ at 9 (May 15, 2015), 

available at http://www.bankofengland.co.uk/

publications/Documents/speeches/2015/

speech814.pdf. 

87See id. at 5–6; Binham, Caroline, ‘‘Highfrequency trading faces tougher Bank of England 

scrutiny,’’ Financial Times (May 15, 2015), 

available at http://www.ft.com/intl/cms/s/0/

f7d4e438-fb20-11e4-9aed00144feab7de.html#axzz3aUzgwb2N. 

systems and must ensure its systems are 

fully tested and properly monitored.72

Furthermore, an investment firm that 

engages in a high-frequency algorithmic 

trading technique must store in an 

approved form accurate and time 

sequenced records of all its placed 

orders, including cancellations of 

orders, executed orders and quotations 

on trading venues and make them 

available to the competent authority 

upon request.73

The MiFID II Directive also requires a 

regulated market to be able to 

temporarily halt or constrain trading if 

there is a significant price movement in 

a financial instrument on that market or 

a related market during a short period. 

In exceptional cases, a regulated market 

must be able to cancel, vary or correct 

any transaction.74 In addition, the 

Directive requires a regulated market to 

have in place effective systems, 

procedures and arrangements, including 

requiring members or participants to 

carry out appropriate testing of 

algorithms. A regulated market must 

also provide environments to facilitate 

such testing, to ensure that algorithmic 

trading systems cannot create or 

contribute to disorderly trading 

conditions on the market. The Directive 

requires a regulated market to 

implement systems to limit the ratio of 

unexecuted orders to transactions that 

may be entered into the system by a 

member or participant, to be able to 

slow down the flow of orders if there is 

a risk of its system capacity being 

reached, and to limit and enforce the 

minimum tick size that may be executed 

on the market.75

The European Commission requested 

that ESMA develop technical and 

implementing standards for MiFID II. 

On May 22, 2014, ESMA published a 

consultation paper seeking comments 

on certain topics in connection with 

MiFID II, including ‘‘micro-structural 

issues’’ such as testing and risk control 

requirements for investment firms 

engaged in algorithmic trading and 

trading venues.76 ESMA published 

another consultation paper on December 

19, 2014, seeking further comments on 

technical and implementing standards 

in connection with the implementation 

of MiFID II and summarizing comments 

received in response to ESMA’s May 

2014 paper.77 The comment period for 

the December 19, 2014 consultation 

paper closed in March 2015. In late 

2014, ESMA released a final report 

covering technical advice in certain 

areas, including the definition of 

algorithmic trading, HFT, and direct 

electronic access.78 In July 2015, ESMA 

released final technical advice relating 

to investor protection topics, including 

procedures for financial services firms 

to apply for authorized status, 

information required of firms applying 

to passport into other jurisdictions, and 

co-operation between regulatory 

authorities.79 On September 28, 2015, 

ESMA released a final report on draft 

regulatory and implementing technical 

standards for MiFID II (‘‘2015 Final 

Draft Regulatory Standards’’).80 This 

report provides regulatory standards for 

investment firms engaged in algorithmic 

trading as well as for trading venues that 

allow algorithmic trading. Details 

regarding ESMA’s standards are 

discussed below as relevant to the 

Commission’s proposed regulations 

relating to risk controls and other 

measures that AT Persons, clearing 

member FCMs and DCMs must 

implement. 

c. Other European Regulatory Initiatives 

In May 2013, Germany enacted the 

Act on the Prevention of Risks and 

Abuse in High-frequency Trading (the 

‘‘High-frequency Trading Act’’). 81 The 

High-frequency Trading Act requires 

that firms engaged in high-frequency 

trading must be licensed.82 In summary, 

high-frequency trading is defined to 

include each of the following four 

elements: (i) Trading for one’s own 

account, or by proprietary trading firms; 

(ii) trading algorithmically without 

human intervention; (iii) trading using 

low-latency infrastructures; and (iv) 

trading that generates a high intraday 

message rate.83 In addition, exchanges 

must impose, on a product-by-product 

basis, an excessive system usage fee and 

an order-to-trade ratio limit intended to 

prevent unnecessary messaging.84

Finally, the High-frequency Trading Act 

requires identification of algorithmically 

generated orders and trading algorithms, 

which is intended to enhance 

monitoring of manipulative activity.85

In May 2015, the Bank of England’s 

Prudential Regulation Authority 

(‘‘PRA’’), the United Kingdom’s 

prudential supervisor of major trading 

firms, announced that it would assess 

the adequacy of existing risk 

measurement and management practices 

with respect to trading algorithms, 

including whether controls around 

algorithmic trading are ‘‘fit for 

purpose.’’ 86 The PRA discussed the 

growth of automated trading in financial 

markets, which has included incidents 

of extreme volatility. For example, 

volatility seen in the Swiss Franc 

exchange rate on January 15, 2015, 

following the Swiss central bank’s 

decision to remove a floor to the 

exchange rate, may have been 

exacerbated by high-frequency 

trading.87

Finally, in July 2015, the United 

Kingdom’s Financial Conduct Authority 

issued a consultation paper addressing 

strengthening accountability in 


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88Financial Conduct Authority (‘‘FCA’’), CP15/22 

Strengthening accountability in banking: Final rules 

(including feedback on CP14/31 and CP15/5) and 

consultation on extending the Certification Regime 

to wholesale market activities, at 46 (July 2015), 

available at https://www.fca.org.uk/your-fca/

documents/consultation-papers/cp15-22. 

89 Id. 

90 Id. 

91See October 15 Joint Staff Report, supra note 

10. 

92NFA, ‘‘9046—Compliance Rule 2–9: 

Supervision of the Use of Automated Order-Routing 

Systems,’’ (Dec. 12, 2006), available at https://

www.nfa.futures.org/nfamanual/

NFAManual.aspx?RuleID=9046&Section=9. 

93 Interpretive Notice 9046 does not require NFA 

members to ‘‘impose pre-execution controls on all 

customers, however. The Member should review 

the customer’s sophistication, credit-worthiness, 

objectives, and trading practices and strategies 

when determining whether to impose controls preexecution or post-execution and deciding what 

levels to use when setting limits.’’ 

94The Interpretive Notice adds that ‘‘[t]his ability 

can be provided by the AORS or through other riskmanagement systems.’’ 

banking.88 The proposed rule 

specifically set out to capture 

individuals responsible for the 

deployment of trading algorithms in its 

Certification Regime.89 Pursuant to the 

proposal, individuals responsible for: 

(1) Approving the deployment of a 

trading algorithm or a material part of 

one; (2) approving the deployment of a 

material amendment to a trading 

algorithm or a material part of one, or 

the combination of trading algorithms; 

and (3) monitoring or deciding whether 

or not the use or deployment of a 

trading algorithm is or remains 

compliant with the firm’s obligations 

would be captured and subject to the 

Certification Regime.90

d. The October 15 Joint Staff Report 

As discussed above in section I(B), on 

July 13, 2015, five regulatory agencies 

issued the October 15 Joint Staff Report 

on the unusually high level of volatility 

and rapid round-trip in prices that 

occurred on October 15, 2014 in the 

market for U.S. Treasury securities, 

futures and other closely related 

financial markets.91 In addition to 

discussing the events of October 15, the 

report includes an Appendix C that 

summarizes many of the risks of 

automated trading. These risks include 

the following: Operational risks (ranging 

from malfunctioning and incorrectly 

deployed algorithms to algorithms 

reacting to inaccurate or unexpected 

data); market liquidity risks (arising 

from abrupt changes in trading 

strategies even when a firm executes its 

strategy perfectly); market integrity risks 

(automated trading can provide new 

tools to engage in unlawful conduct); 

transmission risks (shocks based on 

erroneous orders impacting multiple 

markets); clearing and settlement risks 

(as more firms gain access to trading 

platforms, trades may not be subject to 

sufficient settlement risk mitigation 

techniques); and risks to effective risk 

management (the speed of trade 

execution may make critical risk 

mitigation devices less effective). 

D. Industry and Regulatory Best 

Practices and Recommendations 

Widely recognized organizations and 

governmental entities or agencies have 

issued ‘‘best practices’’ for automated 

trading, including the National Futures 

Association (‘‘NFA’’), the FIA, ESMA, 

and the International Organization of 

Securities Commissions (‘‘IOSCO’’), 

among others. 

1. NFA Compliance Rule 2–9: 

Supervision 

NFA, a registered futures association 

under Section 17 of the Act, has 

provided guidance regarding ATSs to 

industry participants since 2002. 

Specifically, NFA Interpretive Notice 

9046 addresses the ‘‘Supervision of the 

Use of Automated Order-Routing 

Systems’’ in the context of NFA’s 

overarching supervision requirements in 

Compliance Rule 2–9 (Supervision).92

The Commission believes that 

Compliance Rule 2–9 and Interpretive 

Notice 9046 are especially relevant 

because of their wide applicability as 

NFA membership rules, binding on 

FCMs, IBs, CPOs, CTAs, and other NFA 

members. In addition, these provisions 

and interpretations have been in place 

since at least 2006, such that NFA 

members—and by extension many AT 

Persons—will have been subject to 

regulatory requirements concerning 

algorithmic trading for many years. 

Compliance Rule 2–9 requires each 

NFA member to ‘‘diligently supervise its 

employees and agents in the conduct of 

their commodity futures activities for or 

on behalf of the Member.’’ Interpretive 

Notice 9046, first issued in 2002 and 

revised in 2006, states that NFA’s board 

of directors ‘‘firmly believes that 

supervisory standards do not change 

with the medium used. How those 

standards are applied, however, may be 

affected by technology.’’ To fulfill their 

supervisory responsibilities, NFA 

members ‘‘must adopt and enforce 

written procedures to examine the 

security, capacity, and credit and riskmanagement controls provided by the 

firm’s automated order-routing systems 

(AORSs).’’ Interpretive Notice 9046 

applies to systems ‘‘that are within a 

Member’s control, including AORSs that 

are provided to the Member by an 

application service provider or an 

independent software vendor.’’ NFA 

acknowledges that NFA members will 

not control an AORS chosen by an NFA 

customer, such as direct access systems 

provided by exchanges. In such 

circumstances, the NFA member must 

nevertheless adopt procedures 

‘‘reasonably expected to address the 

trading, clearing, and other risks 

attendant to [their] customer 

relationship[s].’’ 

Among other requirements, 

Interpretive Notice 9046 addresses the 

following standards for automated 

systems: 

• Pre-Execution Controls (including 

both credit and ‘‘fat-finger’’ protections): 

‘‘An AORS should allow the Member to 

set limits for each customer based on 

commodity, quantity, and type of order 

or based on margin requirements. It 

should allow the Member to impose 

limits pre-execution and to 

automatically block any orders that 

exceed those limits.’’ 93

• Post-Execution Controls: ‘‘For 

customers subject to post-execution 

controls, the Member should have the 

ability to monitor trading promptly. The 

AORS should generate alerts when 

limits are exceeded through that system. 

The system should also allow the 

Member to block subsequent orders, 

either in their entirety or by kind (e.g., 

to block orders that create a new 

position or increase an existing position 

but not orders that liquidate some or all 

of an existing position).’’ 94

• Direct Access Systems: ‘‘When 

authorizing [customer] use of a direct 

access system that does not allow the 

Member to monitor trading promptly, 

the Member should utilize preexecution controls, if available, to set 

pre-execution limits for each customer, 

regardless of the nature of the 

customer.’’ 

• Review: ‘‘Members should use 

AORSs in conjunction with their creditreview/risk-management systems and 

should evaluate the controls imposed on 

each customer as part of their regular 

credit and risk-control procedures.’’ 

A number of the controls summarized 

above are in keeping with the 

Commission’s proposed requirements 

for AT Persons, including proposed 

§ 1.80, which requires pre-trade risk 

controls and other measures reasonably 

designed to prevent an Algorithmic 

Trading Event, including but not limited 

to maximum order message and 

execution frequencies per unit time; 

order price parameters and maximum 

order sizes; and certain order 

cancellation capabilities. The 

Commission notes once again its intent 

in much of Regulation AT to build on 


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95FIA, ‘‘FIA Guide to the Development and 

Operation of Automated Trade Systems’’ (Mar. 23, 

2015) [hereinafter ‘‘FIA Guide’’], available at 

https://fia.org/sites/default/files/FIA%20

Guide%20to%20the%20Development%20and%20

Operation%20of%20Automated%20Trading%20

Systems.pdf. 

96 Id. at 6. 

97FIA, ‘‘Market Access Risk Management 

Recommendations,’’ (Apr. 2010), available at 

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

Access-6.pdf. 

98FIA PTG, ‘‘Recommendations for Risk Controls 

for Trading Firms,’’ (Nov. 2010), available at 

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

_Best_Pratices.pdf. 

99Sutphen, Leslie, ‘‘Exchange Survey Finds Wide 

Range of Risk Controls in Place,’’ (Jan. 2011), 

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

downloads/RC-survey.pdf. 

100FIA PTG & EPTA, ‘‘Software Development and 

Change Management Recommendations,’’ (Mar. 14, 

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

downloads/Software_Change_Management.pdf. 

101FIA, ‘‘Drop Copy Recommendations,’’ (Sept. 

2013), available at http://www.futuresindustry.org/

downloads/FIA-Drop_Copy(FINAL).pdf. 

102See IOSCO’s public Web site, available at 

https://www.iosco.org/about/?subsection=about_

iosco. 

103Technical Committee of the IOSCO, 

‘‘Regulatory Issues Raised by the Impact of 

Technological Changes on Market Integrity and 

Efficiency: Final Report,’’ (Oct. 2011), available at 

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

IOSCOPD361.pdf. 

104See id. 

105See id. 

106 IOSCO, ‘‘Mechanisms for Trading Venues to 

Effectively Manage Electronic Trading Risks and 

Plans for Business Continuity: Consultation 

Report,’’ (Apr. 2015) [hereinafter ‘‘IOSCO 2015 

Consultation Report’’], available at http://

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

IOSCOPD483.pdf. 

existing regulatory requirements and 

industry practices so that its proposed 

regulations facilitate an ongoing 

transition to effective risk controls in 

algorithmic trading. The Commission 

believes that the existence of related 

regulatory standards enforced by NFA 

since 2002 and updated in 2006 would 

help minimize any potential disruptions 

or burdens that would otherwise be 

associated with a number of the 

Commission’s proposed rules for AT 

Persons. The Commission also believes 

that NFA’s prior experience in this area 

will assist in complying with the 

requirements of proposed § 170.19, 

discussed in detail in section IV(F) 

below. 

2. FIA Reports on Automated Trading 

On March 23, 2015, FIA released the 

‘‘FIA Guide to the Development and 

Operation of Automated Trading 

Systems’’ (the ‘‘FIA Guide’’), which 

provides recommendations concerning 

appropriate risk controls at the trader, 

broker and exchange levels.95 Risk 

controls recommended by FIA include 

maximum order size limits, maximum 

intraday position limits, market data 

reasonability checks, price tolerance 

limits, repeated automated execution 

limits, exchange dynamic price collars, 

exchange market pauses, exchange 

message programs, message throttles, 

self-trade prevention tools, kill 

switches, cancel-on-disconnect service 

and exchange-provided order 

management tools. FIA also 

recommended audit trail procedures 

that identify automated trading system 

operators; certain post-trade measures to 

monitor for potential credit events or 

unintended trading; measures related to 

co-location services; and disaster 

recovery and business continuity 

procedures. Finally, FIA recommended 

measures related to automated trading 

system development and support, 

including general principles related to 

testing; policies and procedures related 

to security; systems monitoring 

procedures; and documentation 

procedures. Consistent with the 

approach the Commission intends to 

pursue in Regulation AT, the FIA Guide 

states that, ‘‘[c]are should be taken to 

avoid implementing overly prescriptive 

standards or rules that impose a onesize-fits-all approach to all entities.’’ 96

The Commission encourages industry 

participants to consider FIA’s 

recommendations. In the event that the 

FIA Guide recommends best practices 

that are not proposed in Regulation AT, 

the Commission encourages industry 

participants to consider implementing 

the FIA best practices if they are 

appropriate to their business and are 

reasonably designed to prevent an 

Algorithmic Trading Event. FIA’s 

recommendations may also serve as a 

useful starting point for an RFA 

considering potential measures in 

response to proposed § 170.19, 

discussed in section IV(F) below. 

FIA has issued several additional 

reports related to the appropriate best 

practices that should be implemented 

with respect to automated trading. In 

April 2010, FIA issued a report 

addressing the risks of direct market 

access and providing recommendations 

for risk controls to be implemented by 

exchanges and applied across all trading 

firms.97 In November 2010, FIA’s 

Principal Traders Group (‘‘FIA PTG’’) 

released a report setting out 

recommended risk controls for trading 

firms that have direct access to 

exchange matching engines,98 as well as 

a global survey of futures exchanges to 

determine what controls were in place 

to manage the risks in providing trading 

firms with direct market access.99 In 

March 2012, FIA PTG and FIA European 

Principal Traders Association issued 

recommendations to assist trading firms 

in establishing internal procedures, 

processes and controls for the 

development, testing and deployment of 

trading software.100 Finally, in 

September 2013, FIA released 

recommendations for increasing the 

usefulness of drop copy systems in 

exchange-traded markets.101

3. IOSCO Reports on Electronic Trading 

IOSCO is an international body of 

securities regulators. IOSCO develops, 

implements and promotes adherence to 

internationally recognized standards for 

securities regulation. Its membership 

regulates more than 95% of the world’s 

securities markets in more than 115 

jurisdictions.102 In October 2011, IOSCO 

released recommendations to promote 

the integrity and efficiency of markets in 

order to mitigate risks posed by the 

latest technological developments.103

Among other things, IOSCO 

recommended that regulators ensure 

that trading venues have in place 

suitable trading control mechanisms 

such as trading halts, volatility 

interruptions, and limit-up/limit-down 

controls to deal with volatile market 

conditions, as well as trading systems 

that have the ability to adjust to changes 

in message traffic (including sudden 

increases).104 In addition, IOSCO 

recommended that all order flow of 

trading participants, regardless of 

whether they access the market directly, 

be subject to appropriate controls, 

including automated pre-trade controls. 

IOSCO also recommended that 

regulators should identify any risks 

arising from currently unregulated 

direct participants of trading venues and 

take steps to address them.105

More recently, in April 2015, IOSCO 

released a consultation report entitled 

‘‘Mechanisms for Trading Venues to 

Effectively Manage Electronic Trading 

Risks and Plans for Business 

Continuity.’’ 106 The report compiles the 

results of a survey that IOSCO sent to 

trading venues across more than 30 

different jurisdictions. Based on the 

information compiled, the report 

proposes best practices that should be 

considered by trading venues when 

developing and implementing risk 

mitigation mechanisms. These practices 

are intended to promote the integrity, 

resiliency and reliability of trading 

systems and business continuity plans. 

With respect to managing risks 

originating from market participant 

technology, the report explains that 

most trading venues have policies, 

procedures and tools to detect and 

address the operational risks associated 

with electronic trading. These tools 


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107See id. at 20–21. 

108See id. 

109See id. at 22–23. IOSCO uses the term DEA or 

‘‘direct electronic access’’ to mean an arrangement 

where a client of an intermediary obtains access to 

the market through the intermediary’s infrastructure 

or access without using the intermediary’s systems. 

See id. at 20 n.56. 

110See CFTC TAC Recommendations, supra note 

34. 

111See FPL Americas Risk Management Working 

Group, ‘‘Recommended Risk Control Guidelines,’’ 

(2012), available at http://

www.fixtradingcommunity.org/mod/file/

view.php?file_guid=32127. 

112See id. at 5. Other scenarios include an order 

where the symbology cannot be resolved to a single 

security and large accrued long or short positions 

that may result in settlement and/or delivery risk 

if the client cannot settle the trade. 

113See id. 

114See id. at 22. 

115See Senior Supervisors Group, ‘‘Algorithmic 

Trading Briefing Note,’’ (Apr. 2015) [hereinafter 

‘‘SSG 2015 Note’’], available at http://

www.newyorkfed.org/newsevents/news/banking/

2015/SSG-algorithmic-trading-2015.pdf. The SSG 

includes staff from the following organizations: 

Canadian Office of the Superintendent of Financial 

Institutions, the European Central Bank Banking 

Supervision, the French Prudential Control and 

Resolution Authority, the German Federal Financial 

Supervisory Authority, the Bank of Italy, the 

Japanese Financial Services Agency, the 

Netherlands Bank, the Bank of Spain, the Swiss 

Financial Market Supervisory Authority, the United 

Kingdom’s Prudential Regulatory Authority, and, in 

the United States, the Office of the Comptroller of 

the Currency, the Securities and Exchange 

Commission, and the Federal Reserve. 

116See id. at 2–3. 

117See id. at 3–4. 

118See Treasury Market Practices Group, 

‘‘Automatic Trading in Treasury Markets,’’ (June 

2015), available at http://www.newyorkfed.org/

tmpg/TPMG_June%202015_automated%20trading_

white%20paper.pdf. 

119See Treasury Market Practices Group, ‘‘Best 

Practices for Treasury, Agency Debt, and Agency 

include, among others, pre-trade risk 

controls (such as price and volume 

controls or filters and order entry 

controls), the ability to block, suspend 

or disconnect a user (e.g., a kill switch), 

measures to halt trading in the event of 

sudden price movements, and throttles 

that constrain the number or frequency 

of messages from any given 

participant.107 IOSCO also explained 

that many trading venue participants 

use pre-trade risk controls such as order 

volume, price per security, credit, 

notional value of order, order value, 

capital, position checks, price deviation 

thresholds, and regulatory integrity 

checks.108 Finally, IOSCO addressed 

direct market access by referring to a 

previous report it issued in 2010, called 

‘‘Principles for Direct Electronic Access 

to Markets.’’ In that report, IOSCO 

recommended that intermediaries 

(including clearing firms) have adequate 

operational and technical capability to 

appropriately manage the risks posed by 

DEA.109

4. CFTC TAC Subcommittee 

In 2011, the Pre-Trade Functionality 

Subcommittee (‘‘TAC Subcommittee’’) 

of the CFTC’s TAC issued 

recommendations for pre-trade controls 

for trading firms, clearing firms and 

exchanges which use, or provide, direct 

market access.110 The TAC 

Subcommittee recommended the 

following risk controls for trading firms: 

Quantity limits on individual orders; 

price collars; execution throttles; 

message throttles; and a kill switch that 

would cancel all existing orders and 

prevent the firm from placing new 

orders. The TAC Subcommittee further 

recommended that clearing firms 

trading on their own behalf should 

comply with those risk controls. In 

addition, clearing firms should confirm 

that their client firms are implementing 

such controls, approve the parameters 

used by the trading firm, and have 

access to the kill switch. Exchanges 

should implement, and require trading 

firms to use, pre-trade quantity limits on 

individual orders; intra-day position 

limits; price collars; and message 

throttles. The TAC Subcommittee also 

recommended that exchanges 

implement clear and consistent error 

trade policies, order cancellation 

policies that allow for automatic 

cancellation of orders on disconnect, 

and the ability for clearing firms to view 

their firm’s orders and to cancel 

working orders. 

5. FIX Risk Management Working Group 

Additional organizations have 

released best practices documents, 

including FIX Protocol Ltd.’s (‘‘FIX’’) 

Americas Risk Management Working 

Group. FIX is a non-profit, industry 

standards association that owns, 

maintains and continuously develops 

the Financial Information eXchange 

(FIX) Protocol in response to market 

requirements. In 2012, FIX released risk 

control guidelines for algorithmic 

trading orders and direct market access 

orders.111 FIX identified typical order 

scenarios that brokers attempt to detect, 

which include the following: An order 

for an exceedingly large quantity; an 

order that will adversely impact the 

market for a given security; an order 

with incomplete or conflicting 

instructions; an order that is potentially 

duplicative or unintentionally 

repeating; an order where adverse or 

favorable price moves impact the order 

while it is working; and an order that 

may be stale or may have been replaced 

by the client or a system.112 FIX 

explained that the absence of 

appropriate risk controls can result in 

market dislocation, failure to settle/

deliver, conflict between the client’s 

intent and order execution, and trading 

the wrong product.113 FIX provides a 

recommended matrix of risk controls, 

which includes maximum order 

quantity, average daily volume checks, 

price limit checks, favorable/adverse 

price move checks, position limits, 

credit checks, and stale, runaway, and 

duplicate order checks.114

6. Senior Supervisors Group (SSG) 

Briefing Note 

In April 2015, the Senior Supervisors 

Group (‘‘SSG’’), composed of the staff of 

banking and other financial regulatory 

agencies from ten countries and the 

European Union, issued an 

‘‘Algorithmic Trading Briefing Note.’’ 115

The Note focused on how large financial 

institutions currently monitor and 

control for the risks associated with 

algorithmic trading during the trading 

day. The Note identified several risks 

that SSG believes are common to 

algorithmic trading across jurisdiction 

and asset class: (i) Systemic risk may be 

amplified; (ii) algorithmic trading desks 

may face a significant amount of risk 

intraday without transparency and 

robust controls; (iii) internal controls 

may not have kept pace with speed and 

market complexity; and (iv) without 

adequate controls, losses can 

accumulate and spread rapidly.116 The 

Note provided a list of principles for 

supervisors to consider when evaluating 

controls over algorithmic trading at 

banks: (a) Controls must keep pace with 

technological complexity and trading 

speeds; (b) governance and management 

oversight can limit exposure to losses 

and improve transparency; (c) testing 

needs to be conducted during all phases 

of a trading product’s lifespan, namely 

during development, rollout to 

production, and ongoing maintenance; 

and (d) when assessing control depth 

and suitability, management should 

ensure sufficient involvement of control 

functions (including compliance, 

technology, legal, and controllers), as 

well as business-unit management.117

7. Treasury Market Practices Group Best 

Practices 

In June 2015, the Treasury Market 

Practices Group, a group sponsored by 

the Federal Reserve Bank of New York, 

and comprised of legal, compliance and 

business representatives from 

institutions related to U.S. Treasury 

market primary and secondary trading, 

released a white paper on Automated 

Trading 118 and an updated Best 

Practices document for trading in U.S. 

cash Treasury securities markets.119 The 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78837 

Mortgage-Backed Securities Markets,’’ (June 2015), 

available at http://www.newyorkfed.org/tmpg/

TPMG_June%202015_Best%20Practices.pdf. 

120See Concept Release, 78 FR at 56548–49. 

121See U.S. Commodity Futures Trading 

Commission and U.S. Securities and Exchange 

Commission, ‘‘Findings Regarding the Market 

Events of May 6, 2010,’’ (September 30, 2010) 

[hereinafter, the ‘‘Flash Crash Report’’], available at 

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

documents/ifdocs/staff-findings050610.pdf. 

122See SEC Knight Capital Release, supra note 39. 

123See id. 

124See Strasburg, Jenny and Bunge, Jacob, ‘‘Loss 

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

available at http://online.wsj.com/article/SB1000

0872396390443866404577564772083961412.html 

and Valetkevitch, Caroline and Mikolajczak, Chuck, 

‘‘Error by Knight Rips Through Stock Market,’’ 

Reuters (Aug. 1, 2012), available at http://

www.reuters.com/article/2012/08/01/us-usa-nysetradinghalts-idUSBRE8701BN20120801. 

125See IOSCO 2015 Consultation Report, supra 

note 106 at 1 n.6. 

126See id. and ‘‘Technical Failure Delays Eurex 

Trading in Futures, Options,’’ Bloomberg (Feb. 17, 

2015), available at http://www.bloomberg.com/

news/articles/2015-02-17/eurex-futures-optionsopening-delayed-after-technical-problem. 

127See ‘‘Treasuries trading system disrupted,’’ 

Korea Times (Feb. 14, 2014), available at https://

www.koreatimes.co.kr/www/news/biz/2014/09/488_

151619.html. 

128See ‘‘Sebi probes Muhurat trading mishap on 

BSE,’’ Business Standard (Nov. 12, 2011), available 

at http://www.business-standard.com/article/

markets/sebi-probes-muhurat-trading-mishap-onbse-111111200083_1.html. 

129See In re Goldman, Sachs & Co., No. 3–16665 

(SEC June 30, 2014) (order instituting 

administrative and cease-and-desist proceedings). 

130 Id. at 2. 

131 Id. 

132 Id. at 3. 

133 Id. at 2. 

134Concept Release, 78 FR 56542, 56544. 

Best Practice updates, among other 

things, expanded the scope of 

recommended risk controls that address 

the risks of automated trading 

(automated trading, for purposes of the 

Best Practices document, means the 

subset of electronic trading that relies 

on computer algorithms for decisionmaking and execution of order 

submissions), including the 

documentation of internal policies and 

procedures, additional transparency in 

exchange or trading platform market 

data, error trade rules and exchange 

provided services, expanded design and 

testing environments at firms and 

exchanges, and updated risk controls 

that align with the speed of trading 

technology. The white paper notes that 

these updates were issued in a period 

when cash Treasury securities markets, 

like many other asset classes, have 

experienced a strong increase in 

automated trading on electronic 

platforms. 

III. Recent Disruptive Events in 

Automated Trading Environments 

The Concept Release discussed 

malfunctions in automated trading 

systems, in both derivatives and 

securities markets, that illustrate the 

technological and operational 

vulnerabilities inherent to automated 

trading environments.120 As an 

example, the Flash Crash of May 2010 

involved an automated trading system 

with a design flaw that impacted both 

the derivatives and securities markets. 

According to the CFTC/SEC joint report 

on the Flash Crash, an automated 

execution algorithm did not take price 

or time variables into account. Given the 

parameters of the program, the 

algorithm continued to send orders even 

as prices moved far beyond traditional 

daily ranges.121 In another example, in 

2012 a securities trading firm, Knight 

Capital Group, made a coding error in 

an automated equity router, and then 

incorrectly deployed new code in the 

same router.122 Because of these coding 

errors, the firm’s automated trading 

system inadvertently built up 

unintended positions in the equity 

market, eventually resulting in losses of 

more than $460 million for the firm.123

The malfunction impacted the broader 

market, creating swings in the share 

prices of almost 150 companies; these 

price swings were high enough to trigger 

pauses in the trading of five stocks.124

Foreign markets have also 

experienced disruptive events in recent 

years. For example, in May 2012 in 

Mexico, a ‘‘fat finger’’ error by a market 

participant resulted in the execution of 

1.13 million shares (representing U.S. 

$3.78 billion).125 In February 2015, 

there was a five minute delay in 

opening futures and options on the 

Eurex exchange in Germany because a 

market participant’s system was 

transmitting duplicate orders.126 In 

February 2014, trading in three-year 

Korean treasury bonds was halted for 

almost two hours at the Korea Exchange 

due to a system malfunction resulting 

from an improper order from a 

brokerage house.127 On October 26, 

2011, the Bombay Stock Exchange had 

to cancel all derivatives trading due to 

unusually high volumes and price 

volatility as a result of a flawed 

algorithm used by a member firm.128

Goldman Sachs was recently fined $7 

million by the SEC for violating its 

Market Access Rule and causing a 

disruptive trading event.129 On August 

20, 2013, a configuration error in one of 

Goldman’s options order routers 

erroneously sent thousands of limit 

orders to the options exchanges prior to 

the start of regular market trading.130 By 

the time the creation of additional 

orders was disabled, and efforts to 

cancel unintended orders were taken, 

approximately 1.5 million unintended 

orders (representing 150 million 

underlying shares) had been executed 

on the market.131 The existing risk 

management controls and supervisory 

procedures in place at Goldman failed 

to stop the erroneous orders, and human 

error and failure to follow best practices 

exacerbated the errors.132 While some 

erroneous orders were able to be 

cancelled, Goldman’s loss ultimately 

totaled $38 million.133

Disruptive events illustrate the 

importance of effective risk controls. 

The risk controls contemplated in 

Regulation AT are intended to limit the 

extent of market disruption caused by 

ATSs or trading platform malfunctions. 

For example, a pre-trade risk control 

such as a message throttle will prevent 

submission of orders that exceed a 

predetermined frequency per unit time. 

Such a control could be operated by the 

market participant generating orders, 

the clearing firm guaranteeing its trades, 

or the trading platform on which orders 

would be executed, and would limit the 

impact of an algorithmic trading system 

not operating as intended. As another 

example, monitoring and supervision 

standards for algorithmic trading may 

help ensure that human supervisors 

intervene quickly when automated 

systems experience unexpected or 

degraded performance, and that 

supervision staff have the both the 

authority and knowledge to take 

appropriate steps in this scenario. 

IV. Overview of Regulation AT 

A. Concept Release/Regulation AT 

Terminology 

The Concept Release used the term 

‘‘automated trading system’’ 

(abbreviated ‘‘ATS’’) to refer to the 

algorithms used to automate the 

generation and execution of a trading 

strategy.134 In discussing comments to 

the Concept Release, the Commission 

will continue to use the term automated 

trading system. However, for greater 

precision, the proposed rules and 

preamble for Regulation AT instead 

refer to ‘‘algorithmic trading system’’ 

(also abbreviated ‘‘ATS’’). This change 

is intended only as a change in in 

nomenclature. ATSs as described herein 

should not be confused with alternative 

trading systems in equities markets. 

B. Commenter Preference for PrinciplesBased Regulations 

As an initial matter, the Commission 

notes a preference expressed in 

comments to the Concept Release for 

principles-based, as opposed to 

prescriptive, regulations. Fifteen 


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135The Futures Industry Association (‘‘FIA’’) 

Comment Letter (Dec. 11, 2013) at 2, 12; CME 

Group (‘‘CME’’) Comment Letter (Dec. 11, 2013) at 

3, 41–42; Gelber Group, LLC (‘‘Gelber’’) Comment 

Letter (Dec. 9, 2013) at 1–2; KCG Holdings, Inc. 

(‘‘KCG’’) Comment Letter (Dec. 11, 2013) at 3; The 

Alternative Investment Management Association 

(‘‘AIMA’’) Comment Letter (Dec. 11, 2013) at 1; The 

Minneapolis Grain Exchange (‘‘MGEX’’) Comment 

Letter (Dec. 11, 2013) at 1; CBOE Futures Exchange, 

LLC (‘‘CFE’’) Comment Letter (Dec. 11, 2013) at 2; 

Managed Funds Association (‘‘MFA’’) Comment 

Letter (Dec. 11, 2013) at 2; Holly Bell (Bell’’) 

Comment Letter (Dec. 11, 2013) at 3; Virtu Financial 

LLC (‘‘VFL’’) Comment Letter (Jan. 10, 2014) at 2– 

3; Chris Barnard Comment Letter (Jan. 29, 2014) at 

2; Susquehanna International Group (‘‘SIG’’) 

Comment Letter at 2; IntercontinentalExchange 

Group, Inc. (‘‘ICE’’) Comment Letter (Feb. 14, 2014) 

at 1–2; 3Red Trading LLC (‘‘3Red’’) Comment Letter 

(Feb. 14, 2014) at 2; OneChicago, LLC 

(‘‘OneChicago’’) Comment Letter (Feb. 14, 2015) at 

5. 

136FIA at 2, 12; CME at 3–4, 7; Gelber at 1–2; 

Tellefsen and Company, L.L.C. (‘‘TCL’’) Comment 

Letter (Oct. 31, 2013) at 5, 18; AIMA at 1, 2; CFE 

at 2; VFL at 3; Bell at 3. 

137The Commission notes that six entities 

submitted letters in support of FIA’s comment 

letter: RGM Advisors, LLC, Allston Trading LLC, 

Geneva Trading USA, LLC, Tibra Trading America 

LLC, DRW Trading Group and IMC Financial 

Markets. 

138FIA at 63; CME at 41. 

139 ICE at 1–2. 

140SIG at 2. 

141 VFL at 3. 

142CME at 3; FIA at 5; MFA at 6; Gelber at 2, 5, 

20; Bell at 2, 4. 

143 Gelber at 21; CFE at 1; MFA at 6. 

144MFA at 4; CFE at 1. 

145 Gelber at 2, 5, 20; CFE at 3; CME at 3; MFA 

at 6; Bell at 2. 

146The Institute for Agriculture and Trade Policy 

(‘‘IATP’’) Comment Letter (Dec. 11, 2013) at 4; 

Better Markets Inc. (‘‘Better Markets’’) Comment 

Letter (Dec. 11, 2013) at 1; Americans for Financial 

Reform (‘‘AFR’’) Comment Letter (Dec. 11, 2013) at 

6. 

147 IATP at 4. 

148Eric Budish et al. Comment Letter (Feb. 14, 

2014) at 1; Brian F. Mannix Comment Letter 

(Dec.10, 2013) at 2; Elaine Wah et al. Comment 

Letter (Dec. 11, 2013) at 2. 

149CME at 8–9; FIA at 61; Federal Reserve Bank 

of Chicago (‘‘Chicago Fed’’) Comment Letter (Dec. 

11, 2013) at 2; AIMA at 7; KCG at 2; VFL at 2. 

150FIA at 61. 

151See id. 

152FIA at 62. 

153See id. 

154CME at 7–8. 

commenters advocated a limited or 

‘‘principles-based’’ approach to any 

regulation arising from the Concept 

Release.135 Commenters indicated that 

prescriptive requirements will become 

obsolete, stifle innovation, discourage 

self-reporting of technological failures, 

may not account for the unique 

characteristics of market participants, 

and would result in participants 

designing around such measures.136

More specifically, FIA 137 and CME 

Group, Inc. (‘‘CME’’) suggested that the 

best way to achieve standardization of 

risk controls is through implementing 

‘‘best practices’’ developed through 

working groups of DCMs, FCMs, and 

other market participants.138 Similarly, 

IntercontinentalExchange, Inc. (‘‘ICE’’) 

indicated that ‘‘exchanges are able to 

better implement and update risk 

controls on a market-by-market basis 

than through a Commission 

rulemaking,’’ and should be allowed 

flexibility in designing exchange risk 

controls.139 Susquehanna International 

Group (‘‘SIG’’) stated that the 

Commission should ‘‘allow the 

exchanges to work with firms on 

tailoring the rules for implementation in 

ways that best consider the technical 

intricacies between firms and 

exchanges.’’ 140 Virtu Financial LLC 

(‘‘VFL’’) suggested that ‘‘mandating risk 

controls and supervisory systems that 

are ‘reasonably designed’ or ‘provide 

reasonable assurance’ of protection 

would allow participants to tailor these 

controls to the specific risks associated 

with their business.’’ 141

In addition, five commenters 

indicated that the Commission already 

has robust regulations in place to 

address the risks of automated 

trading.142 Such comments cited the 

DCM and SEF Core Principles; 143

Commission regulations 1.73, 23.609, 

38.255, and 38.607; 144 and CEA and 

Commission market manipulation and 

disruptive trading practices rules.145

In contrast to a limited or principlesbased approach to regulation, several 

commenters supported a more 

prescriptive approach to a rulemaking 

addressing the risks of automated 

trading.146 These commenters include 

the Institute for Agriculture and Trade 

Policy (‘‘IATP’’), Better Markets, and 

Americans for Financial Reform 

(‘‘AFR’’). For example, IATP stated that 

unless the Commission receives 

documentation that the risk controls of 

firms and exchanges are consistent and 

effective, the Commission should 

assume that regulatory standardization 

will be beneficial for each risk control 

and at each phase of the trade 

lifecycle.147 In addition, several 

academic commenters discussed 

concerns with automated, high speed 

trading and advocated specific changes 

to the trade matching or order 

submission process to increase market 

liquidity and efficiency.148

As discussed below, consistent with 

comments received, the Commission 

has taken a balanced approach to the 

regulations it believes are necessary to 

manage the risks of algorithmic trading. 

For example, the Commission proposes 

a principles-based approach to its risk 

controls requirements, in that it would 

require particular controls but allow the 

relevant entity—a trading firm, clearing 

member FCM, or DCM—discretion in 

the design of such control and the 

parameters that would be used. 

C. Multi-Layered Approach to Pre-Trade 

Risk Controls and Other Measures 

In response to the Commission’s 

questions in the Concept Release about 

the appropriate location for risk controls 

and other measures, commenters 

generally supported a multi-layered 

approach to risk controls, with each 

level—trading firm, clearing firm, and 

exchange—implementing risk controls 

that are adjusted depending on 

circumstance.149

For example, FIA commented that 

‘‘[i]ntroducing redundant risk controls 

at more than one focal point in the 

trading lifecycle may increase the 

integrity of the marketplace when 

careful consideration is given to their 

differences in roles, implementations 

and configurations.’’ 150 However, FIA 

also stated that ‘‘we caution against a 

mandated proliferation of redundant 

risk controls because the existence of 

similar but not identically implemented 

risk controls may do more harm than 

good. Each new implementation of a 

control will increase complexity and 

may cause misunderstanding between 

traders and risk managers as a 

consequence of conflicting risk 

limits.’’ 151 As an example of a control 

that may be appropriately implemented 

at multiple levels, FIA stated that 

maximum order size limits may be 

implemented at both market participant 

and FCM levels without redundancy 

because they reflect the different 

responsibilities of each participant.152

FIA further explained that if an FCM 

has implemented customer-specific 

controls within its infrastructure, it 

would be redundant to use the same 

controls at the DCM level, though as an 

additional protection, it is permissible 

to set higher limits at the DCM that 

apply across all customers.153

CME cited the TAC Subcommittee’s 

‘‘Recommendations on Pre-Trade 

Practices for Trading Firms, Clearing 

Firms and Exchanges involved in Direct 

Market Access,’’ and commented that 

‘‘each level of the ‘electronic trading 

‘supply chain’ (trading firms, clearing 

firms, and exchanges) must share in the 

effort to preserve market integrity 

through the implementation of effective 

risk controls, no matter if that 

participant has direct market access or 

is routing to the exchange via its 

clearing member firm’’.154 Specifically 


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155CME at 22. 

156See id. 

157CME at 43–44. 

158See id. 

159AIMA at 7. 

160 KCG at 2. 

161 VFL at 2. 

162ESMA September 2015 Final Draft Standards 

Report, supra note 80 at 201. 

163See id. 

164ESMA September 2015 Final Draft Standards 

Report Annex 1, supra note 80 at 218. 

165FIA at 41–42; CME at 29. CME defines ‘‘ATS’’ 

as ‘‘a trading method in which a computer makes 

decisions and enters orders without a person 

entering those orders. This is a programmatic way 

of representing the trader.’’ See CME Glossary, 

available at http://www.cmegroup.com/education/

glossary.html. ICE defines ‘‘ATS’’ as ‘‘any system 

that automates the generation and submission of 

orders to ICE.’’ See ICE Notice, Revision to 

Authorized Trader Requirements (Jan. 4, 2011) at 3, 

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

advisory_notices/ICE%20Advisory%20Notice%20

for%20Authorized%20Trader%20

Registration%20010411.pdf. 

166FIA at 41; CME at 29. 

167 Gelber at 2–3. 

168CFTC Technology Advisory Committee 

Subcommittee on Automated and High-Frequency 

Trading, Presentation to the TAC (Oct. 12, 2012), 

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

public/@newsroom/documents/file/tac103012_

wg1.pdf. 

169Regulation 1.3(yy) provides that the term 

‘‘commodity interest’’ means (1) any contract for the 

purchase or sale of a commodity for future delivery; 

(2) any contract, agreement or transaction subject to 

a Commission regulation under section 4c or 19 of 

the Act; and (3) Any contract, agreement or 

transaction subject to Commission jurisdiction 

under section 2(c)(2) of the Act; and (4) Any swap 

as defined in the Act, by the Commission, or jointly 

by the Commission and the Securities and 

Exchange Commission. See 17 CFR 1.3(yy). 

with respect to kill switch functionality, 

CME indicated that kill switch 

functionality deployed at multiple 

levels should not be considered 

redundant.155 CME further suggested 

that while multi-layered kill switch 

functionality is not necessary for 

effective risk control, it is nevertheless 

beneficial as it adds additional measures 

of protection.156 CME made a general 

point that registrants should establish 

controls appropriate to the nature of 

their business that are reasonably 

designed to control access, effectively 

monitor trading, and prevent errors as 

well as other inappropriate activity.157

CME indicated that, regardless of 

whether orders are entered manually 

through an electronic system or entered 

through an automated trading system, 

such principles are equally important, 

because the method of order entry does 

not lessen the impact of a particular 

order on the market.158

Other commenters supported a multilayered approach to risk controls. AIMA 

indicated that risk controls should be 

‘‘broadly similar’’ and applied at the 

trading firm, clearing firm, and 

exchange levels.159 KCG stated that 

‘‘risk management is most effective 

when it is multi-layered and 

overlapping.’’ 160 VFL stated that a 

‘‘multilayered system of risk controls is 

a key ingredient to protect the market 

from disruptive events.’’ 161

The Commission agrees with the 

comments above that it should adopt a 

multi-layered approach to regulations 

intended to mitigate the risks of 

automated trading. As explained below, 

the Commission proposes to impose 

requirements at multiple stages of the 

lifecycle of an order. The Commission 

acknowledges FIA’s comment that the 

different role of entities at various stages 

in the trade lifecycle must be carefully 

evaluated. While Regulation AT 

requires the same types of pre-trade and 

other risk controls to be implemented by 

different entities, the Commission notes 

that the proposed regulations allow for 

discretion in the appropriate design and 

parameters of each risk control. 

Accordingly, a trading firm, clearing 

member FCM, and DCM may each 

choose to design and calibrate the same 

control in different ways, depending on 

how the control is used by each entity 

to manage risks. 

The Commission notes that ESMA’s 

2015 Final Draft Regulatory Standards 

require pre-trade risk controls at both 

investment firms and trading venues.162

ESMA acknowledged commenter 

disagreement with such redundancy 

and stated, ‘‘ESMA believes that at least 

two lines of defence are appropriate in 

this complex business and thus 

continues to require the pre-trade risk 

controls conducted by both investment 

firms and trading venues.’’ 163 ESMA’s 

regulatory standards further provide 

that where a client is granted market 

access either through an intermediary’s 

systems, or directly without using the 

intermediary’s systems, the direct 

electronic access provider must apply 

the required pre-trade risk controls.164

Regulation AT requires pre-trade and 

other risk controls at both the AT Person 

and clearing member FCM level (as well 

as the DCM level) based on its 

understanding that the risks—and the 

resulting calibration levels of the 

controls—may be different given those 

entities’ distinct priorities and 

understanding of the risks to themselves 

and their customers. 

Below is a summary of each element 

of Regulation AT. For each element, the 

Commission addresses relevant Concept 

Release comments, summarizes the 

proposed regulation, and asks questions 

concerning the proposed regulation. 

D. Codification of Defined Terms Used 

Throughout Regulation AT 

1. ‘‘Algorithmic Trading’’—§ 1.3(zzzz) 

a. Concept Release Comments 

The Concept Release requested 

comment concerning whether the 

Commission should define ATS or 

algorithm for purposes of any ATS 

identification system. Commenters 

disagreed on whether the Commission 

should adopt a definition of ‘‘ATS.’’ FIA 

and CME opposed a regulatory 

definition, arguing that industry already 

has a definition of automated trading 

system.165 FIA and CME indicated that 

the definition of ATS is self-evident and 

has been in use for a long time, and that 

ATS, or automated orders, are orders 

that are generated and/or routed without 

human intervention. This includes 

orders generated by a computer system 

as well as orders that are routed using 

functionality that manages order 

submission by automated means (i.e., 

execution algorithms).166 Another 

commenter, Gelber Group, LLC 

(‘‘Gelber’’), stated that the Commission 

should adopt a ‘‘strong but 

appropriately flexible definition’’ of 

ATS aligned with existing exchange 

definitions.167

The Commission’s evaluation of this 

issue is also informed by the work of the 

TAC Subcommittee. In particular, the 

TAC Subcommittee described 

‘‘automated trading’’ as follows: 

‘‘[Automated trading] covers 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.’’ 168

b. Description of Regulation 

While the Commission does not 

define the term ‘‘ATS’’ in this NPRM, 

the Commission does propose a new 

§ 1.3(zzzz) that defines the related 

activity of ‘‘Algorithmic Trading.’’ This 

proposed term means trading in any 

commodity interest as defined in 

Regulation 1.3(yy) 169 on or subject to 

the rules of a DCM, where: (1) One or 

more computer algorithms or systems 

determines whether to initiate, modify, 

or cancel an order, or otherwise makes 

determinations with respect to an order, 

including but not limited to: the product 

to be traded; the venue where the order 

will be placed; the type of order to be 

placed; the timing of the order; whether 

to place the order; the sequencing of the 

order in relation to other orders; the 

price of the order; the quantity of the 


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170The reference to a ‘‘front-end system’’ may 

include a system provided by an independent 

software vendor (‘‘ISV’’), a broker or an exchange, 

or developed internally. 

171The Commission notes that if a customer 

submits an order to its clearing FCM, which then 

submits the order to a DCM, such order would still 

be considered ‘‘electronically submitted for 

processing on or subject to the rules of a designated 

contract market,’’ notwithstanding the fact that the 

order is routed through the intervening clearing 

FCM. 

172See ESMA Technical Advice Final Report, 

supra note 78 at 318. Article 4(1)(39) of MiFID II 

defines algorithmic trading as ‘‘trading in financial 

instruments where a computer algorithm 

automatically determines individual parameters of 

orders such as whether to initiate the order, the 

timing, price or quantity of the order or how to 

manage the order after its submission, with limited 

or no human intervention, and does not include any 

system that is only used for the purpose of routing 

orders to one or more trading venues or for the 

processing of orders involving no determination of 

any trading parameters or for the confirmation of 

orders or the post-trade processing of executed 

transactions.’’ See MiFID II, supra note 70. The 

ESMA Technical Advice Final Report states at 323, 

‘‘There is limited or no human intervention (and 

therefore algorithmic trading) when the system at 

least makes independent decisions at any stage of 

order-execution processes, either on initiating, 

routing or executing orders. It is noted that the 

reference to ‘orders’ encompasses ‘quotes’ as well.’’ 

173See ESMA Technical Advice Final Report, 

supra note 78 at 324. 

174See FINRA, Regulation Notice 15–06, 

‘‘Registration of Associated Persons Who Develop 

Algorithmic Trading Strategies,’’ (Mar. 2015), 

available at http://www.finra.org/sites/default/files/ 

notice_doc_file_ref/Notice_Regulatory_15-06.pdf. In 

the Notice, FINRA defines an ‘‘algorithmic trading 

strategy’’ as ‘‘any program that generates and routes 

(or sends for routing) orders (and order-related 

messages, such as cancellations) in securities on an 

automated basis.’’ Id. at 3. 

175See SEC Knight Capital Release, supra note 39. 

176See CME Glossary, available at http://

www.cmegroup.com/education/glossary.html. 

177See ICE Notice, Revision to Authorized Trader 

Requirements (Jan. 4, 2011) at 3, available at 

https://www.theice.com/publicdocs/otc/advisory_

notices/ICE%20Advisory%20Notice%20for%20

Authorized%20Trader%20Registration%20

010411.pdf. 

178The Commission notes that Forex Capital 

Markets, LLC (‘‘FXCM’’) commented in response to 

the Concept Release that automatic order routing 

systems be excluded from any definition of ‘‘highfrequency trading,’’ arguing that such systems are 

already subject to extensive regulatory oversight 

and control. See FXCM 1–2. For the reasons stated 

above, the Commission determined to include such 

systems within the definition of Algorithmic 

Trading. 

order; the partition of the order into 

smaller components for submission; the 

number of orders to be placed; or how 

to manage the order after submission; 

and (2) such order, modification or 

order cancellation is electronically 

submitted for processing on or subject to 

the rules of a DCM; provided, however, 

that Algorithmic Trading does not 

include an order, modification, or order 

cancellation whose every parameter or 

attribute is manually entered into a 

front-end system 170 by a natural person, 

with no further discretion by any 

computer system or algorithm, prior to 

its electronic submission for processing 

on or subject to the rules of a DCM.171

The term ‘‘Algorithmic Trading’’ is a 

critical underpinning of other elements 

of this NPRM. Specifically, the 

Commission proposes a number of 

requirements related to Algorithmic 

Trading, including that trading firms 

(i.e., AT Persons, as defined in section 

IV(D) below), clearing member FCMs, 

and DCMs implement certain pre-trade 

risk controls for Algorithmic Trading; 

that trading firms implement certain 

standards for the development, testing, 

monitoring, and compliance of ATSs; 

and that trading firms and clearing 

members FCMs submit compliance 

reports describing the new pre-trade risk 

controls. In addition, the term 

‘‘Algorithmic Trading’’ is employed in 

the proposed definition of ‘‘AT Person,’’ 

a term that identifies those persons or 

entities subject to the Commission’s 

proposed new pre-trade risk control 

requirements, among other 

requirements. 

The Commission notes that its 

definition of Algorithmic Trading is 

similar to the definition of algorithmic 

trading adopted by the European 

Commission under MiFID II.172

However, the definition of algorithmic 

trading under MiFID II does not include 

systems that only make decisions as to 

the routing of orders to one or more 

trading venues.173 Similarly, for 

purposes of a proposal relating to 

registration of persons who develop 

algorithmic trading strategies, FINRA’s 

definition of ‘‘algorithmic trading 

strategy’’ does not include an order 

router alone.174 In contrast to MiFID II 

and FINRA, the Commission intends 

that the definition of Algorithmic 

Trading includes systems that make 

determinations regarding any aspect of 

the routing of an order, i.e., systems that 

only make decisions as to the routing of 

orders to one or more trading venues. 

The Commission believes that 

automated order routers have the 

potential to disrupt the market to a 

similar extent as other types of 

automated systems, and therefore 

should not be treated differently under 

the proposed regulations. For example, 

the SEC determined that Knight Capital 

made errors related to the coding and 

testing of an automated equity router, 

which caused the firm to acquire several 

billion dollars in unwanted positions 

and sustain a loss of more than $460 

million, in addition to causing 

substantial market disruption.175

The Commission has taken this 

approach to automated order routers 

after considering existing industry 

definitions of ‘‘automated trading 

systems.’’ For example, CME defines 

‘‘ATS’’ as ‘‘a trading method in which 

a computer makes decisions and enters 

orders without a person entering those 

orders. This is a programmatic way of 

representing the trader.’’ 176 Similarly, 

ICE defines ‘‘ATS’’ as ‘‘any system that 

automates the generation and 

submission of orders to ICE.’’ 177 The 

Commission anticipates that entities 

using automated order routers will be 

using similar or related automated 

technology to determine other 

parameters of an order. In addition to 

the consideration that order routing 

systems have the potential to disrupt the 

market, the Commission believes that, 

given the interconnectedness of trading 

firm systems, carving out a particular 

subset of automated systems from the 

definition of Algorithmic Trading, e.g., 

order routing systems, would introduce 

unnecessary complexity and reduce the 

effectiveness of the safeguards provided 

in its proposed regulations.178

The Commission notes that even if a 

computer algorithm or system makes 

one or more determinations with respect 

to an order (such as product, timing, 

price or quantity), the submission of the 

order would not constitute Algorithmic 

Trading if every parameter or attribute 

of the order is manually entered into a 

front-end system by a natural person, 

with no further discretion by any 

computer system or algorithm, prior to 

its electronic submission for processing 

on or subject to the rules of a DCM. 

However, if a natural person does not 

manually enter an order as described in 

the preceding sentence, but nonetheless 

intervenes in the order in some other 

and more limited manner, the 

submission of the order would still 

represent Algorithmic Trading if the 

other elements of the definition are met. 

The Commission believes that the risks 

of Algorithmic Trading continue to exist 

in trading where there is some limited 

natural person intervention at particular 

stages of order submission or execution, 

and Regulation AT requirements should 

apply to such trading to the same extent 

that it does to trading that is entirely 

automated. In sum, the only 

circumstance in which natural person 

intervention by definition would cause 

trading to not represent Algorithmic 

Trading is if the proviso in clause (2) of 

the definition of Algorithmic Trading 

were met. 

Finally, the Commission clarifies that 

there are certain automated functions 

that do not fall within the proposed 

definition of Algorithmic Trading. For 

example, the use of automated programs 

that incorporate electronic indicators or 


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179See the discussion of front-end systems supra 

note 170. 180See ESMA September 2015 Final Draft 

Standards Report Annex 1, supra note 80 at 201– 

02. 

181See Reg SCI, supra note 40 at 72437. 182 Id. at 72437. 

other technical analysis features to 

notify a trader regarding specified 

market activity (e.g., a product reaches 

a particular price) would not in itself 

represent Algorithmic Trading, unless 

the same program makes the 

determinations described in clause (1) 

of the definition, and clause (2) is also 

met. Similarly, if an entity (such as an 

introducing broker) uses certain 

electronic systems as part of its business 

practices, but does not submit orders to 

a trading platform, that entity’s use of 

electronic systems would not of itself be 

considered Algorithmic Trading. 

Finally, the application of risk filters to 

an order that is otherwise entered 

through entirely manual means (i.e., an 

order whose every parameter or 

attribute is manually entered into a 

front-end system by a natural person, 

with no further discretion by any 

computer system or algorithm) 179

would not be considered Algorithmic 

Trading solely due to the use of risk 

filters. For example, existing §§ 1.11 and 

1.73 require FCMs and clearing member 

FCMs, respectively, to establish certain 

automated financial or risk-based 

controls, including limits based on 

position size, order size and margin 

requirements or capital, credit or 

volume thresholds. The application of 

such automated controls would not, on 

their own, cause an order to fall within 

the definition of Algorithmic Trading. 

The Commission notes that ESMA’s 

2015 Final Draft Regulatory Standards 

address the distinction between 

‘‘investment decision algorithms’’ 

(which make automated trading 

decisions by determining which assets 

to purchase or sell) and ‘‘order 

execution algorithms’’ (which optimize 

order execution processes by automatic 

generation and submission of orders or 

quotes to one or several trading venues 

once the investment decision is made). 

ESMA’s standards provide that pure 

investment decision algorithms which 

generate orders that are only to be 

executed by non-automated means and 

with human intervention are excluded 

from ESMA testing requirements.180

c. Request for Comments 

1. Is the Commission’s definition of 

‘‘Algorithmic Trading’’ generally 

consistent with what algorithmic 

trading is understood to mean in the 

industry? If not, please explain how it 

is inconsistent and how the definition 

should be modified. In your answer, 

please explain whether the definition 

inappropriately includes or excludes a 

particular type or aspect of trading. 

2. Should the Commission adopt a 

definition of ‘‘Algorithmic Trading’’ that 

is more closely aligned with any 

definition used by another regulatory 

organization? 

3. For purposes of the Commission’s 

definition of Algorithmic Trading, is it 

necessary for the Commission to define 

‘‘computer algorithms or systems’’? If 

so, please explain what should be 

included in such a definition. 

4. Should the Commission’s 

definition of ‘‘Algorithmic Trading’’ 

include systems that only make 

determinations as to the routing of 

orders to different venues (which is 

contemplated in the proposed 

definition)? With respect to the 

definition of ‘‘Algorithmic Trading,’’ 

should the Commission differentiate 

between different types of algorithms, 

such as alpha-generating algorithms and 

order routing algorithms? 

5. Is the Commission’s understanding 

correct that most entities using 

automated order routers will be using 

similar or related automated technology 

to determine other parameters of an 

order? 

6. The Commission posits a scenario 

in which an AT Person submits orders 

through Algorithmic Trading, and a 

non-clearing FCM or other entity acts 

only as a conduit for these AT Person 

orders. If the non-clearing FCM or other 

entity does not make any 

determinations with respect to such 

orders, the conduit entity would not be 

engaged in Algorithmic Trading, as that 

definition is currently proposed. Should 

the definition of Algorithmic Trading be 

modified to capture a conduit entity 

such as a non-clearing FCM in this 

scenario, thereby making the entity an 

AT Person subject to Regulation AT? In 

other words, should non-clearing FCMs 

be required to manage the risks of AT 

Person customers? How would nonclearing FCMs do so if the non-clearing 

FCMs do not have risk controls 

comparable to the risk controls specified 

in proposed § 1.82? 

7. The Commission, recognizing that 

natural person traders who manually 

enter orders also have the potential to 

cause market disruptions, is considering 

expanding the definition of Algorithmic 

Trading to encompass orders that are 

generated using algorithmic methods 

(e.g., an algorithm generates a buy or 

sell signal at a particular time), but are 

then manually entered into a front-end 

system by a natural person, who 

determines all aspects of the routing of 

the orders. Such order entry would not 

represent Algorithmic Trading under 

the currently proposed definition. The 

Commission requests comment on this 

proposed expansion of the definition of 

Algorithmic Trading, which the 

Commission may implement in the final 

rulemaking for Regulation AT. The 

Commission requests comment on the 

costs and benefits of this proposal, in 

addition to any other comments 

regarding the effectiveness of this 

proposal in terms of risk reduction. 

2. ‘‘Algorithmic Trading Compliance 

Issue’’—§ 1.3(tttt) 

a. Description of Regulation 

The Commission proposes to define 

three new, related terms: ‘‘Algorithmic 

Trading Compliance Issue,’’ 

‘‘Algorithmic Trading Disruption,’’ and 

‘‘Algorithmic Trading Event’’ (which 

encompasses Algorithmic Trading 

Compliance Issues or Algorithmic 

Trading Disruptions). As a general 

matter, the proposed regulations 

contained in Regulation AT are 

intended to address the risks of 

automated trading. Malfunctioning or 

incorrectly deployed algorithms 

deploying erroneous messages to trading 

venues can significantly impact markets 

and market participants. The speed at 

which trading occurs can magnify the 

harm caused by a malfunctioning 

system, for example, in driving 

unwarranted price changes. The 

proposed definitions work in 

conjunction with proposed regulations 

requiring certain risk controls and other 

measures and are intended to describe 

the types of market disruptions, 

regulatory violations, or other events 

that Regulation AT is designed to 

prevent or mitigate. 

The three proposed terms Algorithmic 

Trading Compliance Issue, Algorithmic 

Trading Disruption, and Algorithmic 

Trading Event have analogues under 

Reg SCI’s definitions of ‘‘Systems 

compliance issue,’’ ‘‘Systems 

disruption,’’ and ‘‘SCI event.’’ 181 The 

term ‘‘SCI event,’’ under Reg SCI, 

encompasses systems compliance issues 

and systems disruptions. Similar to 

Regulation AT, Reg SCI requires that an 

SCI entity’s policies and procedures 

must include monitoring of systems to 

identify potential SCI events, and that 

SCI entities must establish escalation 

procedures to quickly inform 

responsible SCI personnel of potential 

SCI events.182

The term ‘‘Algorithmic Trading 

Compliance Issue’’ is defined in 

proposed § 1.3(tttt), and means ‘‘an 

event at an AT Person that has caused 

any Algorithmic Trading of such entity 

to operate in a manner that does not 


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183The Commission notes that, under this 

definition, an Algorithmic Trading Disruption may 

be the result of intentional or unintentional acts by 

an AT Person. 

comply with the CEA or the rules and 

regulations thereunder, the rules of any 

designated contract market to which 

such AT Person submits orders through 

Algorithmic Trading, the rules of any 

registered futures association of which 

such AT Person is a member, the AT 

Person’s own internal requirements, or 

the requirements of the AT Person’s 

clearing member, in each case as 

applicable.’’ 

The term is relevant to Regulation 

AT’s pre-trade risk and other control 

requirements for AT Persons as 

provided in proposed § 1.80, which 

requires the specified controls and 

measures to be reasonably designed to 

prevent or mitigate an ‘‘Algorithmic 

Trading Event.’’ The term Algorithmic 

Trading Event, as discussed below, 

means either an Algorithmic Trading 

Compliance Issue or an Algorithmic 

Trading Disruption. The defined term 

Algorithmic Trading Compliance Issue 

is also relevant to Regulation AT’s 

proposed testing requirements on AT 

Persons. Specifically, proposed § 1.81(c) 

requires each AT Person to establish 

procedures requiring its staff to review 

Algorithmic Trading systems in order to 

detect potential Algorithmic Trading 

Compliance Issues. Regulation § 1.81(c) 

also would require a plan of internal 

coordination and communication 

between compliance staff of the AT 

Person and staff of the AT Person 

responsible for Algorithmic Trading 

designed to detect and prevent 

Algorithmic Trading Compliance Issues. 

Finally, proposed § 40.20 requires a 

DCM to establish and maintain pre-trade 

and other risk controls reasonably 

designed to prevent the occurrence of an 

Algorithmic Trading Disruption (or 

similar disruption) or an Algorithmic 

Trading Compliance Issue. The 

proposed definition of Algorithmic 

Trading Compliance Issue was not 

discussed in the Concept Release. 

b. Request for Comments 

8. Should the definition of 

Algorithmic Trading Compliance Issue 

be modified to include other potential 

compliance failures involving an AT 

Person that may have a significant 

detrimental impact on such AT Person, 

the relevant DCM, or other market 

participants? 

3. ‘‘Algorithmic Trading Disruption’’— 

§ 1.3(uuuu) 

a. Description of Regulation 

Regulation AT proposes a defined 

term ‘‘Algorithmic Trading Disruption.’’ 

The term is defined in new § 1.3(uuuu), 

and means ‘‘an event originating with 

an AT Person that disrupts, or 

materially degrades, (1) the Algorithmic 

Trading of such AT Person, (2) the 

operation of the designated contract 

market on which such AT Person is 

trading or (3) the ability of other market 

participants to trade on the designated 

contract market on which such AT 

Person is trading.’’ 183 The Commission 

notes that it interprets clause (3) of the 

definition broadly (‘‘an event originating 

with an AT Person that disrupts, or 

materially degrades . . . the ability of 

other market participants to trade on the 

designated contract market on which 

such AT Person is trading.’’) Among 

other events that would meet the 

Commission’s understanding of 

‘‘disrupts, or materially degrades,’’ the 

Commission interprets clause (3) as 

including an event originating with an 

AT Person that prohibits other market 

participants from trading on the 

designated contract market on which 

such AT Person is trading. 

The term Algorithmic Trading 

Disruption is relevant to Regulation 

AT’s pre-trade risk and other control 

requirements for AT Persons and FCMs 

that are clearing members for a DCO, as 

provided in proposed §§ 1.80 and 

1.82(a), respectively. The controls and 

measures required by proposed § 1.80 

must be reasonably designed to prevent 

or mitigate an ‘‘Algorithmic Trading 

Event,’’ The term ‘‘Algorithmic Trading 

Event,’’ as discussed below, means 

either an ‘‘Algorithmic Trading 

Compliance Issue’’ or an ‘‘Algorithmic 

Trading Disruption.’’ The controls and 

measures required of clearing member 

FCMs in proposed § 1.82(a), in contrast 

to those required of AT Persons in 

proposed § 1.80, must be reasonably 

designed to prevent or mitigate only the 

narrower Algorithmic Trading 

Disruption. Finally, proposed § 40.20 

requires a designated contract market to 

establish and maintain pre-trade and 

other risk controls reasonably designed 

to prevent an Algorithmic Trading 

Disruption. The proposed definition of 

Algorithmic Trading Disruption was not 

discussed in the Concept Release. 

b. Request for Comments 

9. Should the definition of 

Algorithmic Trading Disruption be 

modified to include other types of 

disruptive events that may originate 

with an AT Person? 

10. Should the definition be expanded 

to include other types of disruptive 

downstream consequences that may 

result from an Algorithmic Trading 

Disruption originating with an AT 

Person, and which may negatively 

impact the relevant designated contract 

market, other market participants, or 

other persons? Alternatively, should the 

scope of the definition be reduced, and 

if so, why? 

11. In addition, should the reference 

to ‘‘materially degrades’’ in the 

definition of Algorithmic Trading 

Disruption be expanded or otherwise 

modified to encompass other types of 

disruptions that may impact the 

relevant designated contract market, 

other market participants, or other 

persons? Please provide examples of 

real-world events originating with AT 

Persons (as defined under Regulation 

AT) that resulted in disruptions that 

may not be captured by the reference to 

‘‘materially degrades’’ in the definition. 

4. ‘‘Algorithmic Trading Event’’— 

§ 1.3(vvvv) 

Regulation AT proposes a new 

definition in § 1.3(vvvv) (Algorithmic 

Trading Event) that means either an 

Algorithmic Trading Compliance Issue 

or an Algorithmic Trading Disruption. 

As noted above, the term Algorithmic 

Trading Event is used in proposed 

§ 1.80 requiring AT Persons to 

implement risk controls that are 

reasonably designed to prevent or 

mitigate an ‘‘Algorithmic Trading 

Event.’’ The proposed definition is also 

used in rules under proposed § 1.81(a) 

that require AT Persons to conduct 

regular back-testing of Algorithmic 

Trading using historical transaction, 

order, and message data to identify 

circumstances that may contribute to 

future Algorithmic Trading Events. The 

definition is also used in rules under 

proposed § 1.81(b) that require AT 

Persons to conduct continuous real-time 

monitoring of Algorithmic Trading to 

identify potential Algorithmic Trading 

Events, and in rules under proposed 

§ 1.81(d) that require AT Persons to 

establish training procedures for 

communicating and escalating instances 

of Algorithmic Trading Events to the 

appropriate personnel. The proposed 

definition was not discussed in the 

Concept Release. 

5. ‘‘AT Order Message’’—§ 1.3(wwww) 

a. Description of Regulation 

The Commission is proposing to 

define an ‘‘AT Order Message’’ (new 

§ 1.3(wwww)) as each new order or 

quote submitted through Algorithmic 

Trading to a DCM by an AT Person and 

each change or deletion submitted 

through Algorithmic Trading by an AT 


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184The definition of AT Person is discussed in 

section IV.D.6. 185The regulation are proposed §§ 1.80 (for AT 

Persons), 1.82 (for FCMs), 38.255(b) and (c) (for 

DCMs permitting direct electronic access), and 

40.20 (for DCMs). 186Specifically, ESMA considered one message to 

mean ‘‘each content that needs independent 

processing,’’ and further explained that ‘‘messages 

to be counted for these purposes are each new order 

or quote, each successful change to an order or 

quote and each successful deletion of an order or 

quote.’’ See ESMA Technical Advice Final Report, 

supra note 78 at 320. 

187Order terms that have the potential to impact 

the market might include, but are not limited to, 

changes to price, quantity, and order type. 

188By ‘‘heartbeat’’ messages, the Commission 

means signals sent at regular intervals to ensure that 

the connection between the trading firm and the 

DCM’s electronic matching platform is in a normal 

state. 

189As a result, any person who is required to be 

registered as one of these registration categories and 

who is engaged in Algorithmic Trading will be 

subject to all requirements of an AT Person under 

this regulation, regardless of whether such person 

has actually registered with the Commission. 

Person 184 with respect to such an order 

or quote. This term is used in the 

proposed regulations requiring AT 

Persons, clearing member FCMs and 

DCMs to implement pre-trade risk 

controls and other measures with 

respect to AT Order Messages. The 

proposed controls include a maximum 

AT Order Message frequency per unit 

time, which is also known as a message 

throttle requirement.185 The 

Commission notes that its definition of 

AT Order Message is consistent with 

ESMA’s definition of message in its HFT 

analysis.186 The proposed language does 

not impose specific requirements 

concerning the design of the AT Order 

Message throttle or the particular 

thresholds that must be used. 

The Commission believes that 

defining AT Order Message is necessary 

in proposed §§ 1.80, 1.82, 38.255(b) and 

(c), and 40.20(a)(1) to specify the type of 

messages that should be subject to 

frequency controls. The Commission 

intends that required maximum message 

frequency controls would apply to new 

orders, order cancellations, and changes 

to important order terms that have the 

potential to impact the market.187

Notwithstanding the foregoing, while 

the definition of AT Order Message 

would only apply to order-related 

messages, the Commission recognizes 

that certain message types outside of the 

definition of AT Order Message may 

cause market disruptions by affecting 

the operation of a DCM’s electronic 

matching platform. A DCM has the 

discretion to implement controls 

throttling excessive heartbeat 188 or 

administrative-type messages if it 

believes that such controls are necessary 

to prevent fraud or manipulation or 

otherwise ensure the proper functioning 

of its electronic matching platform and 

market. 

As discussed below, the Commission 

believes that requiring maximum order 

message frequencies at the trading firm, 

clearing member FCM and DCM levels 

serves important policy goals. Order 

entry frequencies that are much larger 

than intended could result in an 

accumulation or reduction of positions 

at speeds that outpace or overload 

associated risk management systems. 

Large quantities of unintended orders 

could also impact the market by 

increasing engine matching times or 

order submission latencies. 

b. Request for Comments 

12. Please comment on the proposed 

scope of the Commission’s definition of 

AT Order Message. Is the proposed 

definition too expansive, in that it 

would limit the submission of messages 

that do not have the potential to disrupt 

the market? Alternatively, is the scope 

of the AT Order Message too limited, in 

that it could allow messages not related 

to orders (i.e., heartbeat messages or 

requests for mass quotes) to 

intentionally or unintentionally flood 

the DCM’s systems and slow down the 

matching engine? Please explain how 

this definition would be more 

appropriately limited or expanded. 

6. ‘‘AT Person’’—§ 1.3(xxxx) 

a. Description of Regulation 

The Concept Release did not 

specifically address whether regulations 

in the area of algorithmic trading should 

include a defined term ‘‘AT Person.’’ 

However, the Commission determined 

that such a defined term is necessary in 

order to identify which entities are 

subject to the proposed regulations 

addressing trading firms’ management 

of the risks of algorithmic trading. These 

regulations include, for example, pretrade and other risk controls on the 

orders initiated by the trading firm; 

development, testing and supervision 

standards; and the requirement to 

submit compliance reports regarding the 

new risk controls. 

The proposed definition under new 

§ 1.3(xxxx) lists those particular persons 

or entities that may be considered an AT 

Person: Persons registered or required to 

be registered as FCMs, floor brokers, 

SDs, MSPs, CPOs, CTAs, or IBs that 

engage in Algorithmic Trading on or 

subject to the rules of a DCM, or persons 

registered or required to be registered as 

floor traders as defined in § 1.3(x)(3).189

Regulation § 1.3(x)(3) is a proposed 

revision to the Commission’s existing 

definition of floor trader, and is 

discussed in detail below (see section 

IV(E) below on Registration of Certain 

Persons Not Otherwise Registered with 

the Commission). Such persons or 

entities would be AT Persons if they 

engage in Algorithmic Trading on or 

subject to the rules of a DCM. See 

section IV(H) below for a more detailed 

discussion of which persons would be 

designated as AT Persons for purposes 

of proposed § 1.80 and other 

regulations, and which persons would 

not be AT Persons, but would 

nonetheless be subject to proposed 

§ 1.82. 

b. Request for Comments 

13. The Commission notes that the 

FIA Guide recommends certain pretrade risk controls and contemplates 

three levels at which these controls can 

be placed: Automated trader, broker, 

and exchange. FIA defines ‘‘automated 

trader’’ as any trading entity that uses an 

automated system, including hedge 

funds, buy-side firms, trading firms, and 

brokers who deploy automated 

algorithms, and defines ‘‘broker’’ as 

FCMs, other clearing firms, executing 

brokers and other financial 

intermediaries that provide access to an 

exchange. 

a. Should the Commission’s definition 

of ‘‘AT Person’’ explicitly include or 

exclude any of the classes of parties 

included in FIA’s term ‘‘automated 

trader’’? Please explain. Are there any 

types of entities not present in this list 

that should be included in the ‘‘AT 

Person’’ definition? 

b. Should Regulation AT use the term 

‘‘broker,’’ as understood by FIA? If so, 

please explain. Is there another term 

that would be more appropriate in 

defining the scope of AT Persons? 

14. Algorithmic Trading carries 

technological and personnel costs, and 

the Commission expects that such 

trading will be performed by entities, 

not natural persons. Is this a reasonable 

assumption? For purposes of 

quantifying the number of AT Persons 

that will be subject to the regulations, 

do you believe that any AT Person (a 

definition that encompasses the 

following persons if engaged in 

Algorithmic Trading: FCMs, floor 

brokers, swap dealers, major swap 

participants, commodity pool operators, 

commodity trading advisors, 

introducing brokers, and newly 

registered floor traders using Direct 

Electronic Access) will be a natural 

person or a sole proprietorship with no 

employees other than the sole 

proprietor? 

15. The Commission recognizes that a 

CPO could use Algorithmic Trading to 

enter orders on behalf of a commodity 

pool which it operates. In these 


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190The Commission notes that CPOs are separate 

legal entities from the underlying commodity pools 

which they operate. 

191See section II(B) above for a discussion of 

direct market access in the Concept Release. 

192FIA at 12, 15; KCG at 2; CME at 7–8; VFL at 

2; AIMA at 1. 

193FIA at 8–9. 194FIA at 12, 15. 195FIA at 8–9; 61–62. 196CME at 7–8. 197 ICE at 2. 198 KCG at 2. 199 VFL at 2. 200See id. 

201 In addition, in the context of foreign boards of 

trade, Section 4(b)(1)(A) of the CEA defines ‘‘direct 

access’’ as ‘‘an explicit grant of authority by a 

foreign board of trade to an identified member or 

other participant located in the United States to 

enter trades directly into the trade matching system 

of the foreign board of trade.’’ 

202The Commission notes that the operative 

element of DEA is submission of an order to a DCM 

without the order first being routed through a 

separate person who is a member of a DCO to which 

the DCM submits transactions for clearing. Other 

factors, such as co-location, or use of FCM-provided 

software, are not on their own determinative of 

whether a customer is submitting orders through 

DEA. 

circumstances, should the Commission 

consider the CPO that operates the 

commodity pool or the underlying 

commodity pool itself as ‘‘engaged in 

Algorithmic Trading’’ pursuant to the 

definition of AT Person? 190

16. The Commission notes that 

pursuant to § 1.57(b) of the 

Commission’s regulations IBs may not 

carry proprietary accounts. However, 

certain customer relationships may 

cause an IB to fall under the definition 

of AT Person. The Commission requests 

comment on the types of IB customer 

relationships that could cause IBs to fall 

under the definition of AT Persons. 

What activities are currently being 

conducted by IBs that could cause an IB 

to be considered engaging in 

Algorithmic Trading on or subject to the 

rules of a DCM and would therefore 

cause the IB to be considered an AT 

Person? 

17. Should the definition of AT 

Person be limited to persons using DEA? 

In other words, should the definition 

capture persons registered or required to 

be registered as FCMs, floor brokers, 

SDs, MSPs, CPOs, CTAs, or IBs that 

engage in Algorithmic Trading on or 

subject to the rules of a DCM, or persons 

registered or required to be registered as 

floor traders as defined in § 1.3(x)(3), in 

each case if such persons are using 

DEA? The Commission requests 

comment on the costs and benefits of 

this approach, including comments on 

whether this more limited definition of 

AT Persons would adequately mitigate 

the risks associated with algorithmic 

trading. 

7. ‘‘Direct Electronic Access’’— 

§ 1.3(yyyy) 

a. Concept Release Comments 

The Concept Release asked whether 

there are specific risk controls that 

should apply in the context of direct 

market access, and whether the 

implementation of risk controls should 

be modified in the context of direct 

market access.191

Several commenters agreed that any 

potential risk controls should also apply 

to those with direct access to the 

market.192 For example, FIA described 

market participants’ access to markets as 

consisting of two broad categories: 

‘‘Direct ATS Participants,’’ 

characterized by use of an ATS directly 

connected to a DCM without using an 

FCM’s infrastructure to route orders, 

and ‘‘Indirect ATS Participants,’’ 

characterized by use of an ATS that 

routes orders through an FCM’s 

infrastructure.193 FIA stated that all 

types of market access create risks; 

therefore, the same principles should 

apply to all types of market access.194

FIA also explained that since market 

participants may now access a DCM 

directly without passing through an 

FCM’s infrastructure, ‘‘the only 

consistent opportunity for risk control is 

at the DCM and the market 

participant.’’ 195

Additional commenters made similar 

points. CME stated that all entities— 

whether they have direct market access 

or not—must ‘‘share in the effort to 

preserve market integrity.’’ 196 ICE 

explained that it treats every order and 

trade equally regardless of connection 

method or participant type.197 KCG 

Holdings, Inc. (‘‘KCG’’) commented that 

‘‘any pre-trade risk control requirements 

[must] be applied so as to not permit 

market participants to avoid their 

application based on the manner in 

which the participant accesses the 

market.’’ 198 VFL commented that ‘‘the 

privilege of direct exchange access 

should bring with it the obligation to 

deploy a system designed to protect the 

integrity of the marketplace.’’ 199 VFL 

explained that all exchange members 

should be required to employ pre- and 

post-trade risk controls, and all nonmembers should be required to access 

exchanges only through a member’s risk 

control layer.200

b. Description of Regulation 

Consistent with the comments 

discussed above, the Commission 

proposes a new § 1.3(yyyy) that defines 

‘‘Direct Electronic Access’’ (‘‘DEA’’) 

and, through other proposed rules, 

requires that AT Order Messages 

originating with an AT Person and 

submitted by AT Persons through such 

DEA be subjected to the same types of 

pre-trade and other risk controls that 

such orders would pass through if they 

flowed through the infrastructure of an 

FCM before entering the market. 

The Commission notes that the 

Concept Release used the term ‘‘direct 

market access,’’ or ‘‘DMA,’’ and such 

term is commonly used in industry. The 

Commission intends that ‘‘Direct 

Electronic Access’’ be consistent with 

the term ‘‘direct market access’’ as it is 

used in Commission-regulated markets. 

The Commission determined to employ 

the term Direct Electronic Access, as 

opposed to direct market access, in the 

interest of regulatory consistency. The 

term ‘‘Direct Electronic Access’’ by FCM 

customers is used in existing Regulation 

38.607, where it is described as 

‘‘allowing customers of futures 

commission merchants to enter orders 

directly into a designated contract 

market’s trade matching system for 

execution.’’ 201

The Commission proposes that the 

term ‘‘Direct Electronic Access’’ means 

an arrangement where a person 

electronically transmits an order to a 

DCM, without the order first being 

routed through a separate person who is 

a member of a DCO to which the DCM 

submits transactions for clearing. By 

‘‘routed,’’ the Commission means the 

process by which an order physically 

goes from a customer to a designated 

contract market.202 As indicated below, 

the Commission requests comment on 

its definition of DEA and whether there 

are particular scenarios where it would 

be unclear whether a customer is 

trading through DEA. 

DEA is relevant to several of the 

proposed regulations. As explained 

below, DEA is used as a filter to help 

define a new category of market 

participants required to register as floor 

traders and be subject to the 

requirements of Regulation AT (see 

proposed § 1.3(x)(3), discussed below). 

In addition, the term DEA is relevant to 

revised § 38.255, which would require 

DCMs to have in place systems and 

controls reasonably designed to 

facilitate FCM’s management of the risks 

that may arise from Algorithmic 

Trading, and proposed § 1.82, which 

requires FCMs to implement such DCMprovided controls for DEA orders. This 

approach recognizes that when DEA is 

used, clearing FCMs do not have the 

ability to apply market risk controls to 

orders they receive for clearing before 

these orders reach the DCM. This 

approach of enabling clearing FCMs to 

implement DCM-based controls is 


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203See Risk Management Controls for Brokers or 

Dealers With Market Access, 75 FR 69792, 69793 

(Nov. 15, 2010). 

204See id. 

205See id. 

206ESMA Technical Advice Final Report supra 

note 78 at 340; IOSCO 2015 Consultation Report, 

supra note 106 at 20 n.56. 

207CEA Section 1a(23)(A) provides that the term 

‘‘floor trader,’’ in general, means any person (i) 

who, in or surrounding any pit, ring, post, or other 

place provided by a contract market for the meeting 

of persons similarly engaged, purchases, or sells 

solely for such person’s own account (I) any 

commodity for future delivery, security futures 

product, or swap; or (II) any commodity option 

authorized under section 4c; or (ii) who is 

registered with the Commission as a floor trader. A 

further definition of the term ‘‘floor trader’’ is 

provided for by Section 1a(23)(B), which states that 

the Commission, by rule or regulation, may include 

within, or exclude from, the term ‘‘floor trader’’ any 

person in or surrounding any pit, ring, post, or 

other place provided by a contract market for the 

meeting of persons similarly engaged who trades 

solely for such person’s own account if the 

Commission determines that the rule or regulation 

will effectuate the purposes of the Act. 7 U.S.C. 

1a(23). 

similar to how the Commission 

addresses financial risk management by 

FCMs, as reflected in existing DCM 

regulation § 38.607. 

The Commission’s proposed 

definition of DEA differs from SEC, 

ESMA and IOSCO terminology. The 

SEC characterizes ‘‘direct market 

access’’ as an arrangement whereby a 

broker-dealer permits customers to enter 

orders into a trading center but such 

orders flow through the broker-dealer’s 

trading systems prior to reaching the 

trading center.203 ‘‘Sponsored access’’ 

generally refers to an arrangement 

whereby a broker-dealer permits 

customers to enter orders into a trading 

center that bypass the broker-dealer’s 

trading system and are routed directly to 

a trading center, in some cases 

supported by a service bureau or other 

third-party technology provider.204

‘‘Unfiltered’’ or ‘‘naked’’ access is a 

subset of sponsored access, where pretrade filters or controls are not applied 

to orders before such orders are 

submitted to an exchange or ATS.205

Similarly, ESMA and IOSCO refer to 

‘‘direct electronic access’’ as including 

direct market access and sponsored 

access; ‘‘direct market access,’’ as an 

arrangement where a member of a 

trading venue provides a connecting 

system to a person to transmit orders; 

and ‘‘sponsored access’’ as an 

arrangement where such an 

infrastructure is not used by a person.206

While the Commission’s proposed 

terminology differs from that used by 

other regulatory organizations, the 

Commission believes that its defined 

term DEA is consistent with existing 

Commission regulations. References to 

‘‘DEA’’ and ‘‘Direct Electronic Access’’ 

throughout this preamble shall refer to 

the term proposed in § 1.3(yyyy). 

c. Request for Comments 

18. Please explain whether the 

Commission’s proposed definition of 

DEA will encompass all types of access 

commonly understood in Commissionregulated markets as ‘‘direct market 

access.’’ In light of the proposed 

regulations concerning pre-trade and 

other risk controls and standards for the 

development, testing and supervision of 

algorithmic trading systems, do you 

believe that the proposed definition of 

Direct Electronic Access is too limited 

(or, alternatively, too expansive)? If so, 

please explain why and how the 

definition should be revised. 

19. Should the Commission define 

‘‘routed’’ in its definition of DEA? If so, 

how? Are there specific examples of 

trading or routing arrangements where it 

would be unclear whether trading was 

performed through DEA? 

20. Should the Commission use the 

term ‘‘direct market access’’ instead of 

DEA, and if so why? 

21. Should the Commission define 

sub-categories of DEA, such as 

sponsored market access? 

22. The Commission’s proposed 

definition of DEA in § 1.3(yyyy) differs 

from definitions of direct electronic 

access in § 38.607 and direct access for 

FBOTs in § 48.2(c). The Commission 

believes that the more technical 

definition in proposed 1.3(yyyy) is 

appropriate for Regulation AT. The 

Commission solicits comment regarding 

proposed 1.3(yyyy), whether all 

definitions of ‘‘direct’’ access should be 

harmonized across the Commission’s 

rules, and if so how. Do you believe that 

two definitions would create confusion 

with respect to Commission 

requirements as to direct electronic 

access? With respect to §§ 1.80, 1.82 and 

38.255(b) and (c) provisions imposing 

risk control requirements on AT 

Persons, FCM and DCMs, should the 

Commission use the existing definition 

of direct electronic access provided in 

§ 38.607? 

E. Registration of Certain Persons Not 

Otherwise Registered With 

Commission—§ 1.3(x) 

The Commission proposes to amend 

the definition of ‘‘Floor trader’’ in 

Commission regulation 1.3(x), in order 

to facilitate the registration of 

proprietary traders using DEA for 

Algorithmic Trading on a DCM. Such 

persons would be required to register as 

Floor traders pursuant to proposed 

§ 1.3(x)(3), assuming that they were not 

already registered or required to register 

with the Commission in another 

capacity. The remainder of this section 

presents Concept Release comments on 

this topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments 

The Concept Release requested 

comment on whether all firms operating 

ATSs to trade solely for their own 

account should be required to register 

with the Commission. As discussed in 

greater detail below, a registration 

requirement for firms operating ATSs 

and not otherwise registered with the 

Commission would enhance the 

Commission’s oversight capabilities and 

allow for wider implementation of some 

or all of the pre-trade controls and risk 

management tools discussed in this 

NPRM and currently used in the market 

today. In particular, registration will 

help ensure that all market participants 

that actively trade on Commissionregulated markets implement 

appropriate controls, including those 

trading firms that access the market 

directly and use algorithmic trading 

systems that could malfunction and 

create systemic risk to all market 

participants. 

In the Concept Release, the 

Commission requested specific 

comment on whether firms operating 

ATSs to trade solely for their own 

account would meet the definition of 

‘‘floor trader’’ in Section 1a(23) of the 

Act, and whether registering such firms 

as floor traders would effectuate the 

purposes of the Act. The ‘‘floor trader’’ 

definition in CEA 1a(23) 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 

persons similarly engaged, purchases, or 

sells solely for such person’s own 

account.207 Given the evolution of 

futures trading over recent years, 

electronic trading platforms have now 

become a primary ‘‘other place’’ in 

which proprietary market making and 

trading generally, takes place. 

Seven commenters (including FIA, 

CME, MFA and the Chicago Fed) 

opposed registration for reasons 

including: DCMs already use Operator 

IDs; the DCM audit trail already satisfies 

the goals of registration; implementing 

the Commission’s final rule on 

ownership and control reporting 

(‘‘OCR’’) will provide additional 

information on trading identities; and 

the Commission already has access to 

trade data (i.e., Regulation 1.40 and part 

38’s mandate that DCMs require market 

participants to submit to a DCM’s 


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208FIA at 43–46; CME at 32–34; Gelber at 22–24; 

KCG at 18; MFA at 3; AIMA at 2, 24; Chicago Fed 

at 3. 

209CME at 34; Gelber at 22–24. 

210Better Markets at 13; AFR at 8–9; TCL at 17. 

211AFR at 8–9. 

212AIMA at 24; VFL at 3. 

213 VFL at 3. 

214Chicago Fed at 4. 

215See supra note 207. 

216Futures Trading Practices Act of 1992, Pub. L. 

102–546, 106 Stat. 3590, 3625–28 (1992). 

217Registration of Floor Traders; Mandatory 

Ethics Training for Registrants; Suspension of 

Registrants Charged with Felonies, 58 FR 19575 

(1993) (hereinafter ‘‘Registration of Floor Traders 

Rule’’). 

218 Id. at 19576. 

219 Id. 

220 Id. 

221 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 1376 

(2010). 

222See supra note 207. 

223See Final Rule, Adaptation of Regulations to 

Incorporate Swaps, 77 FR 66288, 66317 (Nov. 2, 

2012). 

jurisdiction).208 In response to the 

Concept Release question seeking 

information concerning whether firms 

operating ATSs would meet the 

definition of ‘‘floor trader’’ under the 

CEA, CME and Gelber stated that the 

term floor trader is an anachronism that 

is irrelevant to automated trading 

environments.209

In contrast, Better Markets, AFR, and 

TCL supported ATS registration.210 AFR 

stated that ‘‘[t]he enhancement of 

investigative authority is extraordinarily 

important given that the Commission 

staff would often need to involve itself 

in the workings of the ATSs to 

anticipate problems and to detect and 

investigate problems that have occurred. 

HFT firms should have the highest 

priority.’’ 211

Finally, AIMA and VFL supported 

registration for participants with direct 

market access.212 VFL commented that 

if an exchange provides a participant 

the ability to connect directly, then that 

participant enjoys all of the rights of a 

member and should be regulated at the 

federal and exchange level.213 Finally, 

while Chicago Fed opposed a 

requirement that ATSs register with the 

Commission, it suggested that 

participants with direct market access 

must register with the exchange.214

2. Description of Regulation 

The Commission proposes to require 

the registration of proprietary traders 

using DEA for Algorithmic Trading on 

a DCM. As discussed in greater detail in 

section 3 below, registration of entities 

with DEA as floor traders would mean 

that such firms must implement the pretrade controls and risk management 

tools that Regulation AT requires of AT 

Persons. If the Commission were to only 

require those firms that are already 

registered with the Commission to 

implement such controls, some market 

participants conducting Algorithmic 

Trading on Commission-regulated 

markets would not be subject to the 

Commission’s risk control requirements. 

In order to achieve registration of 

proprietary traders using DEA for 

Algorithmic Trading on a DCM, the 

Commission proposes amending the 

definition of ‘‘Floor trader’’ in 

Commission regulation 1.3(x). The 

amended definition would expressly 

include any person who purchases or 

sells futures or swaps solely for such 

person’s own account in a place 

provided by a contract market for the 

meeting of persons similarly engaged, 

where such place is accessed by such 

person in whole or in part through DEA 

(as defined in proposed § 1.3(yyyy)) for 

Algorithmic Trading, and such person is 

not otherwise registered with the 

Commission as a futures commission 

merchant, swap dealer, floor broker, 

major swap participant, commodity 

pool operator, commodity trading 

advisor, or introducing broker. The 

Commission notes, however, that 

persons otherwise registered or required 

to register with the Commission in 

another capacity (e.g., as a swap dealer) 

would not be exempt from such 

registration simply by registering as a 

Floor trader pursuant to proposed 

§ 1.3(x)(3). 

CEA 1a(23) states that 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 persons similarly 

engaged, purchases, or sells solely for 

such person’s own account.215 The term 

was added to the Act in the Futures 

Trading Practice Act of 1992 (the ‘‘1992 

Act’’).216 The 1992 Act also amended 

Section 4e of the Act to require 

registration of floor traders, and tasked 

the Commission with issuing rules to 

implement the requirement within 180 

days of the date of enactment. 

In 1993, pursuant to the 1992 Act, the 

Commission finalized rules regarding 

registration of floor traders.217 The 

Commission established a definition for 

the term ‘‘floor trader’’ in Regulation 

1.3(x). The Commission noted in the 

preamble to that final rule that ‘‘certain 

persons trading through electronic 

systems come within the [floor trader] 

definition.’’ 218 Given the prevalence of 

pit trading in 1992 and the short time 

frame to implement floor trader 

registration, the Commission 

determined to require registration for 

floor traders operating ‘‘on the trading 

floor of an exchange’’ and ‘‘to defer 

consideration of the application of floor 

trader registration requirements to 

persons using electronic trading systems 

and to reconsider the subject at a later 

date.’’ 219 The Commission expressly 

stated that, ‘‘[i]n order to preserve 

flexibility in this area, the definition of 

floor trader in Rule 1.3(x) states that it 

shall include any person required to 

register as [a floor trader] by rule or 

regulation of the Commission pertaining 

to the operation of an electronic trading 

system.’’ 220

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).221 Title VII of the 

Dodd-Frank Act amended the CEA 

definition of ‘‘floor trader.’’ 222 This 

amendment maintained the language 

from the 1992 Act defining a floor trader 

as a person ‘‘who, in or surrounding any 

pit, ring, post, or other place provided 

by a contract market . . . for the 

meeting of persons similarly engaged, 

purchases, or sells solely for such 

person’s own account’’ any commodity 

for future delivery. However, the 

amended definition also applied to 

trading in swaps, and provided that the 

definition includes ‘‘anyone who is 

registered with the Commission as a 

floor trader.’’ Finally, the amendment 

allows for the Commission by regulation 

to include within the definition or 

exclude from the definition anyone who 

meets the statutory definition. 

Subsequently, the Commission 

amended the definition of floor trader in 

Rule 1.3(x) to precisely mirror the 

language contained in section 1a(23)(A) 

of the Act.223

3. Policy Discussion 

In order to enhance the Commission’s 

oversight capabilities as they relate to 

entities with DEA and allow for wider 

implementation of some or all of the 

pre-trade controls and risk management 

tools discussed in this NPRM and 

currently used in the market today, the 

Commission proposes amending 

Regulation 1.3(x) to expressly include 

such firms within the definition of 

‘‘floor trader.’’ The Commission 

emphasizes that the ‘‘floor trader’’ 

definition is not being expanded to 

capture all proprietary traders engaged 

in Algorithmic Trading; rather, the 

revised floor trader definition is limited 

to firms using DEA to engage in 

Algorithmic Trading. Historically, 

pursuant to the Commission’s preamble 

discussion in the Registration of Floor 

Traders Rule and the original 

formulation of Regulation 1.3(x) 

discussed above, the Commission has 


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224Registration of Floor Traders Rule, 58 FR at 

19576. Further, the Commission notes that it is not 

the first to observe the degree to which the tangible 

technological infrastructure provided by DCMs for 

trading, including for example electronic trade 

matching platforms or co-location or proximity 

hosting facilities, can constitute a ‘‘place.’’ Futures 

Industry magazine, a publication of FIA, noted the 

following in a 2007 article describing co-location 

and proximity hosting: ‘‘[t]he pit is back. Just a few 

years since the concept of a commodity exchange 

as a tangible ‘place’ had begun to seem hopelessly 

old-fashioned, many traders now want to be at the 

heart of the action once more. At Eurex, customers 

that until recently were scattered all over the globe 

are moving closer to the exchange, ‘forming a 

physical community like a pit again,’ says Matthias 

Kluber, head of networks and infrastructure 

operations at Deutsche Bo ̈rse Systems, which builds 

and operates the Eurex trading and clearing 

systems.’’ See Bennet Voyles, Co-Location Catches 

On, Futures Industry (July/Aug. 2007) at 28, 

available at: https://secure.fia.org/downloads/JulAug_Colocatiion.pdf. 

only required registration of floor 

traders conducting business on the 

physical trading floor of an exchange. 

However, the Act contemplates floor 

traders in ‘‘other places’’ besides the 

trading floor, and the Commission has 

previously noted that the Act’s 

definition applies to persons using 

electronic trading systems.224

Registration of entities with DEA as 

floor traders would enhance the pretrade controls and risk management 

tools discussed elsewhere in this NPRM 

by making such entities subject to the 

various regulations governing AT 

Persons under the NPRM. For example, 

the pre-trade risk controls listed in 

proposed § 1.80—maximum AT Order 

Message frequencies per unit time, 

maximum execution frequencies per 

unit time, order price parameters and 

maximum order size limits—must be 

established and used by all AT Persons. 

If the Commission were to only require 

those firms that are already registered 

with the Commission to implement 

such controls, it would be ignoring a 

significant number of market 

participants that actively trade on 

Commission-regulated markets, each of 

which has ATSs that could malfunction 

and create systemic risk to all market 

participants. Registration as floor traders 

would also require entities using DEA, 

as AT Persons, to maintain certain 

books and records, thus enhancing the 

Commission’s ability to gather 

information. 

The Commission estimates that there 

are approximately one hundred 

proprietary trading firms engaged in 

Algorithmic Trading in Commissionregulated markets. Some of these firms 

may already be registered with the 

Commission in some capacity. In the 

event that one of these firms engaged in 

Algorithmic Trading is already 

registered with the Commission, the 

firm would be considered an AT Person 

under clause (1) of the proposed 

definition of AT Person, and would not 

be required to also register as a floor 

trader. The proposed requirement under 

revised § 1.3(x) is intended to require 

firms not otherwise registered to become 

registered with the Commission. Given 

that a technological malfunction in a 

single trading firm’s systems can 

significantly impact other markets and 

market participants, the proposed 

registration requirement is critical to 

ensuring that all such firms are subject 

to appropriate risk control, testing, and 

other requirements of Regulation AT. 

4. Request for Comments 

23. Should firms operating 

Algorithmic Trading systems in CFTCregulated markets, but not otherwise 

registered with the Commission, be 

required to register with the CFTC? If 

not, what alternatives are available to 

fully effectuate the purpose and design 

of Regulation AT? 

24. Should all firms deploying 

Algorithmic Trading systems be 

required to register with the 

Commission? Are there additional 

characteristics of AT Persons that 

should be taken into consideration for 

registration purposes? For example, 

should the Commission limit 

registration to trading firms meeting 

certain trading volume, order or 

message levels? In other words, should 

there be a minimum volume, order or 

message test in order to meet the 

definition of ‘‘floor trader,’’ or otherwise 

to meet the definition of AT Person? If 

so, what should be measured and what 

specific thresholds should be used? 

25. In the alternative, should the 

Commission broaden the registration 

requirements in proposed § 1.3(x)(3)(ii) 

so that all persons trading on a contract 

market through DEA are required to 

register, instead of only those who are 

engaged in Algorithmic Trading? 

26. 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 

Section 1a(23) of the Act. 

27. Do you believe that the 

registration of such firms as ‘‘floor 

traders’’ would help effectuate the 

purposes of the CEA to deter and detect 

price manipulation or any other 

disruptions to market integrity? If you 

believe that registration of such firms 

will not help effectuate the purposes of 

the CEA, or that the same purposes can 

be achieved by other means, please 

explain. 

F. RFA Standards for Automated 

Trading and Algorithmic Trading 

Systems—§ 170.19 

To fully effectuate the design and 

intent of Regulation AT, the 

Commission is proposing a new 

§ 170.19 requiring RFAs to adopt certain 

membership rules—as deemed 

appropriate by the RFA—relevant to 

algorithmic trading for each category of 

member in the RFA. RFAs would have 

discretion as to the rules they issue and 

the categories of members to which their 

rules apply. Further, to ensure that all 

AT Persons are subject to rules of an 

RFA regarding algorithmic trading, the 

Commission is also proposing a new 

§ 170.18 requiring AT Persons to 

become members of at least one RFA. 

Proposed § 170.18 is discussed in detail 

in section G below. Taken together, 

§§ 170.18 and 170.19 would allow RFAs 

to supplement elements of Regulation 

AT as markets and trading technologies 

evolve over time, and allow frontline 

regulators to drive future incremental 

enhancements to the Commission’s 

basic regulatory structure for 

algorithmic trading by AT Persons. 

1. Policy Discussion 

In developing Regulation AT, the 

Commission sought to balance 

meaningful regulatory baselines against 

the need for standards sufficiently 

flexible to keep pace with changing 

industry practices and technologies. The 

Commission’s determination to balance 

both interests is particularly reflected in 

its treatment of AT Persons and in 

proposed §§ 1.80, 1.81, and 1.82, which 

address: (1) Pre-trade risk controls and 

other measures for ATSs; (2) standards 

for the development, testing, 

monitoring, and compliance of ATSs; 

(3) designation and training of 

algorithmic trading staff; and (4) 

clearing FCM risk management. A 

number of the proposed sections and 

subsections in these rules include wellestablished risk control and other 

practices among market participants. 

The proposed pre-trade risk controls in 

§ 1.80(a), for example, are generally 

limited to risk controls identified as best 

practices by FIA in 2015, and the text 

of the rules is intentionally flexible so 

that AT Persons may determine for 

themselves how required pre-trade risk 

controls and other measures should be 

designed and calibrated. Other proposed 

rules addressing AT Persons offer 

flexibility in that they require AT 

Persons to implement specific programs, 

but provide latitude regarding how such 

programs are to be designed. Thus, 

proposed § 1.81(a)(1)(vi) requires AT 

Persons to maintain a source code 


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225The Commission notes an exception in 

proposed § 1.83, which requires the submission of 

annual reports from AT Persons and their clearing 

FCMs to DCMs. 

226 In this regard, the Commission distinguishes 

an RFA’s obligation to establish memberships 

rules—i.e., mandatory requirements for all persons 

in the relevant membership category—from steps 

that a single AT Person or clearing member FCM 

may voluntary take to augment its pre-trade risk 

controls or other measures based on its unique 

trading or technology and its obligations pursuant 

to proposed §§ 1.80, 1.81, and 1.82. 

repository to manage source code 

access, persistence, copies of production 

code, and changes to production code, 

but does not impose a prescriptive 

standard for how the source code 

repository must be structured or 

maintained. Similarly, proposed 

§§ 1.81(a)(1)(iii) and (a)(1)(iv) require 

regular back testing of Algorithmic 

Trading and stress testing of ATSs, but 

impose no specific testing protocols and 

do not specify a minimum testing 

frequency. The Commission also notes 

the existence of numerous other pre and 

post-trade risk controls and measures 

available to AT Persons but not 

incorporated as requirements in 

Regulation AT. Some, such as dropcopy reporting, were raised in the 

Concept Release, and others were 

addressed in responsive public 

comments. 

The Commission has determined to 

focus in Regulation AT on areas where 

the safety and soundness of derivatives 

markets would benefit from a core set of 

pre-trade risk controls and other 

measures applicable to all AT Persons. 

As noted above, the Commission 

believes that effective rules for AT 

Persons are best structured as clear 

regulatory requirements combined with 

embedded flexibility to adapt to 

changing markets and technologies. 

Accordingly, the Commission’s 

proposed rules in §§ 1.80, 1.81, and 1.82 

address only a subset of potentially 

responsive risk controls and other 

measures. Each AT Person shall also 

determine what additional safeguards 

would be reasonably designed to 

prevent an Algorithmic Trading Event 

given its trading strategies, technologies, 

or the markets in which it participates. 

The proposed rules also provide a 

degree of flexibility regarding the 

design, implementation, or calibration 

of those pre-trade risk control or other 

measures that are specifically required 

in §§ 1.80, 1.81, and 1.82, again 

allowing each AT Person to adapt the 

rules to its own trading and technology. 

Given the structure of proposed 

§§ 1.80, 1.81, and 1.82 as regulatory 

baselines with a degree of embedded 

flexibility, the Commission has 

determined to provide RFAs with a 

discretionary role in augmenting the 

requirements of Regulation AT for AT 

Persons.225 RFAs serve a vital regulatory 

function as frontline regulators of their 

members, which would include all AT 

Persons pursuant to proposed § 170.18. 

RFAs promulgate binding membership 

rules and can supplement Commission 

rules as appropriate. RFAs can also 

operate examination programs to 

monitor members’ compliance with 

association rules, and can sanction 

members for non-compliance. The 

Commission believes that RFAs are 

well-positioned to address rules in areas 

experiencing rapid evolution in market 

practices and technologies, including 

particularly §§ 1.80, 1.81, and 1.82. 

Proposed § 170.19 is described below. 

2. Description of Regulation 

Proposed § 170.19 would require 

RFAs to (1) establish and maintain a 

program (2) for the prevention of 

fraudulent and manipulative acts and 

practices, the protection of the public 

interest, and perfecting the mechanisms 

of trading on DCMs (3) by adopting 

rules for each category of member, as 

deemed appropriate by the RFA, 

requiring: (i) Pre-trade risk controls and 

other measures for ATSs (§ 170.19(a)(1)); 

(ii) standards for the development, 

testing, monitoring, and compliance of 

ATSs (§ 170.19(a)(2)); (iii) designation 

and training of algorithmic trading staff 

(§ 170.19(a)(3)); and (iv) operational risk 

management standards for clearing 

member FCMs with respect to customer 

orders originating with ATSs 

(§ 170.19(a)(4)). With respect to rules 

(prong 3 above), the areas RFAs must 

address pursuant to proposed § 170.19 

are similar to those that AT Persons and 

clearing FCMs must address in 

proposed §§ 1.80, 1.81, and 1.82. RFAs, 

however, would be required in § 170.19 

to consider whether additional rules or 

granularity are appropriate as baseline 

SRO requirements and binding 

membership rules for one or more 

categories of RFA members.226 The 

Commission notes that § 170.19 would 

require that RFAs consider the need for 

additional rules, and issue such rules 

where appropriate. However, § 170.19 

would not require RFAs to issue any 

rules pursuant to § 170.19 where the 

RFA believes they are unnecessary. 

Rather, the proposed regulation leaves 

discretion to the RFAs to determine 

what rules would prevent fraudulent 

and manipulative acts and practices, 

protect the public interest, and perfect 

the mechanisms of trading on DCMs. 

When evaluating potential 

membership rules regarding algorithmic 

trading, proposed § 170.19 would also 

require RFAs to consider how such 

rules could help prevent fraudulent and 

manipulative acts, protect the public 

interest, and perfect the mechanisms of 

trading on DCMs (prong 2 above). The 

Commission believes that these are 

important elements in the requirements 

proposed to be codified in § 170.19. 

RFAs should be cognizant, for example, 

of the overarching requirement in 

proposed § 1.80 that AT Persons take 

steps reasonably designed to prevent an 

Algorithmic Trading Event, defined in 

proposed § 1.3(vvvv) to include both 

Algorithmic Trading Compliance Issues 

and Algorithmic Trading Disruptions. 

Algorithmic Trading Compliance Issues 

include events at an AT Person that 

cause its algorithmic trading to operate 

in a manner that does not comply with 

the CEA, Commission regulations, or the 

rules of a DCM. Algorithmic Trading 

Disruptions include events originating 

with an AT Person that disrupt or 

materially degrade the operation of a 

DCM or the ability of other market 

participants to trade on the DCM. In 

short, an AT Person’s algorithmic 

trading should neither disrupt the 

market nor violate law. RFAs should 

consider these factors when determining 

whether and what further rules they 

may promulgate over time pursuant to 

§ 170.19. 

Proposed § 170.19 would require an 

RFA to ‘‘establish and maintain a 

program’’ (prong 1 above) for the 

prevention of fraud and manipulation, 

protection of the public interest, and 

perfecting the mechanisms of trading on 

DCMs. The Commission anticipates that 

an RFA would include in its routine 

examinations of members pursuant to 

such program a verification that such 

members are complying with any rules 

that the RFA may determine to issue 

pursuant to proposed § 170.19. The 

Commission intends for proposed 

§ 170.19 to provide RFAs with a wide 

measure of latitude in both the rules 

they may elect to adopt and in the 

members to whom they apply such 

rules. It is the Commission’s further 

intent that RFAs consider the need for 

rules pursuant to proposed § 170.19, 

and that they adopt such rules where 

the RFA considers it necessary. 

However, the determination as to both 

the necessity of rules and their 

application to specific categories of 

members remains with the RFA. 

Finally, the Commission notes that 

while proposed § 170.19 would require 

RFAs to issue rules as they deem 

appropriate, RFAs would remain free to 

take other steps when potential rules 

regarding algorithmic trading are not yet 

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227 7 U.S.C. 21. 

228RFA members also remain subject to oversight 

by the Commission. 

229Those Commission registrants that are not 

RFA members are nevertheless subject to the rules 

and regulations of the Commission. See 7 U.S.C 

21(e), which specifies that any person registered 

under the CEA, who is not an RFA member, ‘‘in 

addition to the other requirements and obligations 

of [the CEA] and the regulations thereunder shall 

be subject to such other rules and regulations as the 

Commission may find necessary to protect the 

public interest and promote just and equitable 

principles of trade.’’ 

230 17 CFR 170.15 and 170.16. 

231See Membership in a Registered Futures 

Association, 80 FR 55022 (Sept. 14, 2015). 

regulatory organizations, RFAs are 

uniquely positioned to gain insights 

from members through examination 

programs and coordination with other 

self-regulatory or standard-setting 

bodies. In addition to rulemaking when 

necessary, RFAs could leverage these 

resources to issue guidance or best 

practices, hold periodic discussions 

with relevant stakeholders, and 

otherwise provide leadership as risks, 

risk control technologies, market 

practices evolve over time. The 

Commission also affirms that proposed 

§ 170.19 is not intended to create 

conflicting obligations between an 

RFA’s role in establishing algorithmic 

trading standards for its members and a 

DCM’s role as a self-regulatory 

organization. Accordingly, the 

requirements of proposed § 170.19 

specifically address pre-trade risk 

controls for ATSs, standards for the 

designing, testing, monitoring, and 

supervision of ATSs, and the 

designation and training of algorithmic 

trading staff. The Commission believes 

that these areas are appropriate for 

potential future standards issued by an 

RFA in an evolving technological and 

market environment, and that such 

standards will be best implemented as 

uniform requirements of an RFA for its 

relevant members as opposed to 

potentially varying approaches by 

individual DCMs. 

3. Request for Comments 

28. The Commission requests 

comment on the scope of 

responsibilities assigned to RFAs under 

proposed § 170.19. Should RFAs be 

responsible for fewer or additional areas 

regarding AT Persons, ATSs, and 

algorithmic trading than specified in 

proposed § 170.19, prongs (1), (2), (3), 

and (4) (§ 170.19(a)(1)–(a)(4))? 

Regulation 170.19 requires RFAs to 

consider the need for rules in the areas 

listed in prongs (1)–(4) (§ 170.19(a)(1)– 

(a)(4)). Should RFAs be responsible for 

considering whether to adopt rules in 

fewer or additional areas? 

29. The Commission requests 

comment on the latitude afforded to 

RFAs in proposed § 170.19. Should 

RFAs have more or less latitude to issue 

rules than specified in proposed 

§ 170.19? 

30. The Commission requests 

comment on RFAs’ obligation in 

proposed § 170.19 to establish and 

maintain a program for the prevention 

of fraud and manipulation, protection of 

the public interest, and perfecting the 

mechanisms of trading, including 

through rules it may determine to adopt 

pursuant to § 170.19. The proposed 

rules anticipate that an RFA’s program 

will include examination and 

enforcement components. Is this the 

appropriate approach? 

31. The Commission requests 

comment on whether proposed § 170.19 

may result in duplicative obligations on 

AT Persons or any other market 

participant. In particular, please 

comment on potential duplication, if 

any, between algorithmic trading 

requirements that an RFA may impose 

upon its members pursuant to § 170.19, 

and similar requirements that may be 

imposed by a DCM in its role as a selfregulatory organization. What 

amendments would be appropriate in 

any final rules arising from this NPRM 

to clarify that unintended overlap 

between the role of an RFA and a DCM 

in this context? 

G. AT Persons Must Become Members of 

an RFA—§ 170.18 

1. Policy Discussion 

An RFA is an association of persons 

registered with the Commission as such 

pursuant to section 17 of the CEA.227

Subject to Commission oversight, RFAs 

serve a vital self-regulatory role by 

functioning as frontline regulators of 

their members, including in large 

measure most Commission registrants 

who will qualify as AT Persons 

pursuant to proposed § 1.3(xxxx).228

Entities that are not members of an RFA, 

however, are not bound by the rules of 

the RFA.229 As such, the Commission 

previously adopted §§ 170.15 and 

170.16 to require each registered FCM, 

and each registered SD and MSP, 

respectively, to be an RFA member, 

subject to an exception for certain notice 

registered securities brokers or 

dealers.230 The Commission also 

recently adopted § 170.17 to require that 

all registered IBs and CPOs, and most 

registered CTAs, to become RFA 

members.231

Together §§ 170.15, 170.16, and 

170.17 require many, but not all, 

Commission registrants who may be 

considered AT Persons pursuant to 

proposed § 1.3(xxxx) to become RFA 

members. In particular, floor brokers 

and floor traders, who have historically 

been overseen by the DCMs on which 

they operate, are not required by 

§§ 170.15, 170.16, or 170.17 to become 

members of an RFA. In order to ensure 

that all AT Persons will be subject to 

any rules promulgated by an RFA 

pursuant to proposed § 170.19, 

including floor brokers and floor 

traders, the Commission is proposing a 

new § 170.18. This provision would 

require that all AT Persons that are not 

otherwise required to be a member of a 

RFA pursuant to §§ 170.15, 170.16, or 

170.17 be a member of an RFA. 

2. Description of Regulation 

The Commission is proposing a new 

§ 170.18 to require all Commission 

registrants that are AT Persons to be 

members of an RFA. The membership 

requirements proposed by § 170.18 will 

ensure that all AT Persons would be 

subject to membership rules 

promulgated by an RFA, including those 

membership rules promulgated 

pursuant to proposed § 170.19 to 

address algorithmic trading. 

Specifically, proposed § 170.18 requires 

that each registrant that is an AT Person 

that is not otherwise required to be a 

member of an RFA pursuant to 

§§ 170.15, 170.16, or 170.17 must 

become and remain a member of at least 

one RFA that provides for the 

membership of such registrant, unless 

no such futures association is so 

registered. 

3. Request for Comments 

32. The Commission requests 

comment on whether the regulatory 

framework established by Regulation 

AT would require all AT Persons to be 

members of an RFA in order to be 

effective. Alternatively, could the goals 

of Regulation AT be realized without 

requiring all AT Persons to be members 

of an RFA? 

H. Pre-Trade and Other Risk Controls 

for AT Persons—§ 1.80 

The Commission proposes as a 

fundamental element of Regulation AT 

a new § 1.80 of its regulations, requiring 

AT Persons to implement pre-trade risk 

controls, order cancellation systems, 

and other measures reasonably designed 

to prevent an Algorithmic Trading 

Event. Such controls include, but are 

not limited to, maximum AT Order 

Message frequency and maximum 

execution frequency per unit time; order 

price parameters and maximum order 

size limits; order cancellation and 

Algorithmic Trading disconnect 

systems; and connectivity monitoring 

systems for AT Persons with DEA. In 


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232See section IV(Q) below for a discussion of the 

term ‘‘self-trade’’ and proposed regulations with 

respect to self-trade prevention. 

233The pre-trade and other risk controls for DCMs 

in proposed § 40.20 are discussed below in a 

separate section. 

234Concept Release, 78 FR at 56571. 

235Concept Release, 78 FR at 56569. 

236FIA at 59–60. 

237FIA at 12, 15–17, 65; CME at 8–9; Gelber 7; 

AFR at 6–7; KCG at 3–5; Better Markets at 6–7. 

238 KCG at 3–5; MFA at 7, 13. See also Bell at 3– 

4. 

239FIA at 12; CME at 8–9; MFA at 7, 13; Gelber 

at 5–7; AIMA at 8; KCG at 3–4. 

240MFA at 7, 13. 

241 IATP at 3–5. 

242Chicago Fed at 2. 

243CME at 8–9; AIMA at 8. 

244AIMA at 9. 

245AFR at 6–7. 

246FIA at 59–60. 

247AIMA at 13. 

248 Gelber at 10. 

249 KCG at 8; Gelber at 10; 3Red at 2. 

250FIA at 18–19; CME at 15. 

251 KCG at 8. 

252See id. 

253CME at 15–16; KCG at 8. 

254FIX at 3; IATP at 5. 

255FIA at 60. 

addition, proposed § 1.80 requires AT 

Persons to: Notify applicable clearing 

member FCMs and DCMs that the AT 

Person will engage in Algorithmic 

Trading; and calibrate or otherwise 

implement DCM-provided self-trade 

prevention tools.232 It would also 

require AT Persons to periodically 

review the sufficiency and effectiveness 

of their compliance with § 1.80. The 

remainder of this section presents 

Concept Release comments on this 

topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments on PreTrade and Other Risk Controls 

The Concept Release requested 

comment on various pre-trade and other 

types of risk controls, including message 

and execution throttles, maximum order 

sizes, price collars, and order 

management controls, such as 

connectivity monitoring services, 

automatic cancellation of orders on 

disconnect and kill switches. The 

Concept Release contemplated that such 

controls would apply at the trading 

firm, clearing member and trading 

platform levels. As discussed below, the 

Commission has determined to require 

that AT Persons, FCMs, and DCMs 233

implement such pre-trade and other risk 

controls. Relevant comments to the 

Concept Release are discussed below. 

a. Message and Execution Throttles 

The Concept Release described 

message throttles as establishing 

maximum message rates per unit in time 

and execution throttles as establishing 

limits on the maximum number of 

orders that an ATS can execute in a 

given direction per unit in time. The 

Concept Release also sought comment 

on a particular form of execution 

throttle, the repeated automated 

execution throttle, which would disable 

a trading system after a configurable 

number of repeated executions until a 

human re-enables the system.234 The 

Concept Release stated that the throttles 

would be calibrated to address the 

potential for unintended message flow 

or executions from a malfunctioning 

ATS.235

Commenters indicated that message 

and execution throttles are widely used 

in the industry. FIA PTG surveyed its 

members and found that almost all firms 

that responded used message and 

execution throttles.236 Commenters 

noted certain benefits to messaging and 

execution throttles, including that they 

may mitigate the risk and impact of 

disruptive events, alert market 

participants to potential problems with 

their automated order entry systems, 

and help ensure a level playing field for 

all market participants.237 Commenters 

also noted that message or execution 

limits have potential negative effects 

because they can block risk-reducing 

orders.238

Commenters addressing this topic did 

not support regulations mandating 

throttle thresholds because appropriate 

limits will vary per market participant, 

depending on each participant’s unique 

systems and trading strategy.239 MFA 

strongly advised against required use of 

the repeated automated execution 

throttle, stating that it is best for market 

participants to determine which 

controls are most appropriate for their 

ATSs.240 IATP commented on the 

difficulty in setting standardized 

throttle thresholds, and alternatively 

suggested standardizing a graduated 

levy on order cancellations.241 Finally, 

Chicago Fed commented that regulators 

should assess the methodology that 

trading firms use to set throttle limits, 

the reasonableness of those limits, and 

the procedures followed when they are 

breached.242

As to the appropriate design of 

throttles, CME and AIMA commented 

that throttles implemented by market 

participants should be based on the 

specific attributes of an entity or 

account, including the nature of a firm’s 

trading strategies, the market it trades 

in, and the speed of its systems.243

AIMA indicated that applying throttles 

on a per-algorithm basis would distort 

the output of the ATS because an 

algorithm interacts with many other 

algorithms within the same ATS.244 In 

contrast, AFR indicated that in order to 

detect a malfunctioning algorithm, the 

threshold should be based on the 

algorithm’s trading strategy.245

b. Maximum Order Sizes 

Commenters indicated that maximum 

order size controls are already used in 

the industry. According to FIA PTG’s 

survey, all responding trading firms use 

maximum order size limits.246 AIMA 

indicated that many market participants 

use maximum order sizes limits,247 and 

Gelber, a trading firm, stated that it uses 

this risk control.248 KCG, Gelber and 

3Red commented that market 

participants should use exchangeprovided maximum order size 

controls.249

With respect to implementing 

maximum order size limits, FIA and 

CME indicated that this control should 

be applied per product or contract.250

KCG suggested that exchange-provided 

maximum order size controls should 

provide flexibility to the market 

participant in setting different levels for 

users within a firm, for example, based 

on trader ID or customer.251

Alternatively, the market participant 

should rely on tighter internal 

controls.252 CME and KCG opposed 

standardization of maximum order size 

protections, stating that implementation 

of this control depends on individual 

customers and the market,253 while FIX 

and IATP supported uniformity with 

respect to these controls.254

c. Price Collars 

The Concept Release requested 

comment on price collars, a control in 

which trading platforms would assign a 

range of acceptable order and execution 

prices for each product and all market 

participants would establish similar 

limits to ensure that orders outside of a 

particular price range are not 

transmitted to the trading platform. 

While most comments addressing this 

topic focused on price collars 

implemented by exchanges, FIA 

indicated that its FIA PTG survey 

reflected that almost all responding 

trading firms used either price collars or 

trading pauses.255

d. Connectivity Indications and Cancel 

on Disconnect 

The Concept Release requested 

comment regarding ‘‘system heartbeats’’ 

that would indicate proper connectivity 

between a trading firm’s automated 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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256CME at Appendix A–4; CFE at 9–10. 

257FIA at 14. 

258FIA at 14; KCG at 12; MFA at 12; Chicago Fed 

at 2. 

259CME at 23–24. 

260CFE at 11. 

261FIA at 29–33; Citadel LLC (‘‘Citadel’’) 

Comment Letter (December 11, 2013) at 3; AIMA at 

3, 18; MFA at 12–13; KCG at 13. 

262FIA at 30; Citadel at 3; CME at 22; Chicago Fed 

at 2; MFA at 12–13; Gelber at 14. 

263FIA at 29–33; TCL at 8; AIMA at 18; MFA at 

12; KCG at 13–14. 

264FIA at 29–33; CME at 23; Gelber at 14–15; 

AIMA at 19. 

265FIA at 29–33; CME at 23; Gelber at 14–15; 

AIMA at 19; TCL at 8. 

266FIA at 29–33; TCL at 8; Gelber at 14–15; CME 

at 24; KCG at 13; SIG at 8. 

267 Gelber at 14–15; KCG at 13. 

268CME at 24. 

269FIA at 29–33; Gelber at 14–15. 

270 KCG at 14. 

271TCL at 8. 

272Chicago Fed at 2. 

trading system and the trading platform, 

and ‘‘auto-cancel on disconnect,’’ an 

exchange tool allowing trading firms to 

determine whether their orders will be 

left in the market upon disconnection. 

Two exchanges stated that they provide 

an optional cancel-on-disconnect 

functionality.256 FIA characterized 

cancel-on-disconnect as a ‘‘widely 

adopted DCM-hosted pre-trade risk 

control’’ and indicated that it is 

increasingly common for FCMs to 

employ cancel-on-disconnect for their 

connections to the DCM.257 Several 

commenters indicated that they support 

exchanges offering system heartbeats 

and/or cancel-on-disconnect to their 

market participants.258

e. Order Cancellation Systems 

The Concept Release also addressed 

selective working order cancellation, a 

tool that enables an exchange to 

immediately cancel one, multiple, or all 

resting orders from a market participant 

as necessary in an emergency situation. 

Such a tool will mitigate impact to the 

market of a malfunctioning Algorithmic 

Trading system because it will limit 

additional erroneous orders from being 

submitted to a trading platform and 

executed. The Concept Release also 

considered order cancellation 

mechanisms that would immediately 

cancel all working orders and prevent 

submission (by the market participant), 

transmittal (by the clearing member), or 

acceptance (by the trading platform) of 

any new orders from a market 

participant or a particular trader or ATS 

of such market participant. 

In response to the Concept Release, 

numerous commenters addressed kill 

switches, discussing industry use; 

opposition to prescriptive requirements; 

the importance of flexibility in design; 

potential triggers; and content of kill 

switch procedures. For purposes of this 

discussion, the term ‘‘kill switch’’ 

means generally any order cancellation 

tools that cancels or prevents 

submission of orders. Commenters 

generally indicated that kill switches 

could be beneficial, but also stressed the 

complexity involved in their design and 

use. 

Several commenters described order 

cancellation mechanisms currently 

employed in the industry. One exchange 

commented that it has two kill switch 

tools: A kill switch used by the 

exchange, clearing firm, or trading firm 

to remove an entity from the market 

completely; and an order management 

tool that enables clearing firms and endusers to cancel orders at a more granular 

level.259 Another exchange explained 

that it can cancel orders and quotes in 

an emergency and it also provides a kill 

switch to clearing members that cancels 

all orders and quotes from a market 

participant.260 While commenters noted 

the importance of placing kill switches 

at the DCM level,261 several commenters 

stated that kill switches should be 

implemented by market participants 

and clearing firms in addition to 

exchanges.262

Commenters stressed the importance 

of flexibility in the design of kill 

switches 263 and generally opposed 

prescriptive requirements regarding 

their design and implementation.264

Reasons included challenges concerning 

setting the correct level of granularity 

(i.e., whether the control should apply 

to one participant and not others at the 

same firm); the possibility that kill 

switches may prevent a firm from being 

able to enter risk-reducing orders; 

prescriptive requirements will become 

outdated; that time is of the essence, 

and therefore exchanges and firms need 

to be free from time-consuming 

processes concerning the use of the kill 

switch; the standardization of kill 

switches, if poorly calibrated or too 

widely applied, could result in 

increased costs and disruption of 

legitimate trading operations; and a 

concern over adding more layers of 

complexity into an already complex 

market.265

A critical concern raised by 

commenters was how order cancellation 

mechanisms should address riskreducing activity.266 Gelber and KCG 

suggested that kill switches enable a 

firm to mitigate risk through manual 

order entry, and that allowing the 

market participant to set trigger 

thresholds will help ensure that orders 

entered for the purpose of reducing risk 

are not cancelled.267 In contrast, CME 

stated that a kill switch should exist 

solely to completely remove an entity 

from the market, and that other tools 

can be used to enter risk reducing 

orders. CME argued that allowing entry 

of risk reducing orders as an exception 

to the kill switch process introduces too 

much uncertainty and complexity.268

Finally, commenters discussed 

procedures concerning activation of a 

kill switch. For example, FIA and 

Gelber suggested that a kill switch have 

both automated and manual triggers.269

KCG suggested that if the total risk of a 

portfolio exceeds certain thresholds, 

firm systems should automatically send 

only risk reducing orders and 

supervisors should be able to stop 

trading entirely.270 TCL commented that 

an exchange or ATS operator will not 

implement a system that abdicates 

control to an automated kill switch. TCL 

suggested that monitoring systems 

identify irregular market activity and 

alert staff that have access to a kill 

switch.271 Similarly, Chicago Fed 

recommended that a human decide 

whether to use a kill switch based on 

internal and market conditions.272

Additional Concept Release 

comments, including comments on kill 

switch functionality, are discussed 

below with respect to Regulation AT 

pre-trade risk and other control 

requirements on FCMs and DCMs. 

2. Description of Regulation 

The Commission proposes a new 

§ 1.80 of its regulations to require that 

AT Persons implement pre-trade risk 

controls and other measures for all AT 

Order Messages that are reasonably 

designed to prevent an Algorithmic 

Trading Event. Relevant controls and 

measures required by § 1.80 include, but 

are not limited to: Maximum AT Order 

Message frequency and maximum 

execution frequency per unit time; order 

price parameters and maximum order 

size limits; order cancellation and ATS 

disconnect systems; and connectivity 

monitoring systems. They also include 

several other specific requirements, 

such as notification by AT Persons to 

applicable DCMs and clearing member 

FCMs that they will engage in 

Algorithmic Trading; calibrating or 

otherwise implementing DCM-provided 

self-trade prevention tools; and periodic 

consideration of the sufficiency and 

effectiveness of the controls that an AT 

Person has implemented. Consistent 

with comments received in response to 

the Concept Release, proposed § 1.80 

provides market participants latitude in 

the design and implementation of 

required controls, and in fact requires 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78852 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

273See section IV(H) below for a more detailed 

discussion of which persons will be designated as 

AT Persons for purposes of proposed § 1.80 and 

other regulations, and which persons will not be AT 

Persons, but will nonetheless be subject to proposed 

§ 1.82. 

274See FIA at 59–60 (FIA’s surveys of member 

firms and FCMs) and comment indicating that 

exchanges already use throttles (CME at 8–9; CFE 

at 5–6; TCL at 6; KCG at 4; MFA at 7; and AIMA 

at 8). 

275See FIA at 12, 15–17, 65; MFA at 7; CME at 

8; Gelber at 5–7; AFR at 6–7. 

276ESMA September 2015 Final Draft Standards 

Report Annex 1, supra note 80 at 214–15. 

277See id.; ESMA September 2015 Final Draft 

Standards Report, supra note 80 at 200. 

278See id. 

279See id. 

280See id. 

281FIA Guide, supra note 95 at 10, 12. 

282See FIA at 12; CME at 9; Gelber at 5–7; AIMA 

at 8; KCG at 3–4; OneChicago at 5. 

283CME at 8–9; AIMA at 8. 

only a small number of specific controls 

that the Commission understands are 

already widely implemented by likely 

AT Persons (e.g., proposed §§ 1.80(a), 

1.80(b) and 1.80(c)). In this regard, 

proposed § 1.80 provides each AT 

Person with the flexibility to identify 

and implement any additional controls 

that such AT Person believes are 

appropriate for its Algorithmic Trading. 

The Commission is cognizant that 

prescriptive regulations in this area may 

fail to take into account the unique 

characteristics of market participants 

and trading strategies, or may become 

obsolete as technology evolves. The 

Commission has attempted to provide 

appropriate flexibility to accommodate 

such variety and evolution, while also 

establishing a regulatory floor that 

reflects its evaluation of basic 

requirements for all AT Persons.273

3. Policy Discussion 

Proposed § 1.80 requires AT Persons 

to implement pre-trade risk controls and 

other measures reasonably designed to 

prevent an Algorithmic Trading Event. 

This requirement is central to the 

purposes of § 1.80. As discussed below, 

the Commission believes that proposed 

§ 1.80 would reduce the potential for 

market disruptions arising from system 

malfunctions, other errors, or 

intentional disruptive conduct. The 

Commission notes that the risks of such 

disruptions are heightened by the 

increased use of high-speed algorithmic 

trading, which makes the 

implementation of pre-trade risk 

controls and other measures even more 

necessary. Without effective risk 

controls, erroneous orders can 

significantly impact many market 

participants in a short amount of time. 

The prevention of Algorithmic Trading 

Events pursuant to § 1.80 would help 

ensure the integrity of Commissionregulated markets and provide market 

participants with greater confidence that 

intentional, bona fide transactions are 

being executed. 

The pre-trade risk controls and other 

measures required by proposed § 1.80 

include, but are not limited to, those 

described in clauses (a)–(e) of § 1.80. 

The Commission believes that each of 

these enumerated controls and other 

measures will promote the goals of 

§ 1.80, as described above. Proposed 

§ 1.80(f) also promotes the goals of 

§ 1.80, by requiring each AT Person to 

periodically review its compliance with 

§ 1.80 to determine whether it has 

effectively implemented sufficient 

measures reasonably designed to 

prevent an Algorithmic Trading Event. 

Each AT Person must take prompt 

action to remedy any deficiencies it 

identifies. 

a. Maximum AT Order Message and 

Execution Frequencies 

Proposed § 1.80(a)(1)(i) requires AT 

Persons to set pre-trade risk controls 

that establish maximum AT Order 

Message and execution frequencies per 

unit time. These controls are commonly 

referred to in industry as message and 

execution throttles. These controls are 

designed to prevent excessive messaging 

or trading which could disrupt, slow 

down, or impede normal market 

activity. The Commission’s proposed 

regulation on maximum order message 

and execution frequencies is aimed at 

preventing market disruptions caused 

by either inadvertent or intentional 

submission of AT Order Messages. This 

proposed regulation should not prevent 

DCMs from maintaining any and all 

additional safeguards intended to 

prevent intentional activity such as 

quote stuffing, or to apply such 

safeguards to message or data flows that 

are broader than the proposed definition 

of AT Order Messages. As indicated 

above, commenters to the Concept 

Release indicated that message and 

execution throttles are already widely 

used in the industry.274 Commenters 

indicated that the benefits of these risk 

controls include mitigating the risk and 

impact of disruptive events, alerting 

market participants to potential 

problems with their automated trading 

systems, helping to ensure a level 

playing field for all market participants, 

and deterring predatory and disruptive 

activities.275 In light of these benefits, 

and the already extensive use of this 

risk control, the Commission includes 

maximum AT Order Message and 

execution frequencies in its proposed 

rule. 

The Commission notes that ESMA’s 

2015 Final Draft Regulatory Standards 

require investment firms to establish a 

maximum messages limit and repeated 

automated execution throttle.276 The 

execution throttle should limit the 

number of times a strategy is applied 

only where appropriate to the specific 

trading venue, strategy or product.277

ESMA requires that the controls be 

calibrated as appropriate for the 

investment firm’s capital base, clearing 

arrangements, trading strategy, risk 

tolerance and experience.278 ESMA 

further requires that firms take into 

account variables such as length of time 

since engaged in algorithmic trading 

and reliance on third-party vendors, and 

firms must re-calibrate in order to 

account for the changing impact of the 

orders on the relevant market due to 

different price and liquidity levels.279 In 

addition, the calculations supporting 

each control should take into account 

all orders sent to a trading venue.280 FIA 

has recently recommended that 

automated traders implement message 

throttles and repeated automated 

execution limits.281

As to the appropriate thresholds of 

these controls, the Commission agrees 

with Concept Release comments 

indicating that regulations should not 

mandate specific thresholds because, 

among other things, flexibility is 

necessary to respond to the dynamics of 

the market, and appropriate limits will 

vary by participant.282 For example, 

commenters suggested that message and 

execution throttles should be based on 

the specific attributes of the trading firm 

or account, including the nature of the 

firm’s trading strategies, the market it 

trades in, and the speed of its 

systems.283 Therefore, the proposed 

rules do not prescribe particular limits 

or thresholds, aside from the 

overarching requirement that the 

controls be reasonably designed to 

prevent an Algorithmic Trading Event, 

and § 1.80(a)(2)’s requirement that the 

controls be set at the level of each AT 

Person, or such other more granular 

level as the AT Person may determine, 

including but not limited to, by product, 

account number or designation, or one 

or more identifiers of natural persons 

associated with an AT Order Message. 

While several commenters supported 

greater Commission involvement in 

setting risk control parameters, the 

Commission believes that it is not in the 

best position to determine the 

appropriate message or execution rate 

for each trading firm, trading strategy, 

product, and every other potentially 

relevant factor that should be taken into 

account when establishing thresholds. 


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284See FIA Guide, supra note 95 at 10. 285FIA at 18–19, 23; CME at 15; Gelber at 10; KCG 

at 8; 3Red at 2. 286See ESMA September 2015 Final Draft 

Standards Report Annex 1, supra note 80 at 214– 

15. 

287See IOSCO 2015 Consultation Report, supra 

note 106 at 21. 

288See FIA Guide, supra note 95 at 8, 10. 

289See SEC, Responses to Frequently Asked 

Questions Concerning Risk Management Controls 

for Brokers or Dealers with Market Access, supra 

note 37. 

As discussed below, DCMs would 

receive information as to the specific 

quantitative settings used by each AT 

Person as part of Commission-required 

compliance reports pursuant to 

proposed § 1.83. Pursuant to this 

reporting process, DCMs would be able 

to identify AT Persons that have 

message or execution throttle thresholds 

that appear insufficient. 

The Commission notes that several 

commenters cited potential negative 

effects of controls establishing message 

or execution limits (e.g., they can block 

risk-reducing orders and decrease 

liquidity). The Commission believes 

that the overall benefits to maximum 

order message and execution 

frequencies, as noted above, outweigh 

potential negative effects. In addition, 

allowing market participants discretion 

in the design and implementation of 

message and execution throttles, as well 

as in establishing appropriate 

thresholds, would enable market 

participants to address and limit the 

potential negative effects of this risk 

control. 

Finally, as noted above, proposed 

§ 1.80(a)(2) requires the controls to be 

implemented at the AT Person-level. 

Consistent with § 1.80’s overarching 

requirement that an AT Person shall 

implement pre-trade risk controls and 

other measures reasonably designed to 

prevent an Algorithmic Trading Event, 

each AT Person must evaluate whether 

the controls should be set at a more 

granular level—for example, by product, 

account number or designation, or one 

or more identifiers of natural persons 

associated with an AT Order Message. 

Where deemed appropriate by the AT 

Person, the controls should be set at 

such more granular levels. In addition, 

proposed § 1.80(a)(3) requires that 

natural person monitors at the AT 

Person be promptly alerted when the 

controls are breached. The purpose of 

this requirement is to ensure that the AT 

Person would take any further action 

that is necessary to prevent or mitigate 

an Algorithmic Trading Event. 

b. Order Price Parameters and 

Maximum Order Size Limits 

Proposed § 1.80(a)(1)(ii) requires pretrade risk controls that limit the prices 

and quantities associated with 

individual order messages. By requiring 

‘‘order price parameters,’’ the 

Commission means that AT Persons 

must establish price limits intended to 

prevent orders with prices far from the 

prevailing market from entering the 

market. At the trading firm or clearing 

member level, such controls may be 

called ‘‘price tolerance limits’’ that 

define a maximum amount that an order 

price may deviate from a predetermined price, such as the last trade 

price, or the market open price.284 By 

requiring ‘‘maximum order size limits,’’ 

the Commission means the risk control 

generally understood in industry as ‘‘fatfinger’’ limits. Commenters to the 

Concept Release indicated that 

maximum order size controls are 

already widely used by trading firms 

and that this control is effective at 

reducing the likelihood that an 

exchange would need to make use of its 

error trade policy.285

The Commission notes that ESMA’s 

2015 Final Draft Regulatory Standards 

require investment firms to establish 

price collars, maximum order value 

limits and maximum order volume 

limits, appropriately calibrated for their 

capital base, clearing arrangements, 

trading strategy, risk tolerance and 

experience.286 IOSCO has also indicated 

that many market participants already 

employ order price and volume 

limits.287 In addition, FIA has recently 

recommended that automated traders 

employ maximum order size and price 

tolerance limits.288 Finally, the 

Commission also notes that the SEC’s 

Market Access Rule requires controls 

that prevent entry of erroneous orders, 

by rejecting orders that exceed 

appropriate price or size parameters, on 

an order-by-order basis or over a short 

period of time, or that indicate 

duplicative orders.289

Given the usefulness of price and 

order size parameters in preventing the 

execution of erroneous trades, the 

Commission determined to require that 

AT Persons establish such controls on 

all orders submitted through 

Algorithmic Trading. The proposed 

regulations are intended to be 

sufficiently flexible so that as required 

controls improve or new types controls 

emerge, they may be incorporated into 

an AT Person’s pre-trade risk control 

program and satisfy the requirements of 

proposed § 1.80(a). Similarly, this 

regulation is intended to be sufficiently 

flexible that exchanges, AT Persons, and 

clearing member FCMs may set the 

specific thresholds that will be most 

effective in preventing an Algorithmic 

Trading Event. 

Accordingly, the Commission 

proposes to require that each order pass 

through price parameter and maximum 

order size limit checks in order to 

protect the natural price discovery 

process from disruptive behavior such 

as unintentionally large orders. 

Consistent with the Commission’s 

approach to the other pre-trade risk 

controls, the Commission will not 

impose thresholds, but will leave design 

of the control and specific thresholds to 

the discretion of market participants. 

Finally, the Commission notes that 

market participants could comply with 

the pre-trade and other risk controls 

required by Regulation AT in multiple 

ways: By internally developing such 

controls from scratch, upgrading 

existing systems, or purchasing a risk 

management solution from an outside 

vendor. The Commission understands 

that market participants may also be 

able to purchase some risk management 

solutions from DCMs. The Commission 

notes that implementation of exchangeprovided controls, such as a maximum 

order size limit, would comply with 

Regulation AT’s requirement that AT 

Persons use that control. However, an 

AT Person’s use of a DCM-provided 

maximum order size limit would not 

constitute DCM compliance with 

proposed regulations requiring that 

DCMs implement maximum order sizes 

limits at the exchange level. 

c. Order Management Controls 

Proposed § 1.80(b) requires that AT 

Persons implement certain order 

management controls. The required 

controls must have the ability to: (i) 

Immediately disengage Algorithmic 

Trading; (ii) cancel selected or up to all 

resting orders when system or market 

conditions require it; and (iii) prevent 

submission of any new AT Order 

Messages (i.e., a ‘‘kill switch’’). The 

parameters for the order cancellation 

systems must be reasonably designed to 

prevent an Algorithmic Trading Event. 

In addition, proposed § 1.80(c) requires 

that AT Persons with Direct Electronic 

Access (as defined in proposed 

§ 1.3(yyyy)) must implement systems to 

indicate on an ongoing basis whether 

they have proper connectivity with the 

trading platform and any systems used 

by a DCM to provide the AT Person 

with market data. Proposed § 1.80(b)(2) 

requires that prior to an AT Person’s 

initial use of Algorithmic Trading to 

submit a message or order to a DCM’s 

trading platform, such AT Person must 

notify the applicable DCM whether all 

of its resting orders should be cancelled 

or suspended in the event of disconnect 

with the trading platform. 


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290FIA at 14; KCG at 12; MFA at 12; Chicago Fed 

at 2. 291CME at Appendix A–4; CFE at 9–10; MFA at 

12. 292FIA Guide, supra note 95 at 15. 293FIA at 30; Citadel at 3; CME at 22–24; Chicago 

Fed at 2; MFA at 12–13; Gelber at 14; CFE at 11. 

294See ESMA September 2015 Final Draft 

Standards Report Annex 1, supra note 80 at 211– 

12. 

295See FIA Guide, supra note 95 at 14. 

296See id. at 14. 

297See section IV(Q) below for a discussion of 

proposed § 40.23 and requests for comment in 

connection with the proposed regulations. 

The order cancellation systems 

requirements provided in proposed 

§ 1.80(b) and (c) are intended to protect 

against erroneous trading activity 

caused by an algorithmic trading system 

malfunction. As to connectivity 

monitoring and cancel-on-disconnect, 

several commenters supported 

exchanges offering such functionality to 

trading firms.290 Given the possibility of 

a technology failure that causes a market 

participant’s orders to be left in the 

market upon disconnect, leaving the 

trader or trading firm unable to manage 

the orders, the Commission believes that 

systems indicating proper connectivity 

and cancel-on-disconnect are important 

risk management tools that should be 

required. The Commission notes that 

commenters to the Concept Release 

indicated cancel-on-disconnect 

functionality should be a flexible tool, 

allowing market participants to 

determine whether orders should be left 

in the market upon disconnection.291

FIA has explained that automated 

traders must decide whether 

cancellation upon disconnect mitigates 

or increases risk.292 Accordingly, the 

Commission does not require 

cancellation or suspension of orders 

upon disconnect. Rather, it requires AT 

Persons, prior to engaging in 

Algorithmic Trading, to notify the DCM 

as to what action it should take in the 

event of disconnect, which may depend 

on the facts and circumstances. 

As to ‘‘kill switch’’ functionality, 

comments to the Concept Release 

indicated that exchanges already 

provide kill switch functionality for use 

by market participants or clearing 

members, and additional commenters 

suggested that such functionality should 

be implemented by market participants 

and clearing firms in addition to 

exchanges.293 The Commission notes 

the challenges identified by commenters 

around setting the correct level of 

granularity of an order cancellation tool, 

and of the potential need for trading 

firms to submit risk-reducing orders. 

The Commission believes that requiring 

that order cancellation tools allow for 

submission of risk-reducing orders may 

introduce too much uncertainty or 

complexity into the market, or may be 

technically infeasible at this time. In 

light of such considerations, the 

Commission’s proposed regulations do 

not mandate specific elements of kill 

switch design, such as the parameters or 

procedures concerning when the control 

must be triggered, or require that the 

functionality must allow for submission 

of risk-reducing orders. Rather, 

§ 1.80(b)(1) would require that AT 

Persons have the ability and authority to 

disengage Algorithmic Trading, cancel 

selected resting orders, and prevent 

submission of new AT Order Messages, 

but does not specify when such 

functionality should be triggered. The 

Commission allows flexibility for AT 

Persons to design and implement 

appropriate parameters and procedures 

that are appropriate for their trading 

strategy or markets. 

The Commission’s approach to order 

cancellation systems is consistent with 

current recommendations in the 

European regulatory context. ESMA’s 

2015 Final Draft Regulatory Standards 

require that investment firms know 

which algorithm and which trader, 

trading desk or, where applicable, client 

is responsible for each order, and have 

the ability, as an emergency measure, to 

cancel unexecuted orders submitted to 

individual trading venues originated by 

individual traders, trading desks, or 

where applicable, clients. Investment 

firms must also have the ability, as an 

emergency measure, to immediately 

cancel all the firm’s outstanding orders 

at all trading venues to which it is 

connected.294 The Commission also 

notes that FIA recently recommended 

that automated traders build their own 

kill switch functionality into their 

trading systems where it is possible to 

implement it on a sufficiently granular 

level to identify individual trading 

systems.295 FIA also recommended that 

where an exchange provides a kill 

switch, there should be a registration 

process and entitlement system that 

requires automated traders or brokers to 

specify which staff are authorized to use 

the functionality.296 The Commission 

believes that FIA (in its recent Guide to 

the Development and Operation of 

Automated Trading Systems), other 

industry organizations, and commenters 

to the Concept Release provided 

reasonable recommendations as to the 

design and implementation of order 

cancellation systems. The Commission 

urges AT Persons and other market 

participants to consider such 

recommendations in the 

implementation of order cancellation 

and connectivity systems. 

d. Notification of Algorithmic Trading 

Proposed § 1.80(d) requires that, prior 

to an AT Person’s initial use of 

Algorithmic Trading to submit a 

message or order to a DCM, such AT 

Person must notify its clearing member 

FCM, as well as the DCM on which the 

AT Person is trading, that it will engage 

in Algorithmic Trading. The 

Commission intends that this 

requirement ensure that clearing 

member FCMs and exchanges have 

sufficient advance notice to implement 

and calibrate pre-trade and other risk 

controls to manage risks arising from the 

AT Person’s trading. 

e. Self-Trade Prevention Tools 

Proposed § 1.80(e) requires that, to the 

extent that implementation of a DCM’s 

self-trade prevention tools requires 

calibration or other action by an AT 

Person, such AT Person must calibrate 

or take such other action as is necessary 

to apply such tools. This proposed 

regulation is designed to operate in 

conjunction with proposed § 40.23, 

which requires DCMs to either apply, or 

provide and require the use of, self-trade 

prevention tools.297

f. Periodic Review for Sufficiency and 

Effectiveness 

Finally, proposed § 1.80(f) requires 

that each AT Person shall periodically 

review its compliance with § 1.80 to 

determine whether it has effectively 

implemented sufficient measures 

reasonably designed to prevent an 

Algorithmic Trading Event. Proposed 

§ 1.80(f) would also require that an AT 

Person take prompt action to remedy 

any deficiencies it identifies. The 

Commission recognizes through 

proposed § 1.80(f) that trading practices, 

technologies for algorithmic trading, 

and best practices in risk controls will 

necessarily evolve over time. It believes 

that periodic review by AT Persons of 

their own pre-trade risk controls and 

other measures will help to ensure 

compliance with proposed § 1.80 in an 

engaged and proactive manner. 

g. Certain Measures Not Adopted in 

This NPRM 

The Commission determined not to 

address in this NPRM some measures 

that were discussed in the Concept 

Release and supported by Concept 

Release commenters. For example, 

various commenters favored 

standardization around drop copies and 

error trade policies. FIA commented 

that drop copies should be available for 


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298FIA at 13. 

299See id. 

300 KCG at 10–11; MFA at 2, 10–12; Citadel at 3, 

4–5; SIG at 8–9. 

all trading venues and products 

whenever technologically practicable 

and that trade reports and other 

information provided by drop copy 

should be disseminated to the consumer 

in real-time or as near real-time as 

practicable.298 As to error trade policies, 

FIA suggested that they be clear and 

deterministic enough for all participants 

to understand, promote a marketplace 

where all trades stand as executed, 

protect participants who are 

counterparties to error trades, and not 

be subject to discretion.299 KCG, MFA, 

Citadel and SIG also made similar 

comments.300 The Commission believes 

that standardization of drop copy 

reports and error trade policies, as well 

as other measures addressed in the 

Concept Release, merit further 

consideration within the Commission as 

well as in industry. However, the 

Commission determined to include 

particular risk controls in Regulation 

AT, and not others, based on its 

understanding of the critical importance 

of controls required in proposed § 1.80 

in preventing and mitigating market 

disruptions, as well as their current 

widespread industry use. 

In addition, as noted above, the 

Commission has taken a principlesbased approach to its requirements 

relating to risk controls and other 

measures. Proposed § 1.80 provides 

market participants discretion in the 

design and implementation of controls, 

and requires only a small number of 

specific controls that the Commission 

understands are already widely 

implemented. Proposed § 1.80 provides 

AT Persons with flexibility to identify 

and implement any additional controls 

appropriate for their Algorithmic 

Trading. The Commission is aware that 

prescriptive regulations in this area may 

not take into account the unique 

characteristics of each market 

participant, and may become obsolete. 

The proposed regulation reflects the 

Commission’s intent to accommodate 

the diverse and evolving nature of 

market participants’ businesses and 

technology, while establishing basic 

regulatory requirements of essential risk 

controls and related measures that each 

market participant engaged in 

Algorithmic Trading should have. 

4. Request for Comments 

33. Are any pre-trade and other risk 

controls required by § 1.80 ineffective, 

not already widely used by AT Persons, 

or likely to become obsolete? 

34. Are there additional pre-trade or 

other risk controls that should be 

specifically enumerated in proposed 

§ 1.80? 

35. Do you believe that the pre-trade 

and other risk controls required in 

§ 1.80 sufficiently address the 

possibility of technological advances in 

trading, and the development of new, 

more effective controls that should be 

implemented by AT Persons? 

36. The Commission welcomes 

comment on whether the regulation’s 

requirements relating to the design of 

controls and the levels at which the 

controls should be set are appropriate 

and sufficiently granular. 

37. The Commission notes that 

§ 1.80(d) requires that prior to initial use 

of Algorithmic Trading, an AT Person 

must notify its clearing member FCM 

and the DCM that it will engage in 

Algorithmic Trading. The Commission 

welcomes comment on whether the 

content of that notification requirement 

is sufficient, or whether clearing 

member FCMs and DCMs should also be 

notified of additional information. For 

example, should AT Persons be required 

to notify their clearing member FCMs of 

particular changes to their Algorithmic 

Trading systems that would affect the 

risk controls applied by the clearing 

member FCM? 

38. Is § 1.80(f)’s requirement that each 

AT Person periodically review its 

compliance with § 1.80 appropriate? 

Should there be more prescriptive and 

granular requirements to ensure that 

each AT Person periodically reviews its 

pre-trade and other risk controls and 

takes appropriate steps to update or 

recalibrate them in order to prevent an 

Algorithmic Trading Event? 

Alternatively, is § 1.80(f) necessary? 

Does the Commission need to explicitly 

require AT Persons to conduct a 

periodic review of their compliance 

with § 1.80? 

39. AT Persons that are registered 

FCMs are required by existing 

Commission regulation 1.11 to have 

formal ‘‘Risk Management Programs,’’ 

including, pursuant to § 1.11(e)(3)(ii), 

‘‘automated financial risk management 

controls reasonably designed to prevent 

the placing of erroneous orders’’ and 

‘‘policies and procedures governing the 

use, supervision, maintenance, testing, 

and inspection of automated trading 

programs.’’ As described in § 1.11, an 

FCM’s Risk Management Program must 

include a risk management unit 

independent of the business unit; 

quarterly risk exposure reports to senior 

management and the governing body of 

the FCM, with copies to the 

Commission; and other substantive 

requirements. The Commission requests 

public comment regarding whether one 

or more of the proposed requirements 

applicable to FCMs in §§ 1.80, 1.81, 

1.83(a), and 1.83(c) (as described below) 

should be incorporated within an FCM’s 

Risk Management Program and be 

subject to the requirements of such 

program as described in § 1.11. In this 

regard, any final rules arising from this 

NPRM could place all requirements 

applicable to FCMs in §§ 1.80, 1.81, 

1.83(a), and 1.83(c) within the 

operational risk measures required in 

§ 1.11(e)(3)(ii). Such incorporation 

could help improve the interaction 

between an FCM’s operational risk 

efforts and its pre-trade risk controls; 

development, monitoring, and 

compliance efforts; and reporting and 

recordkeeping requirements, pursuant 

to §§ 1.80, 1.81, 1.83(a), and 1.83(c). It 

could also help ensure that an FCM’s 

§§ 1.80, 1.81, 1.83(a), and 1.83(c) 

processes benefit from the same internal 

rigor and independence required by the 

Risk Management Program in § 1.11. 

40. The Commission proposes to 

adopt a multi-layered approach to 

regulations intended to mitigate the 

risks of automated trading, including 

pre-trade risk controls and other 

procedures applicable to AT Persons, 

clearing member FCMs and DCMs. 

Please comment on whether an 

alternative approach, for example one 

which does not impose requirements at 

each of these three levels, would more 

effectively mitigate the risks of 

automated trading and promote the 

other regulatory goals of Regulation AT. 

I. Standards for Development, Testing, 

Monitoring, and Compliance of 

Algorithmic Trading Systems—§ 1.81 

The Commission proposes regulations 

under § 1.81 requiring AT Persons to 

establish policies and procedures that 

accomplish a number of objectives with 

respect to the development, testing, 

monitoring, and compliance of 

Algorithmic Trading. The proposed 

regulations are intended to standardize 

a set of principles in order to reduce the 

operational risk of such systems. The 

remainder of this section presents 

Concept Release comments on this 

topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments 

The Concept Release requested 

comment on testing procedures for 

ATSs. The Concept Release 

contemplated, among other things, that 

market participants operating ATSs 

must test each ATS internally and on 

each trading platform on which it will 


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301FIA at 34–38; CME at 26; CFE at 2–3; AIMA 

at 3, 20–21; TCL at 15; KCG at 15–16; MFA at 2, 

12–13; OneChicago at 2–3. 

302FIA at 34–38. 

303CME at 25. 

304CME at 26. 

305SIG at 9. 

306 Gelber at 15–16. 

307FIA at 34–38; CME at 25–26. 

308CFE at 2–3. 309 KCG at 15–16. 310TCL at 15. 311Chicago Fed at 3. 312 IATP at 7. 313MFA, Presentation Before the CFTC 

Technology Advisory Committee Meeting on Risk 

Controls and System Safeguards for Automated 

Trading Environments (Feb. 10, 2014) at 13, 

available at: http://www.cftc.gov/idc/groups/public/ 

@newsroom/documents/file/tac021014_mfa.pdf. 

314AIMA at 3, 20–21. 

315MFA at 13. 

316MFA at 13. 

317CME at 25–26. 318CFE at 12. 319TCL at 11–14. 320FIX Trading Community (‘‘FIX’’) Comment 

Letter (December 11, 2013) at 4–5. 321 Illinois Institute of Technology (‘‘IIT’’) 

Comment Letter (February 11, 2014) at 1–2. 

operate, and trading platforms must 

provide test environments that simulate 

the production environment. In 

particular, the Concept Release asked 

for comment on when it is most 

beneficial for firms to test an ATS after 

it has been modified, and how the 

Commission and market participants 

should distinguish between major 

modifications and minor modifications. 

Commenters support ATS testing and 

discussed current and best practices, but 

disagreed as to whether regulatory 

measures are appropriate to standardize 

these practices. Most commenters 

(including FIA, CME, CFE, and MFA) 

oppose standardized ATS testing 

procedures.301 FIA indicated that it is 

impractical to implement prescriptive 

standardized procedures for 

development, testing and change 

management given the diversity of 

technologies and business operations at 

DCMs. FIA pointed to the testing 

recommendations outlined in its March 

2012 ‘‘Software Development and 

Change Management 

Recommendations’’ as best practices for 

trading firms, which could also apply to 

all participants. FIA described different 

types of testing and supports DCMs 

providing robust test environments and 

market participants using such 

environments.302 CME cited the FIA 

PTG’s ‘‘Recommendations for Risk 

Controls for Trading Firms’’ as an 

appropriate principles-based approach 

to management, oversight, and testing of 

electronic trading systems.303 CME 

noted that exchange systems vary 

widely, and each exchange should 

develop and test in a manner that 

comports with industry best 

practices.304

SIG indicated that DCMs should 

provide test environments and stated 

that ATS testing procedures should be 

standardized ‘‘where possible.’’ 305

Gelber stated that standardizing 

development, testing and change 

management might be helpful, but it is 

more important that these procedures 

are clear and comprehensive at each 

exchange than that they are 

standardized.306

Both FIA and CME noted the 

difficulty of establishing objective 

criteria to determine what constitutes a 

‘‘major’’ or ‘‘minor’’ modification of an 

ATS.307 CFE noted that DCMs are 

already subject to DCM Core Principle 

20 and Commission regulation 

38.1051(h), which require DCMs to 

conduct periodic, objective testing and 

review of their automated systems to 

ensure that they are reliable, secure, and 

have adequate scalable capacity.308 In 

addition, KCG argued that a ‘‘testing 

process that creates too many frictions 

can discourage making changes that 

improve a system.’’ 309 Similarly, TCL 

stated that the testing procedures 

suggested in the Concept Release are 

overly broad and could force ATS 

operators to take a narrow view of what 

constitutes a change.310

In contrast, several commenters 

support regulatory involvement in this 

area. Chicago Fed noted that many 

industries have standards-setting 

bodies, but because there is no corollary 

for the development of ATSs within an 

‘‘HFT environment,’’ market 

participants and the TAC should work 

together to formulate such standards 

and guidelines that will help mitigate 

the impact of operational risks.311 IATP 

stated that out of all of the safeguards 

addressed in the Concept Release, ATS 

testing has the greatest potential to 

reduce market disruptions. IATP 

recommended that the Commission 

review and select from current best 

practices.312 MFA recommended that 

industry engage in more robust testing, 

and that trading platforms should offer 

testing where a firm’s software interacts 

with other types of software.313

AIMA opposes standardization, and 

suggested alternatively that ‘‘CFTC 

principles’’ create a legal requirement 

for a certain standard of testing and 

change management. AIMA cited as an 

example the Department of Energy 

Software Engineering Methodology.314

While MFA also opposes 

standardization, it stated that ‘‘rules or 

industry practice should encourage 

more robust and more routine testing at 

the trading platform level.’’ 315

Finally, as to current ATS testing 

practices, MFA indicated that ‘‘many, if 

not all, exchanges provide market 

participants a test facility to test trading 

software and algorithms, as well as offer 

test symbols to trade.’’ 316 CME and CFE 

described their own testing practices. 

CME indicated that market participants 

routinely test in their own testing 

environments using historical data to 

test trading strategies against a range of 

market conditions, and that exchanges 

commonly make their own historical 

data available for testing purposes. CME 

explained that it requires all systems 

interfacing with CME Globex to be 

certified on the order entry and/or 

market data interfaces prior to 

deployment.317 CFE provides a user 

testing environment that simulates the 

production environment.318 TCL 

described FIA industry-wide testing of 

backup systems.319

FIX stated that it has a working group 

that is developing best practices related 

to testing and is working to increase the 

availability of test financial 

instruments.320 Similarly, IIT 

commented that a working group named 

AT 9000, which is affiliated with the 

International Organization for 

Standardization, is developing a quality 

management system for automated 

trading. The goals of AT 9000 are to 

help automated trading industry 

organizations satisfy their responsibility 

for trading safety, to satisfy regulatory 

requirements, and to improve the 

efficiency and effectiveness of 

automated trading.321

The Concept Release also requested 

comment on ATS development and 

change development. Among other 

things, the Concept Release 

contemplated that trading platforms and 

market participants operating ATSs 

must maintain a development 

environment that is adequately isolated 

from the production trading 

environment, and that market 

participants must have policies and 

procedures concerning approval and 

verification of changes to their trading 

systems. In particular, the Concept 

Release asked for comment on what 

challenges or benefits may result from 

the implementation of standardized 

development and change management 

procedures. 

FIA described the core components of 

a change management as including 

authorization (effective pre-deployment 

review of the proposed change) and 

auditability (procedures for 

communicating requirements, changes 

and functionality related to proprietary 

software and technical infrastructure). 

FIA indicated that prescriptive 


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322FIA at 4, 36–37. 

323TCL at 15. 

324 KCG at 17. 

325 KCG at 17–18. 

326MFA at 14. 

327For example, if an ATS is designed to operate 

within certain ranges of volatility, liquidity, or 

order or trade prices, automated alerts may be 

triggered when volatility or a moving average 

approaches the pre-determined ranges. 

development and change management 

standards are impractical given the 

diversity of market participants, but 

principles such as authorization and 

auditability can serve as ‘‘building 

blocks’’ that market participants can use 

to tailor a change management process 

to fit their needs.322

Similarly, TCL indicated that 

exchanges and ATSs should have formal 

processes for change management, 

which include a production installation 

authorization process in which no one 

may change the production systems 

after it has been submitted for 

authorization, followed by a formal 

signoff.323 KCG recommended that 

policies for deploying new software 

include staged deployment (deploying 

new software in phases, with explicit 

rollback procedures), and validation 

(manual and automated evaluation of 

whether a change is successful).324

In addition, the Concept Release 

requested comment on ATS monitoring 

and supervision. In particular, the 

Concept Release requested comment on 

the extent to which human monitors 

have been trained in how to respond to 

unexpected problems, and been given 

the requisite authority to intervene at 

these times. The Concept Release 

suggested that 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. Two commenters 

addressed ATS monitoring and 

supervision, but did not specifically 

express support or opposition to 

regulatory action. KCG recommended 

that a monitoring process identify 

‘‘smoke signals’’ (unusual or abnormal 

behaviors), investigate the cause of the 

smoke signals, and, if the smoke signal 

is an error, the monitoring alerts should 

be adjusted to take that information into 

account.325 MFA commented that there 

should be at least one designated 

individual who is available and 

authorized to suspend a firm’s trading 

program. MFA also suggested that FCMs 

should have ‘‘plan-of-action’’ protocols 

that include scenarios where trading is 

suspended based on specific types of 

events.326

2. Description of Regulation 

The Commission proposes regulations 

requiring AT Persons to establish 

policies and procedures that accomplish 

a number of objectives with respect to 

the design, testing, and supervision of 

Algorithmic Trading. The proposed 

regulations are intended to standardize 

a set of principles in order to reduce the 

operational risk of such systems. The 

proposed regulations require each AT 

Person to: Implement written policies 

and procedures for the development and 

testing of ATSs (§ 1.81(a)); implement 

written policies and procedures 

reasonably designed to ensure that each 

of its ATSs is subject to continuous realtime monitoring and supervision by 

knowledgeable and qualified staff while 

such ATS is engaged in trading 

(§ 1.81(b)); implement written policies 

and procedures reasonably designed to 

ensure that ATSs operate in a manner 

that complies with the CEA and the 

rules and regulations thereunder, and 

ensure that staff are familiar with the 

CEA and the rules and regulations 

thereunder, the rules of any DCM to 

which such AT Person submits orders 

through Algorithmic Trading, the rules 

of any RFA of which such AT Person is 

a member, the AT Person’s own internal 

requirements, and the requirements of 

the AT Person’s clearing member FCM, 

in each case as applicable (§ 1.81(c)); 

and implement written policies and 

procedures to designate and train staff 

responsible for Algorithmic Trading 

(§ 1.81(d)). The proposed rules are 

described in greater detail below. 

As a complement to the proposed 

design and testing requirements, 

Regulation AT proposes a new 

requirement that DCMs (under proposed 

§ 40.21, discussed in section IV(O) 

below) provide a test environment that 

will enable market participants to 

simulate production trading and 

conduct exchange-based conformance 

testing of their Algorithmic Trading 

systems. 

Development and Testing of 

Algorithmic Trading Systems. 

Regulation AT proposes a new 

requirement (§ 1.81(a)(1)) that each AT 

Person must implement written policies 

and procedures for the development and 

testing of its Algorithmic Trading 

systems. Such policies and procedures 

must at a minimum include the 

following: (i) Maintaining 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); (ii) testing of all 

Algorithmic Trading code and related 

systems and any changes to such code 

and systems prior to their 

implementation, including testing to 

identify circumstances that may 

contribute to future Algorithmic Trading 

Events (such testing must be conducted 

both internally with the AT Person and 

on each designated contract market on 

which Algorithmic Trading will occur); 

(iii) regular back-testing of Algorithmic 

Trading using historical transaction, 

order, and message data to identify 

circumstances that may contribute to 

future Algorithmic Trading Events; (iv) 

regular stress tests of Algorithmic 

Trading systems to verify their ability to 

operate in the manner intended under a 

variety of market conditions; (v) 

procedures for documenting the strategy 

and design of proprietary Algorithmic 

Trading software used by an AT Person, 

as well as any changes to such software 

if such changes are implemented in a 

production environment; and (vi) 

maintaining a source code repository to 

manage source code access, persistence, 

copies of all code used in the 

production environment, and changes to 

such code (such source code repository 

must include an audit trail of material 

changes to source code that would allow 

AT Persons to determine, for each such 

material change: Who made it; when 

they made it; and the coding purpose of 

the change. The source code must also 

be maintained in accordance with 

Commission regulation § 1.31). 

Monitoring of Algorithmic Trading 

Systems. Regulation AT proposes a new 

requirement (§ 1.81(b)) that each AT 

Person must implement written policies 

and procedures reasonably designed to 

ensure that each of its ATSs is subject 

to continuous real-time monitoring by 

knowledgeable and qualified staff while 

such ATS is engaged in trading. Such 

policies and procedures must at a 

minimum include the following: (i) 

Continuous real-time monitoring of 

Algorithmic Trading to identify 

potential Algorithmic Trading Events; 

(ii) automated alerts when an ATS’s AT 

Order Message behavior breaches design 

parameters, upon loss of network 

connectivity or data feeds, or when 

market conditions approach the 

boundaries within which an ATS is 

intended to operate, to the extent 

applicable; 327 (iii) monitoring staff of 

the AT Person shall have the ability and 

authority to disengage an Algorithmic 

Trading system and to cancel resting 

orders when system or market 

conditions require it, including the 

ability to contact staff of the applicable 

designated contract market and clearing 

firm, as applicable, to seek information 


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328The Commission notes that the supervision 

requirement of proposed § 1.81(b) is analogous to 

the supervision requirements for Commission 

registrants under the customer protection rules of 

Commission regulation 166.3. The Commission 

further notes that ESMA’s draft regulatory standards 

for MiFID II provide that real-time monitoring 

should be performed by a risk function that is 

independent from the trader, to ensure an 

appropriate segregation between the trading desk 

and supporting functions. See ESMA September 

2015 Final Draft Standards Report, supra note 80 

at 201. 

329See ESMA Guidelines, supra note 61 at 10. 330See MiFID II, Article 48(6). 331ESMA September 2015 Final Draft Standards 

Report Annex 1, supra note 80 at 205–16. 

and cancel orders; and (iv) procedures 

that will enable AT Persons to track 

which monitoring staff is responsible for 

an Algorithmic Trading system during 

trading hours. The Commission believes 

that staff persons who are responsible 

for monitoring the trading of other AT 

Person staff should typically not be 

actively engaged in trading at the same 

time, because it would be difficult to 

adequately and consistently monitor 

trading of other AT Person staff while 

engaged in trading activities.328

Compliance of Algorithmic Trading 

Systems. Regulation AT proposes a new 

requirement (§ 1.81(c)) that each AT 

Person shall implement written policies 

and procedures reasonably designed to 

ensure that each of its Algorithmic 

Trading systems operates in a manner 

that complies with the CEA and the 

rules and regulations thereunder. AT 

Persons must also implement 

procedures requiring staff of the AT 

Person to review Algorithmic Trading 

systems in order to detect potential 

Algorithmic Trading Compliance Issues. 

Such staff must include staff of the AT 

Person familiar with the CEA and the 

rules and regulations thereunder, the 

rules of any DCM to which such AT 

Person submits orders through 

Algorithmic Trading, the rules of any 

RFA of which such AT Person is a 

member, the AT Person’s own internal 

requirements, and the requirements of 

the AT Person’s clearing member FCM, 

in each case as applicable. The 

procedures should also include a plan 

of internal coordination and 

communication between compliance 

staff of the AT Person and staff of the 

AT Person responsible for Algorithmic 

Trading regarding Algorithmic Trading 

design, changes, testing, and controls, 

which plan should be designed to detect 

and prevent Algorithmic Trading 

Compliance Issues. 

Designation and Training of 

Algorithmic Trading Staff. Regulation 

AT proposes a new requirement 

(§ 1.81(d)) that each AT Person must 

implement written policies and 

procedures to designate and train its 

staff responsible for Algorithmic 

Trading. Such policies and procedures 

must at a minimum include the 

following: (i) Procedures for designating 

and training all staff involved in 

designing, testing and monitoring 

Algorithmic Trading, and documenting 

training events (training must, at a 

minimum, cover design and testing 

standards, Algorithmic Trading Event 

communication procedures, and 

requirements for notifying staff of the 

applicable designated contract market 

when Algorithmic Trading Events 

occur); (ii) training policies reasonably 

designed to ensure that natural person 

monitors are adequately trained for each 

Algorithmic Trading system or strategy 

(or material change to such system or 

strategy) for which such monitors are 

responsible; and (iii) escalation 

procedures to inform senior staff as soon 

as Algorithmic Trading Events are 

identified. The training described in 

clause (ii) above must include, at a 

minimum, the trading strategy for the 

Algorithmic Trading system, as well as 

the automated and non-automated risk 

controls that are applicable to the 

Algorithmic Trading system or strategy. 

Adequate training should ensure that 

monitors are effectively educated 

regarding the typical behavior of each 

Algorithmic Trading system or strategy 

(or material change to such system or 

strategy) that they are responsible for 

overseeing in production. It should also 

allow monitors to understand when risk 

controls may be triggered, and how to 

respond once they are. As result of the 

training they receive, monitors should 

be capable of making rapid, appropriate 

decisions in real time to help contain or 

mitigate ATS issues. 

3. Policy Discussion 

Consistent with the comments 

received, the Commission is taking a 

principles-based approach in this area, 

which is intended to provide discretion 

to AT Persons, particularly with respect 

to the development and testing of 

Algorithmic Trading systems. The 

Commission acknowledges that 

prescriptive regulations in this area may 

fail to take into account the unique 

characteristics of various market 

participants’ trading strategies, and may 

become obsolete as technology and 

development standards evolve. For 

example, the Commission recognizes 

that software development practices 

continue to evolve, and therefore is not 

imposing very granular coding or testing 

requirements. The Commission believes 

that this principles-based approach is 

consistent with other regulatory 

initiatives and best practice guides 

issued in this area, as further discussed 

below. 

Guidelines, Best Practices and 

Regulatory Standards on Testing and 

Development 

As noted above, the ESMA guidelines 

recommended that investment firms 

should make use of clearly delineated 

development and testing methodologies 

prior to deploying an electronic trading 

system or a trading algorithm, and 

should monitor their electronic trading 

systems, including trading algorithms, 

in real-time.329 The MiFID II Directive 

requires a regulated market to have in 

place effective systems, procedures and 

arrangements, including requiring 

members or participants to carry out 

appropriate testing of algorithms and 

providing environments to facilitate 

such testing. The Directive seeks to 

reduce the likelihood that algorithmic 

trading systems may create or contribute 

to disorderly trading conditions, and to 

promote effective resolution of any 

disorderly trading conditions that do 

arise from algorithmic trading 

systems.330 With respect to MiFID II, 

ESMA’s 2015 Final Draft Regulatory 

Standards include requirements relating 

to the role of compliance and 

monitoring staff, testing (including 

conformance testing, stress testing, and 

testing environments), annual review 

and validation of systems, change 

management procedures, and real-time 

market monitoring procedures.331 These 

standards include, among other things, 

that a firm must have clear lines of 

accountability for the development, 

deployment and updates of algorithms, 

and effective procedures for 

communication of information; 

compliance staff must have a general 

understanding of how trading systems 

and algorithms operate, and be in 

continuous contact with persons with 

detailed technical knowledge of trading 

systems and algorithms; testing must 

ensure that systems conform with the 

rules and systems of the trading venue, 

risk controls work as intended, and 

systems will not contribute to disorderly 

trading and can continue to work 

effectively in stressed market 

conditions; firms must run an annual 

validation process, which includes 

preparation of a validation report; firms 

must keep records of material changes 

made to software, including when a 

change was made, who made it, who 

approved it, and the nature of the 

change; and monitoring systems must 

have real-time alerts that assist staff in 

identifying when an algorithm is not 

behaving as expected, and firms must 


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332See id. 

333See Reg SCI, supra note 40 at 72437. 

334See FINRA Notice 15–09, supra note 59 at 1. 

335See FIA Guide, supra note 95 at 23–30. 

336See IOSCO 2015 Consultation Report, supra 

note 106 at 14, 19. 

337 Id. at 21. 

338See SSG 2015 Note, supra note 115 at 3. 

339 IATP at 7. 

340See SEC Knight Capital Release, supra note 39. 

have a process for remedial action when 

alerts occur, including a process for an 

orderly withdrawal from the market.332

With respect to the U.S. securities 

markets, the SEC’s Reg SCI requires SCI 

entities to implement a program to 

review and keep current systems 

development and testing methodology 

for SCI systems, and to implement 

standards that result in SCI systems 

being designed, developed, tested, 

maintained, operated, and surveilled in 

a manner that facilitates the successful 

collection, processing, and 

dissemination of market data.333 In 

addition, FINRA Notice 15–09, 

published in March 2015, offered 

guidance on effective supervision and 

control practices for market participants 

that use algorithmic trading strategies in 

the equities market. The FINRA notice 

provided guidance in five general areas: 

General risk assessment and response; 

software/code development and 

implementation; software testing and 

system validation; trading systems; and 

compliance.334

The Commission further notes that 

the FIA Guide provides an overview of 

development and testing procedures, 

including software development, source 

code management and implementation, 

exchange-based conformance testing, 

and post-deployment verification, while 

noting that ‘‘market participants and 

exchanges should have the flexibility 

necessary to establish procedures that 

are appropriate and proportional to their 

operations.’’ 335 The IOSCO 2015 

Consultation Report notes that ‘‘many 

regulatory authorities have introduced 

specific requirements and guidelines 

regarding the introduction of new 

systems and changes to existing 

systems,’’ and recommends that trading 

venues should consider establishing 

policies and procedures related to the 

development, modification, testing and 

implementation of critical systems, and 

establishing a governance model for the 

management of critical systems.336 The 

IOSCO report also notes that most 

trading venues have procedures and 

tools designed to address the 

operational risk associated with 

electronic trading, including monitoring 

of trading in real-time (or near realtime), and monitoring of the trading 

venue’s system performance in realtime.337 Finally, the Senior Supervisors 

Group Algorithmic Trading Briefing 

Note, published in April 2015, 

recommended that market participants 

using algorithmic trading conduct 

testing during all phases of a trading 

product’s lifestyle, namely during 

development, rollout to production, and 

ongoing maintenance.338

The rules proposed under § 1.81 are 

intended to be consistent with these 

regulatory initiatives and best practices. 

The Commission believes that most 

market participants and DCMs have 

implemented controls regarding the 

design, testing, and supervision of 

Algorithmic Trading systems, in light of 

the numerous best practices and 

regulatory requirements promulgated in 

this area. The proposed regulations are 

intended to standardize a set of 

principles relating to the design, testing, 

and supervision of Algorithmic Trading 

systems in order to reduce the 

operational risk of such systems. In their 

response to the Concept Release, IATP 

noted that, out of all the safeguards 

discussing in the Release, they believed 

ATS testing had the greatest potential to 

reduce market disruptions.339 By 

standardizing principles in this area, 

Regulation AT is intended to reduce the 

risk of disorderly trading, including the 

risk that orders will be unintentionally 

sent into the marketplace by a poorly 

designed or insufficiently supervised 

algorithm. 

For example, the regulations proposed 

under § 1.81 may reduce the risk of 

market disruptions such as the 2012 

incident involving Knight Capital. The 

SEC later concluded that, among other 

failures, Knight Capital did not have 

adequate controls and procedures for 

code deployment and testing for its 

order router, did not have sufficient 

controls and written procedures to 

guide employees’ responses to 

significant technological and 

compliance incidents, and did not have 

an adequate written description of its 

risk management controls.340 As 

discussed above, proposed § 1.81 

requires written policies and procedures 

relating to the following: Testing of all 

Algorithmic Trading code and relates 

systems and any changes to such code 

and systems prior to their 

implementation; regular stress tests of 

Algorithmic Trading systems to verify 

their ability to operate in the manner 

intended under a variety of market 

conditions; a plan of internal 

coordination and communication 

between compliance staff of the AT 

Person and staff of the AT Person 

responsible for Algorithmic Trading 

regarding Algorithmic Trading design, 

changes, testing, and controls; and 

procedures for documenting the strategy 

and design of proprietary Algorithmic 

Trading software used by an AT Person, 

among other controls. The 

standardization of such written policies 

and procedures may make disruptive 

events like the Knight Capital incident 

less likely in the future. 

4. Request for Comments 

41. The Commission understands that 

the requirements for developing, testing, 

and supervising algorithmic systems 

proposed in § 1.81(a)–(d) are already 

widely used throughout the industry. 

Are any specific requirements proposed 

in this section not widely used by 

persons that would be designated as AT 

Persons under Regulation AT, and if 

not, why not? If any requirements 

described in § 1.81(a)–(d) are not widely 

used, please provide an estimate of the 

cost that would be incurred by an AT 

Person to implement such requirements. 

42. Are there any aspects of § 1.81(a)– 

(d) that are unnecessary for purposes of 

reducing the risks from Algorithmic 

Trading, and should not be mandated by 

regulation? If so, please explain. 

43. Are the procedures described 

above for the development and testing 

of Algorithmic Trading sufficient to 

ensure that algorithmic systems are 

thoroughly tested before being used in 

production, and will operate in the 

manner intended in the production 

environment? 

44. Are there any additional 

procedures for the development and 

testing of Algorithmic Trading that 

should be required under Regulation 

AT? 

45. Are any of the required 

procedures for the development and 

testing of Algorithmic Trading likely to 

become obsolete in the near future as 

development and testing standards 

evolve? 

46. Are the procedures for designating 

and training Algorithmic Trading staff 

of AT Persons sufficient to ensure that 

such staff will be knowledgeable in the 

strategy and operation of Algorithmic 

Trading, and capable of identifying 

Algorithmic Trading Events and 

promptly escalating them to appropriate 

staff members? 

47. Is it typical that persons 

responsible for monitoring algorithmic 

trading do not simultaneously engage in 

trading activity? 

48. Proposed §§ 1.80, 1.81, and 1.83 

would impose certain requirements on 

all AT Persons regardless of the size, 

sophistication, or other attributes of 

their business. The Commission 

requests public comment regarding 


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341FIA at 59–60. 

342FIA at 13. 

343FIA at 13. 

344CFE at 7. 

345FIA at 12, 16. 

346FIA at 16. 347FIA at 12. 348FIA at 16. 349 KCG at 3; Gelber at 6; MFA at 4–5; CME at 

7–9; AIMA at 7; Chicago Fed at 2; SIG at 3. The 

Commission notes that the same concern discussed 

in the AT Person context that message or execution 

limits have potential negative effects because they 

can block risk-reducing orders would also apply to 

message or execution limits applied by an FCM. To 

that end, the Commission notes that FIA 

commented that a FCM should never reject an order 

cancellation request due to message rate limits. See 

FIA at 16. 

350 Gelber at 6. 351 Gelber at 5–7. 352MFA at 4–5. 353CME at 7. 354CME at 9. 

355See id. 

356FIA at 59–60. 

357CME at 15. 

358CFE at 7. 

359FIX at 3. 

360AIMA at 13. 

361MFA at 9. 

362See id. 

363 KCG at 8. 

364Chicago Fed at 2. 

365FIA at 60. 

whether these requirements should vary 

in some manner depending on the AT 

Person. If commenters believe proposed 

§§ 1.80, 1.81, and 1.83 should vary, 

please describe how and according to 

what criteria. 

J. Risk Management by Clearing Member 

FCMs—§ 1.82 

The Commission proposes a new 

§ 1.82 to require clearing member FCMs 

to implement pre-trade risk and order 

management controls with respect to AT 

Order Messages originating with an AT 

Person. Specifically, such clearing 

member FCMs must make use of pretrade risk controls reasonably designed 

to prevent or mitigate an Algorithmic 

Trading Disruption, including at a 

minimum, those pre-trade risk controls 

described in § 1.80(a)(1). The remainder 

of this section presents Concept Release 

comments on this topic, a description of 

the proposed regulation, a discussion of 

the policy justification for the proposal, 

and a request for comments on the 

proposal. 

1. Concept Release Comments 

The Concept Release inquired about 

clearing members’ use of the same pretrade and other risk controls discussed 

above in section IV(H) with respect to 

AT Persons. 

a. Message and Execution Throttles 

FIA indicated that message and 

execution throttles are already widely 

used by clearing members. FIA PTG 

surveyed its members and found that all 

responding FCMs used message and 

execution throttles, either internally or 

at the exchange level.341 FIA also 

indicated that most DCMs provide tools 

to allow FCMs to set pre-trade controls 

for their customers, which are a 

prerequisite for an FCM to provide 

direct access to a market participant 

without routing orders through the 

FCM’s infrastructure.342 FIA explained 

that FCMs encourage DCMs to provide 

pre-trade risk controls that can be set at 

various levels, whether at session level, 

customer level or account level.343 CFE 

commented that it provides an 

execution throttle to clearing 

members.344

FIA stated that DCM message rate 

limits should be supplemented at the 

market participant or FCM level.345 FIA 

explained that where an FCM facilitates 

market access, it has the ability to 

impose the FCM’s own message rate 

limits. These limits should be 

documented and discussed with market 

participants to ensure that they are 

appropriate for the participants’ type of 

activity.346 FIA further stated that FCMs 

that choose to implement message rate 

limits within their infrastructure should 

be transparent to their customers 

regarding the reason for the control and 

the maximum message rate that can be 

supported by the FCM.347 In the case of 

direct access, FIA explained that the 

FCM should rely on DCM-provided 

message rate limits and any controls 

implemented by the market participants 

themselves.348

Additional commenters indicated that 

FCMs should implement messaging or 

execution limits.349 For example, Gelber 

stated that ‘‘in many cases, FCMs 

receive fills from the exchanges and 

have no control over the amount of 

messaging coming from a customer 

controlled-and-run applications. 

Therefore, FCMs need to have the 

ability to coordinate throttle rates 

through the account identifier at the 

exchange.’’ 350 Gelber indicated that 

such limits should take into account 

financial risk and FCMs’ understanding 

of their clients’ business.351 MFA stated 

that clearing members, as the gateways 

to the markets, should have financial 

and regulatory risk management 

controls to reduce risks associated with 

market access.352 Similarly, CME 

supported allowing clearing members to 

provide direct market access to their 

customers as long as the clearing 

member has appropriately vetted the 

client and implemented appropriate risk 

management controls.353 CME stated 

that clearing firms should decide the 

exact nature of the throttles to impose 

across their customer base, taking into 

consideration financial risk to the extent 

possible and their understanding of 

their clients’ businesses.354 Finally, SIG 

commented that clearing firms should 

have the ability to throttle orders at the 

exchange level in connection with 

credit limits set by the clearing firm, 

and that exchanges should make this 

same protection available to executing 

brokers executing for customers for 

whom they do not clear.355

b. Maximum Order Sizes 

Commenters indicated that clearing 

members already use maximum order 

sizes. FIA explained that FIA PTG 

conducted a survey and all responding 

FCMs used this control.356 CME 

commented that it allows clearing 

members to use its technology to set 

maximum order sizes for specific 

customers or accounts.357 CFE stated 

that it allows clearing members to set 

maximum order size limits by product, 

and then set maximum order and quote 

size limits by the ‘‘log-in’’ of trading 

privilege holders.358 FIX indicated that 

it is becoming increasingly common for 

futures and equities exchanges to 

provide tools that allow an FCM the 

ability to set checks for each client that 

accesses the exchange directly.359 AIMA 

suggested that many market participants 

already use maximum order sizes when 

trading through their brokers, but may 

have less access to this control in the 

case of direct market access.360 MFA 

commented that some FCMs already 

offer their customers this control, which 

can be set at the following levels: Each 

direct market access order, each 

individual algorithmic order, net sell 

and buy order limits, and total contract 

limits.361 MFA suggested that all FCMs 

offer this maximum order size control at 

the trader-level.362 Similarly, KCG 

believes that exchange-provided 

maximum order size controls should 

allow the market participant flexibility 

in setting different maximum order size 

levels for different users within a firm, 

such as based on trader ID or 

customer.363 Chicago Fed supports a 

requirement that clearing firms must use 

this control at the account level.364

c. Price Collars 

Most comments addressing this 

control focused on price collars 

implemented by exchanges. However, 

the FIA FCM Survey reflected that 

almost all responding FCMs used price 

collars, administered either internally or 

at the exchange level.365


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366FIA at 14. 

367CME at 23–24; CFE at 11. 

368Citadel at 3; CME at 22; Chicago Fed at 2. 

369Barclays Capital Inc. (‘‘Barclays’’) Comment 

Letter (December 10, 2013) at 1. Similarly, FIA 

commented that where FCMs rely on DCMprovided controls, and such controls fail to operate 

according to the instructions of the FCM, FCMs 

should be deemed to have met their regulatory 

obligations. FIA at 19–20. 

370FIA at 30. 

371 Id. at 31. 

372 Id. 

373The Commission notes that § 23.609 imposes 

the same risk-based limit requirements on SDs and 

MSPs as § 1.73 does on clearing FCMs. SDs and 

MSPs do not carry customer accounts; accordingly, 

any firm that has customer accounts must be a 

registered FCM and implement the controls 

required by new § 1.82. Furthermore, any SD or 

MSP that engages in Algorithmic Trading for its 

own account will have to comply with the AT 

Person requirements of proposed § 1.80. 

d. Order Management Controls 

As noted above, the Concept Release 

requested comment regarding ‘‘system 

heartbeats’’ and ‘‘auto-cancel on 

disconnect,’’ and commenters that 

addressed this topic indicated that 

exchanges provide these tools. In 

addition, FIA indicated that it is 

increasingly common for FCMs to 

employ cancel-on-disconnect for their 

connections to the DCM.366

Some commenters addressed the 

implementation of ‘‘kill switch’’ 

functionality by FCMs. Two exchanges 

commented that their kill switch 

functionality allows clearing firms to 

cancel orders 367 and several 

commenters stated that kill switches 

should be implemented by market 

participants and clearing firms in 

addition to exchanges.368 Barclays 

commented that if a kill switch is 

located at the FCM level, then the 

Commission should provide ‘‘clear 

regulatory guidance’’ about when the 

FCM should alter or cancel orders, given 

that altering or cancelling orders could 

expose the FCM to significant financial 

or legal liability.369

FIA explained that if a DCM cannot 

provide the appropriate level of 

granularity in the function of its kill 

switch, the focus of this functionality 

should be at the FCM level.370 FIA 

recommended that a kill switch 

implemented by an FCM should be able 

to be invoked ‘‘at the finest resolution 

possible’’ and should include both 

manual and automated methods for 

triggering the kill switch.371 FIA 

stressed that a kill switch should be 

used as a ‘‘final measure’’ only when 

other processes have not been 

successful, and that policies and 

procedures for when an FCM will 

invoke a kill switch should be clearly 

communicated to the market 

participant.372

2. Description of Regulation 

The Commission proposes a new 

§ 1.82 to require clearing member FCMs 

to implement pre-trade risk controls and 

order management controls with respect 

to AT Order Messages originating with 

an AT Person. Specifically, such 

clearing member FCMs must make use 

of pre-trade risk controls reasonably 

designed to prevent or mitigate an 

Algorithmic Trading Disruption, 

including at a minimum, those pre-trade 

risk controls described in § 1.80(a)(1). 

(Proposed § 1.80(a)(1) requires AT 

Persons to implement, at a minimum, 

maximum AT Order Message frequency 

per unit time and maximum execution 

frequency per unit time, order price 

parameters and maximum order size 

limits.) The Commission notes that 

proposed § 1.82 requires clearing 

member FCMs to address ‘‘Algorithmic 

Trading Disruptions,’’ rather than the 

broader ‘‘Algorithmic Trading Events’’ 

that AT Persons are required to address 

under proposed § 1.80. As discussed in 

section IV(D) above, an Algorithmic 

Trading Disruption is defined in 

proposed § 1.3(uuuu) as an event 

originating with an AT Person that 

disrupts, or materially degrades, (1) the 

Algorithmic Trading of such AT Person, 

(2) the operation of the DCM on which 

such AT Person is trading or (3) the 

ability of other market participants to 

trade on the DCM on which such AT 

Person is trading. In contrast to an 

Algorithmic Trading Event (defined in 

proposed § 1.3(vvvv)), an Algorithmic 

Trading Disruption does not specifically 

incorporate violations of the CEA or the 

rules thereunder. The Commission 

anticipates that some Algorithmic 

Trading Disruptions may be the result of 

violations of the CEA or Commission 

regulations, and some Algorithmic 

Trading Disruptions may not. Proposed 

§ 1.82 requires clearing member FCMs 

to make use of pre-trade risk controls 

reasonably designed to prevent or 

mitigate an Algorithmic Trading 

Disruption, regardless of whether such 

disruptions were the result of a 

violation of the CEA or Commission 

regulations. It otherwise does not 

require clearing member FCMs to ensure 

that their customers’ order flow does not 

violate the CEA or Commission 

regulations. However, nothing in 

proposed § 1.82 relieves FCMs of their 

obligations under all other applicable 

Commission regulations. 

Proposed § 1.82 also requires that pretrade risk controls must be set at the 

level of each AT Person, or such other 

more granular level as the clearing FCM 

may determine, including but not 

limited to: By product, account number 

or designation, or one or more 

identifiers of natural persons associated 

with an AT Order Message. In addition, 

§ 1.82 would require the clearing 

member FCM to have policies and 

procedures reasonably designed to 

ensure that natural person monitors at 

the FCM are promptly alerted when pretrade risk control parameters established 

pursuant to this section are breached, 

and make use of the order cancellation 

systems described in § 1.80(b)(1). (The 

order cancellation systems are the same 

controls that proposed § 1.80(b)(1) 

requires AT Persons to implement, i.e., 

systems that have the ability to 

immediately disengage Algorithmic 

Trading, cancel selected or up to all 

resting orders when system or market 

conditions require it, and prevent the 

submission of new orders.) 

Pursuant to proposed § 1.82(b) and 

(c), the location of the pre-trade and 

other risk controls calibrated by the 

clearing member FCM varies, according 

to whether an AT Person’s orders are 

placed through DEA or intermediated by 

its clearing FCM. 

DEA Orders—Controls Reside at 

DCM. Proposed § 1.82(b) addresses AT 

Order Messages originating with an AT 

Person and submitted through DEA. In 

the case of DEA, pre-trade and other risk 

controls would be established by and 

located at the DCM, and be controlled 

or calibrated by the clearing FCM. This 

approach recognizes that clearing FCMs 

do not have the ability to apply market 

risk controls to customers’ DEA orders 

before they reach a DCM. With respect 

to financial risk, existing § 38.607 

requires DCMs to establish controls 

facilitating FCMs’ management of 

financial risk, and existing § 1.73 

provides requirements with respect to 

clearing FCMs’ implementation of such 

controls.373 Consistent with that 

structure, proposed amendments to 

§ 38.255 establish a similar structure in 

which DCMs must establish pre-trade 

and other risk controls addressing the 

risks of Algorithmic Trading for use by 

FCMs. Proposed § 1.82(b), accordingly, 

requires FCMs to implement such 

controls residing at the DCM. 

Non-DEA Orders—FCM Implements 

and Calibrates Controls. Proposed 

§ 1.82(c) addresses the scenario in 

which AT Order Messages originating 

with an AT Person are not submitted to 

a trading platform through DEA, but 

instead are routed through a clearing 

member FCM. In the case of such 

intermediated orders, the controls 

would not reside at the DCM. Instead, 

the clearing member FCM itself would 

have the obligation to implement and 


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374See Barclays at 1. 

375 IOSCO 2015 Consultation Report, supra note 

106 at 22–23. 

376See ESMA September 2015 Final Draft 

Standards Report Annex 1, supra note 80 at 218. 

ESMA’s 2015 Final Draft Regulatory Standards 

further require, among other things, that direct 

electronic access providers have the ability to stop 

order flow of their clients, carry out a review of the 

internal risk controls systems of the client, and have 

the ability to identify the different trading desks 

and traders of its clients. The direct electronic 

access provider must also perform due diligence on 

its clients covering, among other things, the type of 

strategies the client will use, the operational set-up, 

systems and controls of the client, its historical 

trading pattern and behavior, an assessment of the 

level of expected trading and order volume, and the 

ability of the client to meet its financial obligations. 

See id. at 219–20. 

377See id. 

calibrate pre-trade risk and other 

controls with respect to such orders. 

The Commission notes that while the 

controls implemented by the FCM are 

the same types of controls that would be 

implemented by AT Persons pursuant to 

§ 1.80 (and by DCMs pursuant to 

§ 40.20, discussed below), each entity 

would be responsible for ensuring the 

appropriate calibration of the control. 

Accordingly, an FCM’s setting of a 

maximum order size limit, for example, 

may be different from the setting used 

by an AT Person, depending on each 

entity’s assessment of the potential for 

an Algorithmic Trading Event or an 

Algorithmic Trading Disruption, as 

applicable. The Commission will not 

mandate exactly when intervention by 

an FCM to modify or cancel orders is 

necessary; rather, the Commission 

believes that each FCM is best 

positioned to determine appropriate 

parameters that will prevent or mitigate 

an Algorithmic Trading Disruption. 

Furthermore, the Commission will not 

specify a mandate which, if complied 

with by an FCM, would absolve the 

FCM of liability (as requested by 

Barclays).374

3. Policy Discussion 

The Commission agrees with 

comments to the Concept Release that 

suggested that all types of market access 

create risks; therefore, the same 

principles should apply to all types of 

market access. When an order does not 

pass through a clearing member FCM’s 

infrastructure before entering the 

market, it is critical that DCMs provide 

clearing member FCMs with the ability 

to subject such orders to controls that 

prevent or mitigate the impact of 

unintended or disruptive trading. In 

addition, where orders pass through a 

clearing member FCM’s infrastructure 

before entering the market, that clearing 

member FCMs should subject such 

orders to similar controls. The 

Commission believes that an order 

should pass through the same pre-trade 

risk controls regardless of trading 

strategy or means of market access, and 

that all market participants have a 

responsibility to implement risk 

controls appropriate to their role in the 

lifecycle of an order. 

As discussed above, commenters 

indicated that the required controls (i.e., 

message and execution throttles and 

price and size parameters) are already 

widely used by clearing members, either 

internally or as provided by the DCM. 

The Commission also notes that IOSCO 

and ESMA have stressed the importance 

of adequate risk controls where a user 

is granted access to the market via an 

intermediary’s systems or directly, 

without using the intermediary’s 

systems. IOSCO has recommended that 

intermediaries (including clearing firms) 

have adequate operational and technical 

capabilities to manage appropriately the 

risks posed by such access.375 ESMA’s 

2015 Final Draft Regulatory Standards 

require that the intermediary providing 

access apply pre-trade risk controls on 

the order flow of their clients.376

ESMA’s regulatory standards provide 

that the direct electronic access provider 

may use its own proprietary controls, 

controls purchased from a third-party, 

or controls offered by a trading venue, 

but in each of those circumstances the 

provider remains responsible for the 

effectiveness of those controls and is 

solely entitled to set or modify any 

parameters and limits.377

4. Discussion of Persons Subject to 

Proposed §§ 1.80 and 1.82 

The following discussion is intended 

to provide detailed examples of which 

persons will be subject to proposed 

§§ 1.80 (applicable to all AT Persons 

when acting as such) and 1.82 

(applicable only to clearing FCMs). 

Proposed § 1.80 would apply to AT 

Persons—i.e., any FCM, floor broker, 

SD, MSP, CPO, CTA, IB or floor trader 

as defined in proposed § 1.3(x)(3) when 

engaged in Algorithmic Trading on or 

subject to the rules of a DCM. In 

contrast, proposed § 1.82 would apply 

to clearing FCMs when acting as 

clearing members for their customers 

with respect to an AT Order Message. 

An entity could be subject to both 

§ 1.80 and § 1.82 in certain 

circumstances. For example, in the 

event that a clearing FCM engages in 

both Algorithmic Trading for its own 

account and acts a clearing member 

with respect to its customers’ AT Order 

Messages, such clearing FCM would be 

subject to both proposed § 1.80 (as an 

AT Person with respect to its own 

Algorithmic Trading) and to proposed 

§ 1.82 (as a clearing member). The 

Commission is providing further clarity 

regarding who would be AT Persons for 

purposes of § 1.80 and other regulations, 

including some detailed order flow 

scenarios that demonstrate the 

application of §§ 1.80 and 1.82, below. 

Question One: In the scenario in 

which a non-clearing FCM trading for a 

proprietary account submits orders to a 

separate clearing FCM, could the 

clearing FCM ever engage in 

Algorithmic Trading and be an AT 

Person? 

If an FCM trading for a proprietary 

account submits an order to a separate 

clearing FCM, the separate clearing FCM 

could be an AT Person if it uses 

computer algorithms or systems to 

determine any of the elements of the 

definition of Algorithmic Trading (e.g., 

determinations regarding order routing). 

If the clearing FCM is not making any 

of these determinations, the clearing 

FCM is not an AT Person. 

If an FCM trading for a proprietary 

account submits an order to a separate 

non-clearing FCM who then submits it 

to an additional separate clearing FCM, 

the clearing FCM is not engaged in 

Algorithmic Trading, provided that it is 

not determining any of the elements of 

the definition of Algorithmic Trading. 

Question Two: Is it correct to say that 

all FCMs using Algorithmic Trading to 

engage in proprietary trading are AT 

Persons? 

Yes. A non-clearing or clearing FCM 

that uses Algorithmic Trading to engage 

in proprietary trading is an AT Person. 

Question Three: Is it correct to say 

that an FCM accepting orders from its 

customer may be an AT Person, if its 

computer algorithms or systems 

determine any of the elements of the 

definition of Algorithmic Trading? 

Yes. A non-clearing or clearing FCM 

that accepts customer orders, and that 

uses computer algorithms or systems to 

determine any of the elements of the 

definition of Algorithmic Trading (e.g., 

determinations regarding order routing), 

would be an AT Person with respect to 

the customer’s orders. 

Below are some detailed order flow 

scenarios that demonstrate the 

application of §§ 1.80 (which applies to 

AT Persons) and 1.82. 

Example 1: Order flow prior to execution 

by DCM: (i) Customer to (ii) non-clearing 

FCM to (iii) separate clearing FCM. Customer 

is not registered with the Commission; uses 

algorithms but not DEA. Neither the nonclearing FCM nor the clearing FCM make any 

of the determinations regarding the order 

described in the definition of Algorithmic 

Trading. 

Who is an AT Person? 


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(i) The customer is not an AT Person, 

because it is not registered and does not 

use DEA. 

(ii) The non-clearing FCM is not an 

AT Person, because it doesn’t make any 

determinations regarding the order and 

therefore doesn’t engage in Algorithmic 

Trading. 

(iii) The clearing FCM is not an AT 

Person, for the same reason as (ii). The 

clearing member FCM is also not subject 

to 1.82, because the customer in (i) 

originating orders isn’t an AT Person. 

Example 2: Order flow prior to execution 

by DCM: (i) Customer to (ii) non-clearing 

FCM to (iii) separate clearing FCM. Customer 

is not registered with the Commission; uses 

algorithms but not DEA. Non-clearing FCM’s 

computer algorithms or systems make some 

of the determinations regarding the order 

described in the definition of Algorithmic 

Trading. 

Who is an AT Person? 

(i) The customer is not an AT Person, 

because it is not registered and does not 

use DEA. 

(ii) The non-clearing FCM is an AT 

Person, because it engages in 

Algorithmic Trading regarding the 

customer’s order. 

(iii) The clearing FCM is not an AT 

Person, assuming it doesn’t make any 

determinations regarding order and 

therefore doesn’t engage in Algorithmic 

Trading. The clearing FCM is also not 

subject to 1.82, because the customer 

originating orders isn’t an AT Person 

(even though the non-clearing FCM in 

the order flow is an AT Person). 

Example 3: Order flow prior to execution 

by DCM: (i) Customer to (ii) a clearing FCM. 

Customer is not registered with the 

Commission; uses algorithms but not DEA. 

Clearing FCM just clears trades, and does not 

make any of the determinations regarding the 

order described in the definition of 

Algorithmic Trading. 

Who is an AT Person? 

(i) The customer is not an AT Person, 

because it is not registered and does not 

use DEA. 

(ii) The clearing FCM is not an AT 

Person, because it doesn’t make any 

determinations regarding the order and 

therefore doesn’t engage in Algorithmic 

Trading. The clearing FCM is also not 

subject to 1.82, because the customer 

originating orders isn’t an AT Person. 

Example 4: Order flow prior to execution 

by DCM: (i) FCM trading for its proprietary 

account to (ii) a separate clearing FCM. The 

FCM trading for a proprietary account uses 

Algorithmic Trading; clearing member FCM 

does not make any of the determinations 

described in the definition of Algorithmic 

Trading. 

Who is an AT Person? 

(i) The FCM trading for the 

proprietary account is an AT Person, 

because it engages in Algorithmic 

Trading. 

(ii) The clearing FCM is not an AT 

Person, because it doesn’t make any 

determinations regarding the order and 

therefore doesn’t engage in Algorithmic 

Trading. But the clearing FCM is subject 

to § 1.82, because the FCM originating 

the orders is an AT Person. 

5. Request for Comments 

49. Are any pre-trade or other risk 

controls required by § 1.82 ineffective, 

not already widely used by clearing 

member FCMs, or likely to become 

obsolete? 

50. Are there any aspects of proposed 

§ 1.82 that pose an undue burden for 

clearing member FCMs and are 

unnecessary for purposes of reducing 

the risks associated with Algorithmic 

Trading? If so, please explain (1) the 

burden; (2) why it is not necessary to 

reduce the risks associated with 

Algorithmic Trading, particularly in the 

case of DEA. What alternatives are 

available consistent with the purposes 

of Regulation AT? 

51. Please describe the technological 

development that would be required by 

clearing member FCMs to comply with 

the requirement to implement and 

calibrate the pre-trade and other risk 

controls required by § 1.82(c) for nonDEA orders. To what extent have 

clearing member FCMs already 

developed the technology required by 

this provision, for example in 

connection with existing requirements 

under § 1.11, and §§ 1.73 and 38.607 for 

clearing FCMs to manage financial 

risks? 

52. Are there additional pre-trade or 

other risk controls that should be 

specifically required pursuant to 

proposed § 1.82? 

53. Do you believe that the pre-trade 

and other risk controls required in 

§ 1.82 sufficiently address the 

possibility of technological advances in 

trading and development of new, more 

effective controls that should be 

implemented by FCMs? 

54. The Commission welcomes 

comment on whether the requirements 

of § 1.82 relating to the design of 

controls and the levels at which the 

controls should be set are appropriate 

and sufficiently granular. 

55. Proposed § 1.82 does not require 

FCMs to have connectivity monitoring 

such as ‘‘system heartbeats’’ or 

automatic cancel-on-disconnect 

functions. Do you believe that § 1.82 

should require FCMs to have such 

functionality? 

56. Proposed § 1.82 requires clearing 

FCMs to implement controls with 

respect to AT Order Messages 

originating with an AT Person. The 

Commission is considering modifying 

proposed § 1.82 to require clearing 

FCMs to implement controls with 

respect to all orders, including orders 

that are manually submitted or are 

entered through algorithmic methods 

that nonetheless do not meet the 

definition of Algorithmic Trading. Such 

a requirement would correspond to the 

requirement under proposed § 40.20(d) 

that DCMs implement risk controls for 

orders that do not originate from 

Algorithmic Trading. If the Commission 

were to incorporate such amendments 

in any final rules arising from this 

NPRM, its intent would be to further 

reduce risk by ensuring that all orders, 

regardless of source, are screened for 

risk at both the clearing member FCM 

and the DCM level. Risk controls at the 

point of order origination would 

continue to be limited to AT Persons. 

The Commission requests comment on 

this proposed amendment to § 1.82, 

which the Commission may implement 

in the final rulemaking for Regulation 

AT. The Commission requests comment 

on the costs and benefits to clearing 

FCMs of this proposal, in addition to 

any other comments regarding the 

effectiveness of this proposal in terms of 

risk reduction. 

K. Compliance Reports Submitted by AT 

Persons and Clearing FCMs to DCMs; 

Related Recordkeeping Requirements— 

§ 1.83 

The Commission is proposing new 

§ 1.83(a) and (b) of its regulations to 

require that AT Persons and clearing 

member FCMs provide the DCMs on 

which they operate with information 

regarding their compliance with 

§§ 1.80(a) and 1.82(a)(1). Specifically, 

the proposed rules would require AT 

Persons prepare, certify, and submit 

annual reports regarding their controls 

for: (1) Maximum AT Order Message 

frequency; (2) maximum execution 

frequency; (3) order price parameters; 

and (4) maximum order sizes. The 

proposed rules would require each FCM 

that is a clearing member for an AT 

Person to prepare, certify, and submit 

annual reports regarding its program for 

establishing and maintaining those same 

controls for its AT Persons (in the 

aggregate). As described in section IV(H) 

and (J) above, the use of such pre-trade 

risk controls would be mandatory for 

both AT Persons and clearing member 

FCMs pursuant to §§ 1.80(a)(1) and 

1.82(a)(1), respectively. 

The reports proposed by § 1.83, 

together with the DCM review program 

proposed by § 40.22, will enable DCMs 

to have a clearer understanding of the 

pre-trade risk controls of all AT Persons 


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78864 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

378Concept Release, 78 FR 56559. 

379 Id. 

380 Id. 

381AFR at 8. 

382AIMA at 21; FIA at 4; CME at 27. 

383AIMA at 21. 

384FIA at 4; CME at 27. 

385FIA at 40. 

386CME at 28. 

387 Gelber at 17. 

388FIA at 4; CME at 27. 

389FIA at 39. 

390 Gelber at 17. 

391AFR at 8. 

392CME at 28. 

393 Gelber at 17. 

394TLC at 15. 

395FIA at 40. 

396 Gelber at 17. 

that are engaged in Algorithmic Trading 

on such DCM. Furthermore, because AT 

Persons and clearing member FCMs will 

have great flexibility in how they 

implement their pre-trade risk controls 

pursuant to proposed §§ 1.80(a)(1) and 

1.82(a)(1), the annual reporting 

obligations in proposed § 1.83 and DCM 

review provisions in § 40.22 will help 

ensure that such controls are being 

implemented and are reasonably 

designed and calibrated. 

As a complement to the compliance 

report program described above, 

proposed § 1.83(c) and (d) would 

require AT Persons and clearing 

member FCMs for AT Persons to keep 

and provide upon request to DCMs 

books and records regarding their 

compliance with §§ 1.80 and 1.81 (for 

AT Persons) and § 1.82 (for clearing 

member FCMs). 

The remainder of this section presents 

Concept Release comments on this 

topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments 

The Concept Release requested 

comment on whether it would be 

appropriate to require periodic selfcertifications by all market participants 

operating ATSs and by clearing firms 

that provide clearing services to those 

market participants.378 In the Concept 

Release, the Commission set forth 

potential areas that a self-certification 

for market participants might cover. The 

Commission stated that a 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.’’ 379 The Concept 

Release also requested comment on a 

number of different aspects of a selfcertification program. These included: 

(1) Whether the chief executive officer 

or chief compliance officer, or similar 

ranking official of each market 

participant should attest to the 

certification; (2) how often should a 

market participant make the selfcertification; (3) which entities should 

receive the certification; and (4) should 

DCMs, SEFs, or clearing member FCMs 

be required to audit the certifications of 

market participants.380

Commenters were mixed in their 

support of a certification requirement 

for market participants operating ATSs 

and for clearing firms that provide 

clearing services to those market 

participants. Some commenters, such as 

AFR, supported certifications.381

Others, such as AIMA, FIA, and CME, 

oppose a certification requirement set 

by the Commission.382 AIMA argued 

that a certification requirement ‘‘could 

merely create extra administrative costs 

for firms and the CFTC.’’ 383 FIA and 

CME stated that it should be left to 

individual DCMs to define certification 

policies for their market participants.384

FIA commented that instead of formal 

certification, market access should 

depend on attestation that the highest 

quality standards are maintained and 

appropriate risk controls and escalation 

procedures are in place.385 CME argued 

that ‘‘[g]iven the breadth of risk profiles 

across the spectrum of clients, it would 

be unduly burdensome and costprohibitive for the exchanges or the 

Commission to mandate specific risk 

management parameters and the 

continuous auditing or formal 

certification thereof.’’ 386

With respect to what information 

might be included in the certifications, 

Gelber argued that ‘‘[a] market 

participant should certify that each of 

its ATS employs pre-trade risk controls, 

post-trade reports and system 

safeguards.’’ 387 FIA and CME also 

commented that if the Commission were 

to impose a certification requirement, 

the standards for such requirement 

should be principles-based.388

Most commenters support requiring 

senior management to make the 

certification. FIA argued that if a 

certification requirement is imposed, 

this certification should be the 

responsibility of senior management at 

the market participant, DCM or FCM.389

Gelber commented that the certification 

should be from a chief technology 

officer or equivalent, and attested to by 

another c-level executive officer.390 AFR 

commented that certifications ‘‘should 

be made by the CEO, as well as both the 

CCO and CRO to make certain that 

responsibility for the underlying 

systems and algorithms is taken by 

those officers having direct 

responsibility.’’ 391 CME commented 

that any attestation should lie with the 

supervisors with business line 

responsibility for, and knowledge of, the 

systems at issue. CME also stated that 

the certifications ‘‘should be tendered to 

each level of the supply chain with 

supervisory authority.’’ 392

With respect to the frequency of the 

certifications, Gelber commented that 

market participants should certify twice 

per year and whenever there has been 

a material change to a program that they 

employ.393 TCL stated that ATSs should 

be required to make the certification 

annually, or whenever a major 

functional change to their business 

environment is implemented.394 With 

respect to the auditing of the 

certifications, FIA argued that audit 

responsibilities should only be 

determined after standards are in 

place.395 Alternatively, Gelber argued 

that exchanges should require firms to 

maintain certifications and produce 

them upon request. Gelber stated that it 

should be at the exchanges’ discretion 

as to whether they audit such 

certifications.396

2. Description of Regulation 

Compliance Report Program. 

Proposed § 1.83(a) and (b) would require 

that AT Persons and clearing member 

FCMs, respectively, provide the DCMs 

on which they operate with information 

regarding their compliance with 

§§ 1.80(a) and 1.82(a)(1). Specifically, 

the proposed rules would to require AT 

Persons to prepare, certify, and submit 

annual reports regarding their controls 

for: (1) Maximum AT Order Message 

frequency; (2) maximum execution 

frequency; (3) order price parameters; 

and (4) maximum order sizes. The 

proposed rules would require each FCM 

that is a clearing member for one or 

more AT Persons to prepare, certify, and 

submit annual reports regarding its 

program for establishing and 

maintaining those same controls for its 

AT Persons in the aggregate. As 

described in section IV(H) and (J) above, 

the use of such pre-trade risk controls 

would be mandatory for AT Persons 

pursuant to § 1.80(a)(1), and mandatory 

for clearing member FCMs pursuant to 

§ 1.82(a)(1). 


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397 17 CFR 240.15c3–5(e). 

398ESMA September 2015 Final Draft Standards 

Report Annex 1, supra note 80 at 210, 224–26. 

399See section IV(P) below for a discussion of 

DCMs’ obligations under proposed § 40.22. 

The Commission is also proposing a 

new § 40.22 (discussed in more detail 

below) to require that each DCM that 

receives a report described in § 1.83 

establish a program for effective review 

and evaluation of the reports. The 

reports proposed by § 1.83 and the 

review program proposed by § 40.22 

would enable DCMs to have a clearer 

understanding of the pre-trade risk 

controls and compliance procedures of 

all AT Persons that are engaged in 

Algorithmic Trading on such DCM. The 

proposed reports and review program 

will also give DCMs a better 

understanding of the program for 

establishing and maintaining the pretrade risk controls used by any FCM of 

an AT Person that is engaged in 

Algorithmic Trading on such DCM. 

The Commission notes that the SEC’s 

Market Access Rule, as discussed in 

greater detail above, has a similar 

certification requirement for certain 

broker-dealers.397 The Market Access 

Rule requires that certain broker-dealers 

maintain a system for regularly 

reviewing the effectiveness of the risk 

management controls and supervisory 

procedures required by the Market 

Access Rule. It also requires that the 

Chief Executive Officer (or equivalent 

officer) of a broker-dealer subject to the 

Market Access Rule certify, on an 

annual basis, that the risk management 

controls and supervisory procedures 

established by the broker-dealer comply 

with the Market Access Rule, and that 

the broker-dealer conducted the 

required review of the risk management 

controls and supervisory procedures. 

The certification required by the Market 

Access Rule must be preserved by the 

broker-dealer as part of its books and 

records. 

The Commission also notes that 

ESMA’s 2015 Final Draft Regulatory 

Standards require an annual selfassessment and validation process in 

which investment firms must review 

their algorithmic trading systems and 

trading algorithms, and overall 

compliance with Article 17 of Directive 

2014/65/EU (MiFID II’s requirements on 

firms that engage in Algorithmic 

Trading).398 ESMA sets out elements 

that investment firms should consider 

in its self-assessment, which include 

elements relating to the nature of its 

business (e.g., level of automation, types 

of strategies it employs, latency 

sensitivity), the scale of its business 

(e.g., number of algorithms, number of 

trading desks, messaging volume 

capabilities), and the complexity of its 

business (e.g., diversity of trading 

systems and connectivity methods, and 

the speed of trading). The validation 

report must be approved by the firm’s 

senior management and the firm must 

remedy any deficiencies identified. 

While not identical to the certification 

required of broker-dealers in the Market 

Access Rule or ESMA’s annual selfassessment process for investment 

firms, the compliance report program 

proposed by § 1.83 and § 40.22 is 

similarly designed to ensure that market 

participants have effective risk controls 

in place and that these risk controls are 

regularly reviewed. Specifically, 

proposed § 1.83(a) would require each 

AT Person to annually prepare a report, 

and submit such report by June 30 to 

each DCM on which such AT Person 

engaged in Algorithmic Trading, that 

covers from May 1 of the previous year 

to April 30 of the year such report is 

submitted. Together with the annual 

report, each AT Person would be 

required to submit copies of the written 

policies and procedures developed to 

comply with § 1.81(a) and (c). The 

report must include descriptions of the 

AT Person’s pre-trade risk controls 

required by proposed § 1.80(a)(1), and 

the parameters and specific quantitative 

settings used for the risk controls. The 

report would also be required to include 

a certification by the chief executive 

officer or chief compliance officer of the 

AT Person that, to the best of his or her 

knowledge and reasonable belief, the 

information contained in the report is 

accurate and complete. 

Proposed § 1.83(b) would require each 

FCM that is a clearing member for an 

AT Person to annually prepare a report, 

and submit such report by June 30 to 

each DCM on which such AT Person 

engaged in Algorithmic Trading, that 

covers from May 1 of the previous year 

to April 30 of the year such report is 

submitted. The report must include a 

description of the FCM’s program for 

establishing and maintaining the pretrade controls required by proposed 

§ 1.82(a)(1) for its AT Persons (in the 

aggregate) at the DCM. The requirements 

of proposed § 1.83(b) apply to the pretrade risk controls implemented by the 

FCM for AT Persons using DEA, as well 

as for AT Persons that do not use DEA. 

The report would also be required to 

include a certification by the chief 

executive officer or chief compliance 

officer of the FCM that, to the best of his 

or her knowledge and reasonable belief, 

the information contained in the report 

is accurate and complete. Related to 

these reporting requirements in 

proposed § 1.80(a) and (b), proposed 

§ 40.22(c) 399 would require DCMs to 

establish a program for effective 

periodic review and evaluation of AT 

Person and clearing member FCM 

reports. 

Recordkeeping Requirements. As a 

complement to the compliance report 

review program, proposed § 1.83(c) and 

(d) would require AT Persons and 

clearing member FCMs for AT Persons 

to keep and provide upon request to 

DCMs books and records regarding their 

compliance with proposed §§ 1.80 and 

1.81 (for AT Persons) and § 1.82 (for 

clearing member FCMs). Related to 

these provisions, the Commission is also 

proposing a new § 40.22(d) (discussed 

in more detail below) to require DCMs 

to implement rules that require each AT 

Person to keep and provide to the DCM 

books and records regarding such AT 

Person’s compliance with all 

requirements pursuant to § 1.80 and 

§ 1.81, and require each clearing 

member FCM to keep and provide to the 

DCM books and records regarding such 

clearing member FCM’s compliance 

with all requirements pursuant to § 1.82. 

Finally, proposed § 40.22(e) would 

require DCMs to review and evaluate, as 

necessary, books and records 

maintained by AT Persons and clearing 

member FCMs regarding their 

compliance with §§ 1.80 and 1.81 (for 

AT Persons) and § 1.82 (for clearing 

member FCMs). 

3. Policy Discussion 

The Commission is proposing § 1.83 

because it believes that Regulation AT 

must include a mechanism to ensure 

that AT Persons and clearing member 

FCMs are complying with the 

requirement to implement certain pretrade risk controls. Moreover, an 

assessment of such compliance requires 

an adequate level of expertise and 

knowledge of markets and market 

participants’ technological systems and 

trading strategies. In this regard, the 

Commission notes that reports proposed 

by § 1.83 will enable DCMs to have a 

better understanding of the pre-trade 

risk controls of all AT Persons engaged 

in Algorithmic Trading. Furthermore, 

because the Commission’s pre-trade risk 

control requirements in proposed 

§§ 1.80(a)(1) and 1.82(a)(1) offer 

substantial flexibility, the annual 

reporting obligations in proposed § 1.83 

will help ensure that such controls are 

reasonably designed and calibrated. The 

Commission believes that a review 

program requiring AT Persons and 

clearing member FCMs to provide 

information concerning compliance 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78866 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

400The proposed amendments would also redesignate the existing requirements in § 38.255 as 

§ 38.255(a). 

401FIA at 12, 15; KCG at 2; CME at 7–8; VFL at 

2; AIMA at 1. 

402FIA at 12, 15. 

403CME at 7–8. 

with §§ 1.80(a) and 1.82(a)(1), and 

requiring DCMs to review such 

information, is the most effective 

method to ensure that all market 

participants are implementing measures 

that are reasonably designed to prevent 

an Algorithmic Trading Event or 

Algorithmic Trading Disruption. 

The recordkeeping requirements 

proposed under § 1.83(c) and (d) and 

§ 40.22(d) and (e) complement the 

compliance report program. These 

provisions will enable DCMs to review 

the compliance of AT Persons and 

clearing member FCMs with their 

various obligations under §§ 1.80, 1.81, 

and 1.82, by inspecting the books and 

records of AT Persons and clearing 

member FCMs as necessary. For 

example, a DCM may find it necessary 

to conduct such a review if: It becomes 

aware if an AT Person’s kill switch is 

frequently activated, or otherwise 

performs in an unusual manner; if a 

DCM becomes aware that an AT 

Person’s algorithm frequently performs 

in a manner inconsistent with its 

design, which may raise questions about 

the design or monitoring of the AT 

Person’s algorithms; if a DCM identifies 

frequent trade practice violations at an 

AT Person, which are related to an 

algorithm of the AT Person; or if an AT 

Person represents significant volume in 

a particular product, thereby requiring 

heightened scrutiny, among other 

reasons. 

4. Request for Comments 

57. The Commission welcomes 

comment on the type of information that 

should be included in the reports 

required by proposed § 1.83. Should 

different or additional descriptions be 

included in the reports, which will be 

evaluated by DCMs under proposed 

§ 40.22? 

58. How often should the reports 

required by proposed § 1.83 be 

submitted to the relevant DCMs? Should 

the report be submitted more or less 

frequently than annually? 

59. When should the reports required 

by proposed § 1.83 be submitted to the 

relevant DCMs? Should the reports be 

submitted on a date other than June 30 

of each year? 

60. Should a representative of the AT 

Person or clearing member FCM other 

than the chief executive officer or the 

chief compliance officer be responsible 

for certifying the reports required by 

proposed § 1.83? Should only the chief 

executive officer be permitted to certify 

the report? Alternatively, should only 

the chief compliance officer be 

permitted to certify the report? 

61. Are there any aspects of proposed 

§ 1.83(b) that pose an undue burden for 

clearing member FCMs and are 

unnecessary for purposes of reducing 

the risks associated with Algorithmic 

Trading? If so, please explain (1) the 

burden; (2) why it is not necessary to 

reduce the risks associated with 

Algorithmic Trading, particularly in the 

case of DEA. What alternatives are 

available consistent with the purposes 

of Regulation AT, including in 

particular Regulation AT’s intent that 

§ 1.83 reports benefit from the thirdparty SRO review performed by DCMs 

with respect to such reports? 

62. Should the reports required by 

proposed § 1.83 be sent to any entity 

other than each DCM on which the AT 

Person operates, such as the 

Commission or an RFA? For example, 

should the Commission require that AT 

Persons that are members of a RFA send 

compliance reports to RFA upon NFA’s 

request? 

63. Proposed § 1.83(c) includes 

recordkeeping requirements imposed on 

AT Persons, and proposed § 1.83(d) 

includes recordkeeping requirements 

imposed on clearing member FCMs. 

Should the recordkeeping requirements 

of § 1.83(c) be distributed throughout 

the sections of the Commission’s 

regulations that contain recordkeeping 

requirements for various categories of 

Commission registrants that will be 

classified as AT Persons? Should 

§ 1.83(d) be transferred to section 1.35 of 

the Commission’s regulations, which 

contains recordkeeping requirements for 

clearing member FCMs? 

L. Risk Controls for Trading: Direct 

Electronic Access Provided by DCMs— 

§ 38.255(b) and (c) 

The Commission proposes to amend 

§ 38.255 (Risk controls for trading) by 

adding new § 38.255(b) requiring DCMs 

to implement systems and controls 

reasonably designed to facilitate a 

clearing FCM’s management of 

Algorithmic Trading risks arising from 

its DEA customers. The Commission 

also proposes to amend § 38.255 by 

adding new paragraph (c), which would 

require that DCMs who permit DEA also 

mandate the use of § 38.255(b) risk 

controls by all clearing member FCMs 

with respect to the Algorithmic Trading 

of their DEA customers. The 

Commission notes that the risk controls 

and requirements described in proposed 

§ 38.255(b) and (c), while provided by 

and residing at the DCM, are 

fundamentally intended to facilitate a 

clearing member FCM’s management of 

the risks posed by the clearing member 

FCM’s DEA customers. In this regard, 

proposed § 38.255(b) and (c) should be 

read in conjunction with proposed 

§ 1.82(b), which would require clearing 

member FCMs to make use of the 

systems provided by DCMs pursuant to 

§ 38.255(b). The remainder of this 

section presents Concept Release 

comments on this topic, a description of 

the proposed regulation, a discussion of 

the policy justification for the proposal, 

and a request for comments on the 

proposal.400

1. Concept Release Comments 

As noted above in section IV(D)(7), in 

the Commission’s discussion of its 

proposed definition of Direct Electronic 

Access, several commenters agreed that 

any potential risk controls should also 

apply to those with direct access to the 

markets.401 FIA stated, for example, that 

all types of market access create risks.402

Similarly, CME stated that all entities— 

whether they have direct market access 

or not—must ‘‘share in the effort to 

preserve market integrity.’’ 403 In 

addition, commenters indicated that 

exchanges already provide certain pretrade risk controls for use by clearing 

firms. Please see the discussion at 

section IV(H)(1) above for a discussion 

of Concept Release comments with 

respect to clearing firms’ use of 

exchange-provided pre-trade and other 

risk controls. 

2. Description of Regulation 

The Commission proposes to amend 

§ 38.255 (Risk controls for trading) to 

require DCMs to have in place systems 

and controls designed to facilitate a 

clearing member FCM’s management of 

the risks that may arise from 

Algorithmic Trading by its AT Person 

customers using DEA (as defined in 

proposed § 1.3(yyyy)). The DCM 

regulations already address financial 

risk using a similar structure. Existing 

§ 38.607 provides that, in the context of 

direct electronic access, a DCM must 

have in place systems and controls 

designed to facilitate an FCM’s 

management of ‘‘financial risk.’’ The 

DCM must also require FCMs to use 

such controls. 

The pre-trade risk controls and order 

cancellation systems that DCMs must 

provide to clearing member FCMs are 

the same as those that proposed 

§ 1.80(a) requires AT Persons to 

implement, i.e., maximum AT Order 

Message frequency per unit time and 

maximum execution frequency per unit 

time, and order price parameters and 

maximum order size limits. The order 


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404FIA at 12, 15; KCG at 2; CME at 7–8; VFL at 

2; AIMA at 1. 

405FIA at 12, 15. 

406 IOSCO 2015 Consultation Report, supra note 

106 at 22–23. 

407See ESMA September 2015 Final Draft 

Standards Report Annex 1, supra note 80 at 218. 

408See id. at 269–70. 409Concept Release, 78 FR 56546. 

cancellation systems that DCMs must 

establish for implementation by the 

clearing member FCM are the same 

controls that proposed § 1.80(b)(1) 

requires AT Persons to implement, i.e., 

systems that have the ability to 

immediately disengage Algorithmic 

Trading, cancel selected or up to all 

resting orders when system or market 

conditions require it, and prevent the 

submission of new orders. 

The proposed regulation text is 

articulated broadly enough to allow 

DCMs the flexibility to design controls 

for use by clearing member FCMs that 

are appropriate to their markets and 

market participants. Proposed 

§ 38.255(b)(1)(ii) provides that the pretrade risk controls established by the 

DCMs must enable the clearing member 

FCM to set the controls at the level of 

each AT Person, product, account 

number or designation, and one or more 

identifiers of natural persons associated 

with an AT Order Message. DCM rules 

should permit clearing member FCMs to 

choose the level at which they place the 

control, as long as clearing member 

FCMs use at least one of the levels. 

Similarly, proposed § 38.255(b)(2) 

provides that the DCM-provided order 

cancellation systems should enable the 

clearing member FCM to apply such 

systems to orders from each AT Person, 

product, account number or 

designation, or one or more identifiers 

of natural persons associated with an 

AT Order Message. A DCM that permits 

DEA must require FCMs to use the 

§ 38.255(b) controls with respect to all 

AT Order Messages originating with an 

AT Person that are submitted through 

DEA. 

3. Policy Discussion 

The Commission believes that its 

proposed amendments to § 38.255, and 

corresponding proposed § 1.82 

applicable to clearing member FCMs, is 

consistent with those comments to the 

Concept Release that suggested that pretrade risk controls should apply to those 

with direct market access.404 As FIA 

explained, all types of market access 

create risks; therefore, the same 

principles should apply to all types of 

market access.405 In addition, the 

Commission’s approach to controls that 

should exist in the context of DEA is 

consistent with recommendations of or 

steps taken by other regulatory 

organizations. For example, IOSCO has 

recommended that intermediaries 

(including clearing firms) should have 

adequate operational and technical 

capabilities to manage appropriately the 

risks posed by direct electronic 

access.406 In addition, as discussed 

above, ESMA’s 2015 Final Draft 

Regulatory Standards require direct 

electronic access providers to apply pretrade controls on the order flow of their 

clients consistent with the controls that 

ESMA requires for investment firms.407

ESMA’s standards further provide, 

among other things, that trading venues 

must have public rules pursuant to 

which direct electronic access providers 

provide their service, and in the case of 

sponsored access (where a client 

transmits orders directly to a trading 

platform without such orders passing 

through an intermediary’s 

infrastructure), the trading venue must 

require such firms to implement the 

same pre-trade risk controls as the 

trading venue’s members.408 The 

Commission believes that requiring 

DCMs to establish pre-trade risk 

controls and order management controls 

for use by clearing member FCMs with 

respect to their direct access customers 

will ensure that all orders, regardless of 

access method, are subjected to the 

same tools that mitigate the risks posed 

by Algorithmic Trading. 

4. Request for Comments 

64. Are there any pre-trade and other 

risk controls required by § 38.255(b) and 

(c) that will be ineffective, not already 

widely provided by DCMs for use by 

FCMs, or likely to become obsolete? 

65. Are there additional pre-trade or 

other risk controls that DCMs should be 

specifically required to provide to FCMs 

pursuant to proposed § 38.255(b) and 

(c)? 

66. Do you believe that the pre-trade 

and other risk controls required 

pursuant to § 38.255(b) sufficiently 

address the possibility of technological 

advances in trading? For example, do 

they appropriately address the potential 

for the future development of additional 

effective controls that should be 

provided by DCMs and implemented by 

FCMs? 

67. The Commission welcomes 

comment on whether § 38.255(b)’s 

requirements relating to the design of 

controls and the levels at which the 

controls should be set are appropriate 

and sufficiently granular. 

68. Proposed § 38.255(b) and (c) do 

not require DCMs to provide to FCMs 

connectivity monitoring systems such as 

‘‘system heartbeats’’ or automatic 

cancel-on-disconnect functions. Should 

§ 38.255 require such functionality? 

M. Disclosure and Transparency in DCM 

Trade Matching Systems—§ 38.401(a) 

Regulation AT proposes to amend 

§ 38.401(a) of the Commission’s 

regulations to enhance public 

transparency regarding the design and 

operation of a DCM’s electronic 

matching platform. Currently, 

§ 38.401(a) requires DCMs to have 

procedures, arrangements, and 

resources for disclosing to the 

Commission, market participants, and 

the public accurate information on the 

rules and specifications of their 

electronic matching platforms or trade 

execution facilities. The proposed 

amendments to § 38.401(a) would 

clarify that such existing obligations 

include disclosure of any attributes of 

an electronic matching platform or trade 

execution facility that materially impact 

market participant orders, but which are 

not readily apparent to a market 

participant. The proposed amendments 

recognize that the structure, 

architecture, mechanics, characteristics, 

attributes, or other elements of an 

electronic matching platform or trade 

execution facility—elements that are 

under the design control of the DCM— 

may affect how market participant 

orders are received or executed. The 

Commission believes that each market 

participant should have ready access to 

information that explains the existence 

and operation of any attribute within an 

electronic matching platform or trade 

execution facility that will impact how 

a market participant experiences the 

market. The remainder of this section 

presents Concept Release comments on 

this topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments 

As noted above, the proposed 

amendments to § 38.401(a) focus in 

large measure on attributes of an 

electronic matching platform or trade 

execution facility that impact the timing 

and sequencing of specific events on the 

exchange. While the Concept Release 

did not directly address proposed 

§ 38.401(a), it did ask for public 

comment on latencies in the 

transmission of various types of 

messages between exchanges, firms and 

vendors wherein differences in latency 

could provide opportunities for 

informational advantage.409 It pointed to 

press reports that one exchange sent 

confirmations to the traders involved in 


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78868 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

410Scott Patterson, Jenny Strasburg, & Liam 

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

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

www.wsj.com/articles/SB10001424127

887323798104578455032466082920. 

411Concept Release, 78 FR 56546. 

412 Id. at 56561. 

413AIMA at 7. 

414Bell at 3. 

415FIA at 51. 

416CME at 6–7; FIA at 47–48. 

417CME at 48. 

418FIA at 47–48; SIG at 2; OneChicago at 1. The 

Commission is using the term ‘‘confirmation-first 

latency’’ for ease of reference; it was not used in the 

comment letters. 

419FIA at 48. 

420 Id. The Commission is using the term ‘‘market 

data-first latency’’ for ease of reference; it was not 

used in the comment letters. 

421OneChicago at 1. 

422SIG at 2. 

an executed transaction before the DCM 

posted the transaction on its market data 

feed to the marketplace as a whole.410

The Commission asked for comments 

on: (a) Whether the extent of latency in 

message transmission can have an 

adverse impact on market quality or 

fairness; and (b) whether exchanges, 

vendors and firms should be required to 

audit their systems and processes on a 

periodic basis to identify and resolve 

such latencies.411

The Concept Release also asked for 

public comment on the advisability of 

requiring each trading platform to 

provide market quality indicators on a 

periodic basis for each product traded 

on its platform.412 The Concept Release 

also asked for comments on what types 

of market quality data would be helpful 

to market participants and promote 

market efficiency through transparency 

and market competition. 

Several commenters supported 

increased transparency by the 

exchanges in the operation of their 

electronic matching platforms. AIMA, 

for example, would welcome new 

requirements for transparency by 

exchanges on issues of latency, noting 

that market participants without DMA 

are currently not able to calculate many 

measures of latency and market quality 

that are available to those with DMA.413

Bell noted that the disclosure of 

latencies in CME’s electronic matching 

platform removed the informational 

advantage held by those market 

participants who knew of the latency 

compared to those who did not.414

However, Bell also cautioned that the 

threat of sanctions against an exchange 

for the existence of a latency arbitrage 

opportunity in an electronic matching 

platform could discourage that exchange 

from publicly disclosing such 

information. FIA noted that real-time 

access to additional information 

regarding the order book creates a more 

transparent marketplace, which 

ultimately breeds confidence among 

market participants.415

CME and FIA noted that latency is a 

natural component of market structure 

because of the time it takes computer 

systems to process information as well 

as the communications systems 

involved in transmitting order message 

information.416 Even if no latencies 

existed within an exchange’s 

infrastructure, market participants may 

still face latencies in clearing and 

executing firms’ systems.417

Several commenters addressed the 

specific issue of whether participants in 

a trade should receive confirmations of 

that trade before, or at least not after, the 

trade is reflected in market data sent to 

all market participants (‘‘confirmationfirst latency’’).418 FIA commented that 

the confirmation-first latency on one 

exchange was not hidden, and that it 

could be measured and understood by 

anyone with the proper market 

access.419 FIA stated that it is 

imperative that the market data 

broadcast to all market participants not 

be sent before the participants to a trade 

know that the trade was executed 

(‘‘market data-first latency’’).420 FIA also 

stated that market data-first latency 

would cause liquidity providing 

participants to be unaware of their 

positions and therefore hamper their 

ability to hedge risk effectively. The 

commenter believed that this would 

cause market makers to widen the 

spreads they offer. OneChicago 

suggested that confirmation-first latency 

should not be considered an unfair 

advantage.421 SIG suggested that 

confirmation-first latency would 

encourage liquidity by allowing an 

executing trader to hedge a position 

before quickly responding momentum 

traders exhausted available liquidity in 

the market.422

2. Description of Regulation 

Current § 38.401(a) requires DCMs to 

have procedures, arrangements, and 

resources for disclosing to the 

Commission, market participants, and 

the public accurate information on, inter 

alia, the rules and specifications 

concerning the operation of the DCM’s 

electronic matching platform or trade 

execution facility. Current § 38.401(b) 

requires DCMs to provide such 

information that ‘‘it believes, to the best 

of its knowledge, is accurate and 

complete, and must not omit material 

information.’’ Current § 38.401(c) 

requires DCMs to make publicly 

available on their Web sites any new 

product listings, rules, rule 

amendments, or other changes to 

previously-disclosed information, 

concurrent with filing such submissions 

with the Commission. The proposed 

amendments to § 38.401 build on these 

disclosure, accuracy, and timing 

requirements, and extend the disclosure 

requirements to cover certain attributes 

of the operation of electronic matching 

platforms. 

The Commission proposes to amend 

§ 38.401(a)(1)(iii) to require DCMs to 

disclose to the Commission, market 

participants and the public accurate 

information pertaining to rules or 

specifications pertaining to the 

operation of the electronic matching 

platform or trade execution facility, 

including but not limited to those 

pertaining to the operation of its 

electronic matching platform that 

materially affect the time, priority, 

price, or quantity of execution, or the 

ability to cancel, modify, or limit 

display of market participant orders. 

The Commission also proposes to 

amend § 38.401(a)(1) by adding a new 

requirement (§ 38.401(a)(1)(iv)) that 

DCMs must disclose to all market 

participants any known attributes of the 

electronic matching platform, other than 

those already disclosed in rules or 

specifications under section (a)(1)(iii), 

that materially affect the time, priority, 

price, or quantity of execution of market 

participant orders, the ability to cancel, 

modify, or limit display of market 

participant orders, or the dissemination 

of real-time market data to market 

participants, including but not limited 

to latencies or other variability in the 

electronic matching platform and the 

transmission of message 

acknowledgements, order 

confirmations, or trade confirmations, or 

dissemination of market data. The 

Commission notes, however, that 

proposed § 38.401(a)(1)(iii) and (iv) are 

not intended to require the disclosure of 

trade secrets by any DCM. 

Finally, the Commission also 

proposes to amend § 38.401(c) by 

adding a new requirement 

(§ 38.401(c)(3)) that a DCM, in making 

available on its Web site information 

pursuant to paragraphs (a)(1)(iii) and 

(iv) of § 38.401(c), must place such 

information and submissions on its Web 

site within a reasonable time, but no 

later than 10 business days, following 

the identification of or changes to such 

attributes. Such information shall be 

disclosed prominently and clearly in 

plain English. The Commission 

emphasizes that the disclosure of 

information prominently and clearly by 

a DCM precludes such DCM from 

placing information required by this 


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423 In evaluating what attributes of a platform 

would be material, the Commission would look to 

the substantial case law on the issue of materiality. 

See, e.g., R&W Tech. Servs., Ltd. v. CFTC, 205 F.3d 

165, 169 (5th Cir. 2000) (‘‘A statement or omitted 

fact is ‘material’ if there is a substantial likelihood 

that a reasonable investor would consider the 

information important in making a decision to 

invest.’’); see also CFTC v. R.J. Fitzgerald & Co., 310 

F.3d 1321, 1332 (11th Cir. 2002) (finding 

misrepresentations material where ‘‘an objectively 

reasonable investor’s decision-making process 

would be substantially affected’’ by them and the 

misrepresentations would ‘‘as a matter of law, alter 

the total mix of relevant information available to the 

potential . . . investor.’’). Materiality in the context 

of attributes of an electronic matching platform 

would include those attributes whose existence or 

degree a reasonable market participant would 

consider when making a decision on whether, when 

or how to place orders on an exchange’s platform. 

424For purposes of this discussion, ‘‘categories of 

market participants’’ may be based on access 

method, colocation, involvement in a market maker 

incentive program, or membership status, among 

other things. DCMs are currently required to submit 

as rule changes under Part 40 any changes to these 

programs. As discussed more fully below, the 

proposed transparency requirement would only 

require disclosure of attributes not already 

disclosed through submissions under Part 40, 17 

CFR 40.1, et seq. (2014). 

425As an illustration of attributes that should be 

disclosed to market participants (and 

acknowledging the more complex order types and 

modes of execution in the equities market), the 

Commission notes two recent SEC enforcement 

actions against the operators of alternative trading 

systems for selective disclosure or non-disclosure 

regarding how certain order types operate under 

different market conditions. See In the Matter of 

UBS Securities LLC., No. 3–16338 (SEC, Jan. 15, 

2015); In the Matter of EDGA Exchange, Inc., No. 

3–16332 (SEC, Jan. 12, 2015). 

426The Commission notes that the proposed 

disclosure requirements in large part would address 

IOSCO’s recommendation relating to sound 

practices on controls surrounding the development 

of new or changes to critical systems at trading 

venues. IOSCO, after reviewing current member 

state regulations, recommended ‘‘[e]stablishing and 

implementing communication protocols that govern 

the sharing of information regarding the 

introduction of new, or changes to, critical 

systems[,]’’ including information on the timing of 

such new systems or changes to provide market 

participants sufficient lead time to make changes or 

adjustments to their own systems. See IOSCO 2015 

Consultation Report, supra note 106 at 13–20. 

427The Commission is mindful that some DCMs 

use electronic matching platforms leased from or 

otherwise provided by other DCMs or non-DCM 

entities. However, each DCM would be required 

under this provision to provide information on any 

electronic matching platform it uses, regardless of 

whether that platform is owned or leased by the 

DCM. 

428Both DCMs and SEFs are obligated to 

‘‘conduct regular, periodic, objective testing and 

review of their automated systems to ensure that 

they are reliable, secure, and have adequate scalable 

capacity.’’ Regulations §§ 37.1401(g) and 

38.1051(h), 17 CFR 37.1401(g) and 38.1051(h) 

(2014). 

429See regulation 37.203(e), 17 CFR 37.203(e) 

(2014), for real-time market monitoring obligations 

of SEFs. See regulation 38.157, 17 CFR 38.157 

(2014), for real-time monitoring obligations of 

DCMs. 

430 DCM Core Principle 12, Section 5(d)(12) of the 

Act, 7 U.S.C. 7(d)(12) (2012). 

rule behind registration, log in, user 

name, password or other walls on the 

DCM’s Web site. 

a. What Must Be Disclosed Under the 

Proposed Regulations 

The proposed § 38.401(a)(1)(iii) and 

(iv) would apply to all known attributes 

of an electronic matching platform that 

materially affect the time, priority, 

price, or quantity of execution of market 

participant order messages, or the 

ability to cancel, modify, or limit 

display of, market participant order 

messages. The Commission proposes a 

‘‘materiality’’ threshold to such 

obligations so that the disclosure 

requirements would not capture aspects 

of exchange systems that do not have a 

discernible effect on how orders are 

entered or executed.423

An ‘‘attribute’’ for purposes of 

proposed § 38.401(a)(1)(iv) would mean 

any aspect of the structure, architecture, 

mechanics, characteristics, or other 

elements of the design or operation of 

an electronic matching platform that 

materially affects how market 

participant orders are received and 

executed, and how information on such 

orders and executed trades are 

communicated to other market 

participants. ‘‘Attributes’’ would 

include, but are not limited to, aspects 

of the platform that may provide an 

advantage or disadvantage to a category 

of market participants.424 ‘‘Attributes’’ 

would also include aspects of the 

platform that affect orders from all 

market participants regardless of access 

method or membership status, such as 

latencies within the matching engine 

and any data feeds.425

The Commission’s proposals under 

§ 38.401(a)(1)(iii) and (iv) apply to 

‘‘electronic matching platforms,’’ which 

comprise all systems under the control 

or operation of the DCM that interact 

with market participant order messages 

and are involved in market data 

dissemination. Such systems are not 

limited to matching engines, but would 

apply more broadly to the network 

architecture that accepts and processes 

order messages, and disseminates 

market data and messages to market 

participants. To the extent that they 

impact order entry and execution, the 

electronic matching platform would also 

include pre-trade risk management 

systems and controls such as self-trade 

prevention tools.426

The Commission’s proposals under 

§ 38.401(a)(1)(iii) and (iv) are intended 

to apply to various aspects of how an 

electronic platform operates, beyond the 

technical process of how any order is 

actually matched. The proposed 

regulations explicitly require the 

disclosure of information relating to 

latencies in the matching of orders and 

transmission of that information to 

market participants. In addition, if they 

have a material impact on market 

participants, exchanges must disclose 

information on exchange functions such 

as self-trade prevention, implied spread 

markets, and priority assignment of 

orders in a central limit order book, 

where applicable. Exchanges also must 

disclose how available order types 

would be executed (or not) under 

different market conditions, where 

applicable. The Commission is mindful 

that DCMs should only be required to 

describe attributes of their own systems. 

However, such systems would include 

platform systems or components that are 

monitored, leased from, or otherwise 

operated by an affiliate or third party.427

The Commission has also proposed 

under amended § 38.401(a)(2) that a 

DCM must provide a description of 

known attributes of its electronic trading 

platform under paragraph (a)(1)(iv). 

However, this may not relieve an 

exchange of the obligation to disclose 

information if the exchange should have 

known of an attribute. The Commission 

notes that DCMs must regularly test and 

review their automated systems,428

monitor trading on their facilities, and 

identify any market or system 

anomalies.429 The Commission 

cautions, however, that compliance 

with Regulation AT’s disclosure 

requirements may not absolve a DCM of 

other statutory or regulatory obligations. 

For instance, DCMs must promote fair 

and equitable trading and protect 

markets and market participants from 

abusive practices.430

b. How Information Should Be 

Disclosed 

The Commission proposes under 

§ 38.401(a)(1)(iv) that DCMs be required 

to disclose any known attributes of their 

electronic matching platform, other than 

those already disclosed pursuant to 

§ 38.401(a)(1)(iii). This description 

should, at a minimum, identify what the 

attribute is and how it may affect market 

participant orders. To the extent such 

information is necessary for market 

participants to understand the 

significance of an attribute, the 

description may need to provide 

statistics or examples. As with all 

information provided to market 

participants under current regulation 

38.401, the description must include 

information that the DCM believes, to 

the best of its knowledge, to be accurate 

and complete, and not omit material 


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78870 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

431See regulation 38.401(b), 17 CFR 38.401(b) 

(2014). 

432Part 40 of the Regulations applies to all 

registered entities, which include DCMs, SEFs, 

derivative clearing organizations (‘‘DCOs’’), swap 

data repositories (‘‘SDRs’’), and certain electronic 

trading facilities and boards of trade registered 

under Section 5c of the Act. As discussed below in 

the cost benefit consideration section (sections 

V(E)(9) and (11)), none of the proposed 

amendments to § 40.1(i) should create new costs for 

any registered entity, because the amendments 

merely clarify and codify the Commission’s 

interpretation of the definition of ‘‘rule.’’ See, e.g., 

the Final Rule for Provisions Common to Registered 

Entities, published in the Federal Register in 2011, 

in which the Commission stated with respect to 

market maker and trading incentive programs, ‘‘The 

Commission continues to view such programs as 

‘agreements * * * corresponding’ to a ‘trading 

protocol’ within the § 40.1 definition of ‘rule’ and, 

as such, all market maker and trading incentive 

programs must be submitted to the Commission in 

accordance with procedures established in part 40.’’ 

Final Rule, Provisions Common to Registered 

Entities, 76 FR 44776, 44778 (July 27, 2011). 

information.431 Cost estimates for the 

Commission amendments to § 38.401 

are provided in this NPRM’s cost-benefit 

considerations below. 

The Commission proposes under 

§ 38.401(c)(3) that DCMs be required to 

disclose information on the attributes of 

their platforms ‘‘prominently and 

clearly’’ on their Web sites. The 

Commission also proposes under 

§ 38.401(c)(3) that information regarding 

attributes of the electronic matching 

platforms be provided in ‘‘plain 

English.’’ Because market participants 

may have different degrees of technical 

understanding, the Commission aims to 

make information on the electronic 

matching platforms accessible to market 

participants regardless of their technical 

proficiency or sophistication. Providing 

highly complex information on the 

platforms may allow more technicallyproficient market participants to 

understand the operations of the 

platform, but may be inaccessible to 

other market participants. 

c. When Information Should Be 

Disclosed 

The Commission’s proposals on DCM 

transparency are intended to account for 

two situations: (1) Where the DCM 

makes a change to the platform, 

resulting in an impact on the execution 

of market participant orders, and (2) 

where the DCM becomes aware of an 

existing attribute within the platform 

that affects the execution of such orders. 

Under the first situation, as clarified in 

the proposed amendment to the 

definition of ‘‘rule’’ under § 40.1(i), 

information submitted to the 

Commission under §§ 40.5(a) or 40.6(a) 

would be public information, except to 

the extent that confidential treatment is 

granted pursuant to § 40.8. Furthermore, 

a DCM would be required to post the 

relevant submission on its Web site 

concurrent with the provision of such 

submission to the Commission pursuant 

to current § 38.401(c). Under the second 

situation, the Commission’s proposals 

would require the DCM to make the 

relevant information available ‘‘within a 

reasonable time, but no later than 10 

days’’ following the identification or 

change to the attribute. DCMs must also 

ensure that information can be accessed 

by visitors to the Web site without the 

need to register, log in, provide a user 

name, or obtain a password. 

d. Changes in Definition of ‘‘Rule’’ 

The Commission also proposes 

amending the definition of ‘‘rule’’ under 

§ 40.1(i), which is relevant to 

regulations common to all registered 

entities.432 The proposed change to the 

definition of ‘‘rule’’ would track 

language in the transparency 

requirements under proposed 

§ 38.401(a)(1)(iv) (which applies only to 

DCMs). The proposed change to the 

definition would make clear that 

‘‘trading protocols’’ includes ‘‘any 

operation of an electronic matching 

platform that materially affects the time, 

priority, price, or quantity of execution 

of market participant orders, the ability 

to cancel, modify, or limit display of 

market participant orders, or the 

dissemination of real-time market data 

to market participants.’’ As with any 

other rule change, changes to a 

registered entity’s trading protocols 

must be submitted to the Commission 

pursuant to existing §§ 40.5 or 40.6. 

The Commission notes that this 

proposed amendment to the definition 

of ‘‘rule’’ also adds a reference to market 

maker and trading incentive programs. 

This change clarifies and codifies the 

Commission’s current interpretation of 

the definition of ‘‘rule’’ under § 40.1(i), 

in which registered entities are required 

to submit new rules and rule 

amendments to the Commission when 

changes are made to, among other 

things, matching algorithms, market 

maker or trading incentive program 

agreements, and available order types. 

This proposed change to § 40.1(i), which 

reflects the Commission’s 

understanding of ‘‘rule’’, should be 

distinguished from the proposed 

regulations regarding market maker and 

trading incentive programs under 

§§ 40.25–40.28, which represent new 

requirements that apply only to DCMs. 

3. Policy Discussion 

With the proposed transparency 

requirements, the Commission aims to 

increase the relevant information 

available to market participants that 

may influence their choice of trading 

venue. The Commission believes that 

such will foster competition among 

exchanges by incentivizing them to 

provide the most efficient and fairest 

venue for trading. Should an exchange 

intentionally or unintentionally 

structure its trading systems to 

potentially or actually advantage one 

category of market participant over 

others, the potentially disadvantaged 

market participants may opt to trade on 

another venue. 

One Concept Release commenter 

noted that market participants, if they 

have direct market access, could 

calculate market quality metrics 

including latencies and therefore would 

be aware of many of the attributes of a 

platform that affect order execution. The 

requirements proposed under 

§ 38.401(a)(1)(iii) and (iv) give all 

market participants an equal footing in 

terms of understanding how the 

platform operates independent of access 

methods and services such as 

colocation. 

4. Request for Comments 

69. The Commission has proposed 

that certain components of an 

exchange’s market architecture should 

be considered part of the ‘‘electronic 

matching platform’’ for purposes of the 

DCM transparency provision. Are there 

any additional systems that should fall 

within the meaning of ‘‘electronic 

matching platforms’’ for purposes of 

proposed § 38.401(a)? 

70. The Commission has specifically 

identified, as ‘‘attributes’’ that must be 

disclosed, latencies within a platform 

and how a self-trade prevention tool 

determines whether to cancel an order. 

Are there any other attributes that 

would materially affect the execution of 

market participant orders and therefore 

should be made known to all market 

participants? Should the Commission 

revise the final rule so that it only 

applies to latencies within a platform 

and how a self-trade prevention tool 

determines whether to cancel an order? 

71. What information should be 

disclosed as part of the description of 

relevant attributes of the platform? For 

instance, with latencies within a 

platform, should statistics on latencies 

be required? If so, what statistics would 

help market participants assess any 

impact on their orders? Would a 

narrative description of attributes be 

preferable, including a description of 

how the attributes might affect market 

participant orders under different 

market conditions, such as during times 

of increased messaging activity? 


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72. The Commission notes that 

proposed § 38.401(a)(1)(iii) and (iv) are 

not intended to require the disclosure of 

a DCM’s trade secrets. The Commission 

requests comments on whether the 

proposed rules might inadvertently 

require such disclosure, and if so, how 

they might be amended to address this 

concern. Furthermore, the Commission 

anticipates that the mechanisms and 

standards for requesting confidential 

treatment already codified in existing 

§ 40.8 could be used by DCMs to 

identify and request confidential 

treatment for information otherwise 

required to be disclosed pursuant to 

proposed § 38.401(a)(1)(iii) and (iv), for 

example by incorporating § 40.8’s 

mechanisms and standards into any 

final rules arising from this NPRM. If 

commenters believe that the 

mechanisms and standards in § 40.8 are 

inappropriate for this purpose, please 

describe any other mechanism that 

should be included in any final rules to 

facilitate DCM requests for confidential 

treatment of information otherwise 

required to be disclosed pursuant to 

proposed § 38.401(a)(1)(iii) and (iv). 

73. The Commission notes that DCMs 

are required, as part of voluntary 

submissions of new rules or rule 

amendments under § 40.5(a) and selfcertification of rules and rule 

amendment under § 40.6(a), to provide 

inter alia an explanation and analysis of 

the operation, purpose and effect of the 

proposed rule or rule amendment. 

Would the information required under 

§§ 40.5(a) or 40.6(a) provide market 

participants and the public with 

sufficient information regarding 

material attributes of an electronic 

matching platform? 

74. The Commission recognizes that 

DCMs are required to have system 

safeguards to ensure information 

security, business continuity and 

disaster recovery under DCM Core 

Principle 20. The Commission 

understands that some attributes of an 

electronic matching platform designed 

to implement those safeguards should 

be maintained as confidential to prevent 

cybersecurity or other threats. Does 

existing § 40.8, 17 CFR 40.8 (2014) 

provide sufficient basis for DCMs to 

publicly disclose the relevant attributes 

of their platforms while maintaining as 

confidential information concerning 

system safeguards? 

75. With respect to material attributes 

affecting market participant orders 

caused by temporary or emergency 

situations, such as network outages or 

the temporary suspension of certain 

market functionality, what is the best 

way for DCMs to alert market 

participants? How are DCMs currently 

handling these situations? 

76. The Commission proposes that 

DCMs provide a description of the 

relevant material attributes in a single 

document ‘‘disclosed prominently and 

clearly’’ on the exchange’s Web site. The 

Commission also proposes that this 

document be written in ‘‘plain English’’ 

to allow market participants, even those 

not technically proficient, to understand 

the attributes described. Would these 

requirements be practical and help 

market participants locate and 

understand the information provided? 

77. The Commission proposes 

requiring DCMs to disclose information 

on the relevant attributes: (a) When 

filing a rule change submission with the 

Commission for changes to the 

electronic matching platform; or (b) 

within a ‘‘reasonable time, but no later 

than ten days’’ following the 

identification of such attribute. Do the 

proposed timeframes provide sufficient 

time for DCMs to disclose the relevant 

information? Do the proposed 

timeframes offer sufficient notice of 

changes or discovered attributes to 

market participants to allow them to 

adjust any systems or strategies, 

including any algorithmic trading 

systems? 

78. The Commission proposes 

requiring disclosure of newly identified 

attributes within 10 days of discovery. 

Does this provide DCMs sufficient time 

to analyze the attribute and provide a 

description? Should DCMs be required 

to provide notice of the existence of the 

attribute and supplement as further 

analysis is performed? 

N. Pre-Trade and Other Risk Controls at 

DCMs—§ 40.20 

The Commission proposes a new 

§ 40.20 to require DCMs to establish pretrade and other risk controls specifically 

designed to address the risks that may 

arise from Algorithmic Trading. The 

Commission is also proposing to codify 

in § 40.20 basic pre-trade risk control 

requirements and order cancellation 

capabilities for orders that do not 

originate from Algorithmic Trading. In 

this regard, the Commission recognizes 

that natural person traders manually 

entering orders also have the potential 

to cause market disruptions. While the 

majority of the pre-trade and other risk 

controls in Regulation AT address 

Algorithmic Trading, the Commission 

believes it is also important to promote 

a basic degree of risk control for all 

trading regardless of source. 

The pre-trade and other risk controls 

required of DCMs pursuant to proposed 

§ 40.20 reflect Regulation AT’s layered 

approach to risk mitigation in 

automated trading. In particular, the 

measures required of DCMs in § 40.20 

are similar to those required of AT 

Persons in proposed § 1.80(a)(1) and 

(b)(1), and also similar to those required 

of clearing member FCMs in § 1.82(a). 

The Commission intends to offer AT 

Persons, clearing member FCMs and 

DCMs the flexibility to design and 

calibrate such controls according to 

their own distinct priorities and 

understanding of the risks to 

themselves, their customers, and the 

broader market. In this regard, while 

certain proposed rules may appear 

duplicative on their face, Regulation AT 

is designed to address the diverse needs 

of market participants trading across 

multiple markets, by spreading the 

requirement to impose risk controls 

across AT Persons, clearing member 

FCMs and DCMs and encouraging them 

to each independently calibrate such 

controls. 

The remainder of this section presents 

Concept Release comments on this 

topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments 

The Concept Release requested 

comment on various pre-trade and other 

types of risk controls, including message 

and execution throttles, maximum order 

sizes, price collars, and order 

management controls, such as 

connectivity monitoring services, 

automatic cancellation of orders on 

disconnect and kill switches. The 

Concept Release contemplated that such 

controls would apply at the trading 

firm, clearing member and trading 

platform levels. As explained above, 

proposed § 1.80 requires AT Persons to 

implement certain pre-trade risk 

controls and order management 

controls. By reference to the proposed 

§ 1.80 regulations, proposed § 40.20 will 

require DCMs to establish similar pretrade and other risk controls specifically 

designed to address the risks that may 

arise from Algorithmic Trading, and to 

establish similar controls for orders 

entered manually. Relevant comments 

to the Concept Release addressing pretrade and other risk controls for DCMs 

are discussed below. 

a. Message and Execution Throttles 

As discussed above, the Concept 

Release described message throttles as 

establishing maximum message rates 

per unit of time and execution throttles 

as establishing limits on the maximum 

number of orders that an ATS can 

execute in a given direction per unit in 

time. The Concept Release also sought 


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433Concept Release, 78 FR 56571. 

434Concept Release, 78 FR 56569. 

435CME at 8–9; CME at Appendix A, 3–4, 6; CFE 

at 5–6. 

436TCL at 6; KCG at 4; MFA at 7; AIMA at 8. 

437 KCG at 5. 

438FIA at 12, 15–17, 65; MFA at 7; CME at 8; 

Gelber at 5–7; AFR at 6–7; SIG at 3. 

439SIG at 3. 

440FIA at 16. 

441FIA at 12, 15–17; CME at 8–9; MFA at 13; 

Gelber at 5–7; KCG at 3–4; AIMA at 8; OneChicago 

at 5. 

442FIA at 15; CME at 8–9; Gelber at 5–7; KCG at 

4; AIMA at 8. 

443FIA at 12, 16. 

444Chicago Fed at 2. 

445 IATP at 3–5. 

446CME at 15, Appendix A–1; CFE at 7. 

447AIMA at 13. 

448Chicago Fed at 2; MFA at 2, 9; Gelber at 10; 

KCG at 8. 

449MFA at 9. 

450FIA at 18–19. 

451CME at 13–14; 16–17, CME at Appendix A– 

6; CFE at 6–8. 

452FIA at 18. 

453FIA at 18. 

454 Id. at 13–14. 

455 Id. at 18. 

456 KCG at 7–8. 

457See id. 

458 Gelber at 9. 

459MFA at 8–9. 

460SIG at 8–9. 

461Chicago Fed at 3; AFR at 7. 

462AIMA at 12–13. 

463See id. 

comment on a particular form of 

execution throttle, the repeated 

automated execution throttle, which 

would disable a trading system after a 

configurable number of repeated 

executions until a human re-enables the 

system.433 The Concept Release stated 

that the throttles would be calibrated to 

address the potential for unintended 

message flow or executions from a 

malfunctioning ATS.434

Commenters indicated that DCMs are 

already implementing messaging rate 

limits. Two exchanges described their 

own message rate limits 435 and four 

commenters stated generally that many 

exchanges have messaging rate limits in 

place.436 Commenters generally 

discussed throttles at the exchange as 

being ‘‘messaging’’ limits. KCG 

explained that many participants’ 

trading strategies include trading 

activity on multiple markets, and thus 

the responsibility for establishing limits 

on executions must reside with the 

market participant and its clearing 

firm.437 Benefits of exchange-based 

messaging limits noted by commenters 

include identifying potentially 

malfunctioning ATSs, preventing a 

platform overload that would impact the 

processing of messages across all market 

participants, ensuring a level playing 

field for all market participants, 

mitigating risk to the DCO, and 

deterring predatory and disruptive 

activities that require high message 

traffic.438 SIG cautioned that exchanges 

should not impose ‘‘speed-bump’’ 

throttles on order messaging as a means 

to ‘‘slow down trading for its own 

sake.’’ 439 FIA suggested that a DCM 

should never reject an order 

cancellation request due to message rate 

limits.440

Commenters indicated that exchanges 

should have flexibility in setting 

messaging limits because exchanges are 

in the best position to respond to the 

dynamics of the market, monitor the 

activity of all participants, and 

determine the impact of messaging.441

Commenters indicated that throttle 

limits implemented by DCMs should be 

based on the unique characteristics of 

each product; the capacity and 

performance of a DCM’s network and 

matching engine and the matching 

algorithm; and the market participant’s 

role (i.e., liquidity providers may be 

excluded from limits).442 FIA noted that 

a DCM’s message rate limit should not 

adjust to market conditions because 

participants must always know what the 

limit is.443 Chicago Fed commented that 

regulators should assess the 

methodology that trading venues use to 

set throttle limits, the reasonableness of 

those limits, and the procedures 

followed when they are breached.444

Finally, IATP commented on the 

difficulty in setting standardized 

throttle thresholds, and alternatively 

suggested standardizing a graduated 

levy on order cancellations.445

b. Maximum Order Sizes 

Commenters indicated that exchanges 

already implement maximum order size 

limits. Two exchanges, CME and CFE, 

stated that they apply order size limits 

on each of their products.446 AIMA also 

stated that maximum order sizes are 

normally applied per product at the 

DCM or FCM level to all customers.447

Chicago Fed commented that exchanges 

should implement maximum order size 

limits.448 MFA also recommended that 

maximum order size controls be 

implemented at the FCM and/or 

exchange level, and apply to both 

manual and automated traders.449 FIA 

commented that while it ‘‘has been a 

proponent of standardization of pretrade risk controls across DCMs we 

understand that each DCM needs to 

have discretion on how these controls 

are implemented.’’ 450

c. Price Collars 

The Concept Release requested 

comment on price collars, a control in 

which trading platforms would assign a 

range of acceptable order and execution 

prices for each product and all market 

participants would establish similar 

limits to ensure that orders outside of a 

particular price range are not 

transmitted to the trading platform. 

Commenters indicated that exchanges 

already implement price collars. CME 

and CFE described their own price 

collar mechanisms.451

FIA indicated that price collars are a 

‘‘widely adopted’’ DCM-hosted risk 

control and are effective at preventing 

orders from disrupting the market and 

affecting the price discovery process.452

FIA further explained that they have 

been proven to minimize erroneous 

trading by controlling the range of 

execution prices and can ensure the 

integrity of trades cleared through the 

DCO by dramatically reducing the 

chance that a trade may be deemed 

erroneous and subsequently adjusted or 

busted.453 FIA recommended that price 

collars be used on all contracts, set by 

the DCM based on estimates of volatility 

and market conditions.454 FIA 

cautioned that price collars should not 

be mandated at the same levels across 

all products.455

Other commenters made similar 

points. KCG stated that ‘‘the futures 

markets’ price collars work well,’’ and 

reduce the potential for erroneous 

trades.456 KCG supports requiring 

exchanges to establish price collars on 

all contracts, but believes that 

exchanges should have discretion in 

setting the price collars.457 Gelber stated 

that exchanges should establish price 

collars and that this control protects 

DCOs and market participants from 

volatile markets.458 MFA stated that 

price collars in the futures markets have 

been effective in maintaining fair and 

orderly markets, and have fewer 

unintended consequences than trading 

pauses.459 SIG also stated that the 

markets benefit from price collars.460

Finally, Chicago Fed and AFR 

recommended that trading venues 

implement price collars.461

In contrast to the above comments, 

AIMA acknowledged that price collars 

may be beneficial, but explained that 

price collars have potentially negative 

consequences in that they may impede 

the efficient price discovery process.462

In particular, AIMA suggested that 

market participants should be 

encouraged to place bids and offers far 

above or below the current market 

price.463 Among other things, AIMA 


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464See id. 465CME at Appendix A–4; CFE at 9–10. 466FIA at 14. 467FIA at 14; KCG at 12; MFA at 12; Chicago Fed 

at 2. 468CME at 23–24. 

469CFE at 11. 

470FIA at 29–33; Citadel at 3; AIMA at 3, 18; MFA 

at 12–13; KCG at 13. 

471Citadel at 3. 

472FIA at 29–33; CME at 23; AIMA at 18; SIG at 

8; Gelber at 14–15. 

473FIA at 29; MFA at 12; Citadel at 3. 

474FIA at 29. 

475MFA at 12. 

476CME at 23. 

477FIA at 29–33; Gelber at 14–15. 

478FIA at 29–33. 

479FIA at 29–33. 

480Citadel at 3–4. 

481 KCG at 13. 

482 Gelber at 14. 

483SIG at 8. 

484See ‘‘Euronext Derivatives Trading Resumes 

Following One-Hour Halt,’’ Bloomberg (March 30, 

2015), available at http://www.bloomberg.com/

news/articles/2015-03-30/euronext-derivativestrading-halted-because-of-technical-issue. 

485See ‘‘CME Test Orders Went Live,’’ Wall St. 

J. (September 15, 2010), available at http://

www.wsj.com/articles/SB10001424052748703376

504575491971336921954. 

486See ‘‘Technical Glitch Hits CME Trading,’’ 

Wall St. J. (April 8, 2014), available at http://

www.wsj.com/articles/SB1000142405270230481

9004579489683245107384. The Commission notes 

that moving to the floor will no longer be available 

Continued 

suggested that brief trading pauses were 

preferable to price collars, and that if a 

collar or pause is activated, market 

participants should be notified as soon 

as possible.464

d. Connectivity Indications and Cancel 

on Disconnect 

As noted above, the Concept Release 

requested comment regarding ‘‘system 

heartbeats’’ that would indicate proper 

connectivity between a trading firm’s 

automated trading system and the 

trading platform, and ‘‘auto-cancel on 

disconnect,’’ an exchange tool that 

allows trading firms to determine 

whether their orders will be left in the 

market upon disconnection. Two 

exchanges stated that they provide an 

optional cancel-on-disconnect 

functionality 465 and FIA characterized 

cancel-on-disconnect as a ‘‘widely 

adopted DCM-hosted pre-trade risk 

control.’’ 466 Several commenters 

indicated that they support exchanges 

offering system heartbeats and/or 

cancel-on-disconnect to their market 

participants.467

e. Order Cancellation Systems 

As discussed above, the Concept 

Release addressed selective working 

order cancellation, a tool in which an 

exchange can immediately cancel one, 

multiple, or all resting orders from a 

market participant as necessary in an 

emergency situation and well as order 

cancellation mechanisms that would 

immediately cancel all working orders 

and prevent submission (by the market 

participant), transmittal (by the clearing 

member), or acceptance (by the trading 

platform) of any new orders from a 

market participant or a particular trader 

or ATS of such market participant. The 

Commission notes that comments to the 

Concept Release generally discussing 

the design and implementation of kill 

switches are addressed above with 

respect to order cancellation systems 

requirements on AT Persons. 

Specifically as to exchanges, the 

Commission notes that one exchange 

indicated that it has two kill switch 

tools: A kill switch used by the 

exchange, clearing firm, or trading firm 

to remove an entity from the market 

completely; and an order management 

tool that enables clearing firms and endusers to cancel orders at a more granular 

level.468 Another exchange explained 

that it can cancel orders and quotes in 

an emergency and also provides a kill 

switch to clearing members that cancels 

all orders and quotes from a market 

participant.469

Some commenters noted the 

importance of placing kill switches at 

the DCM level.470 For example, Citadel 

noted that ‘‘kill switches can operate at 

a number of levels—at the market 

participant, at the clearing firm, or at the 

trading platform. While all are 

advisable, their use at the trading 

platform level is of paramount 

importance. Trading platforms sit at the 

center of trading and are therefore best 

positioned to efficiently and 

consistently monitor activity across a 

wide variety of market participants.’’ 471

While commenters generally opposed 

prescriptive kill switch requirements 

and indicated the challenges of 

standardization, several noted that there 

could be some benefits to standardized 

kill switch processes across 

exchanges.472

Commenters also stressed the 

importance of clear, transparent 

procedures governing use of the kill 

switch.473 FIA stated that ‘‘a failure to 

communicate policies that govern the 

use of kill switches, any potential 

changes to such policies, or the 

utilization of a kill switch in a live 

trading environment without prior 

notification can introduce significant 

risk to a market participant’s trading 

operation as well as the wider 

marketplace.’’ 474 MFA commented that 

trading platforms should have clear and 

objective policies detailing the 

circumstances that warrant use of a kill 

switch.475 In contrast, CME stressed that 

the kill switch tool must be free of 

restrictive policies and procedures, 

because time is of the essence in use of 

the kill switch. However, CME stated 

that if policies do govern an exchange’s 

use of a kill switch, such policies 

should define a hierarchy of authority 

for who can send kill instructions.476

Regarding activation of the kill 

switch, FIA cautioned that this tool 

should only be used as a ‘‘final 

safeguard’’ that should be a redundant 

control as long as appropriate risk 

controls are implemented at the FCM 

and DCM levels.477 FIA suggested that 

a kill switch have both automated and 

manual triggers, but a DCM should 

contact the market participant before 

activating the kill switch.478 FIA also 

suggested that a DCM be allowed to 

terminate market access without 

contacting the participant if necessary to 

protect market integrity or the financial 

integrity of participants.479 Citadel 

commented that exchange systems 

should employ robust and reliable 

systems that automatically identify 

potentially erroneous activity, and this 

activity could trigger automatic 

notifications to the participant; review 

by exchange staff; automatic blocks of 

further activity; and, under appropriate 

circumstances, a confidential 

notification to other trading platforms 

that a firm’s trading is halted.480 KCG 

stressed that market participants should 

establish thresholds for kill switches,481

and Gelber cautioned that exchanges 

should apply kill switches on an ATS, 

not firm-wide, level.482 SIG suggested 

that exchanges set kill switches at the 

gateway level, firm level, or an account 

level.483

An issue related to pre-trade and 

other risk controls implemented by 

DCMs is the testing of exchange 

systems. The Concept Release did not 

directly explore the testing of DCM 

automated systems. Moreover, 

commenters did not raise the issue. 

Nevertheless, the Commission notes that 

there have been incidents following 

automated system changes that might 

have been prevented or mitigated by 

additional testing. For example, in early 

2015, certain European futures 

exchanges experienced outages in their 

trading platforms following updates to 

their automated systems.484 In 

September 2010, 30,000 test orders were 

accidentally submitted to the CME 

Globex system (due to human error), 

resulting in numerous executed 

trades.485 In April 2014, the Globex 

system halted, forcing traders to execute 

futures trades on the trading floor.486


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as a backup as the CME was planning to close most 

futures trading pits in July 2015. 

487See IOSCO 2015 Consultation Report, supra 

note 106 at 19. 

488FIA at 29–33; Citadel at 3; AIMA at 3, 18; MFA 

at 12–13; KCG at 13. 

489ESMA September 2015 Final Draft Standards 

Report, supra note 80 at 201–02. 

490See id. 

491 IOSCO 2015 Consultation Report, supra note 

106 at 21. 

492See ESMA September 2015 Final Draft 

Standards Report Annex 1 at 269. 

493See id. at 266. 

494See id. at 285–88. 

The Commission further notes that 

IOSCO published in April 2015 a 

consultation report recommending that 

exchanges consider ‘‘establishing 

policies and procedures related to the 

development, modification, testing and 

implementation of new, or changes to, 

critical systems.’’ 487 Existing 

§ 38.1051(h) requires DCMs to ‘‘conduct 

regular, periodic, and objective testing 

of its automated systems to ensure that 

they are reliable, secure, and have 

adequate scalable capacity’’ and 

§ 38.1051(a)(5) requires exchanges to 

address risk analysis and oversight for 

‘‘systems development and quality 

assurance.’’ While the Commission is 

not proposing any amendments to 

§ 38.1051 in this NPRM, the 

Commission requests comment on 

whether the existing rule provides the 

Commission with adequate authority to 

require DCMs to adequately test 

planned changes to their matching 

engines and other automated systems. 

2. Description of Regulation 

Existing § 38.255 requires DCMs to 

establish risk control mechanisms to 

prevent and reduce the potential risk of 

price distortions and market 

disruptions, including market 

restrictions that pause or halt trading. 

The Commission proposes a new § 40.20 

to require DCMs to establish pre-trade 

and other risk controls specifically 

designed to address the risks that may 

arise from Algorithmic Trading, and to 

establish similar controls for orders 

entered manually. 

The controls required by § 40.20 are 

consistent with the controls that 

Regulation AT would require AT 

Persons and clearing member FCMs to 

implement. By reference to the pre-trade 

and other risk controls required of AT 

Persons pursuant to § 1.80(a)(1), 

proposed § 40.20 would require message 

and execution throttles and controls 

establishing price and size parameters. 

Proposed § 40.20 would also require 

DCMs to implement the above risk 

controls for orders that do not originate 

from Algorithmic Trading. 

The proposed regulation, by reference 

to § 1.80(b) and (c), would also require 

DCMs to establish certain order 

cancellation and connectivity 

monitoring systems. The cancellation 

systems must have the ability to: (i) 

Immediately disengage Algorithmic 

Trading; (ii) cancel selected or up to all 

resting orders when system or market 

conditions require it; (iii) prevent 

acceptance or submission of any new 

orders; and (iv) cancel or suspend all 

resting orders from AT Persons in the 

event of disconnect with the trading 

platform. The connectivity monitoring 

systems established by the DCM must 

enable the systems of AT Persons with 

DEA to indicate to the AT Persons on 

an intermittent or continuous basis 

whether they have proper connectivity 

with the trading platform, including any 

systems used by a DCM to provide the 

AT Person with market data. 

Finally, the Commission is amending 

the Acceptable Practices for Core 

Principle 4 in part 38 of the DCM 

regulations. The existing Acceptable 

Practices provide that the DCM may 

choose from risk controls, including 

pre-trade limits on order size, price 

collars or bands around the current 

price, message throttles and daily price 

limits, to comply with Core Principle 4. 

Such controls are now required. 

Accordingly, the Acceptable Practices 

will be revised to correspond to the new 

requirements set forth in § 40.20. 

3. Policy Discussion 

Consistent with its multi-layered 

approach to regulations intended to 

mitigate the risks of automated trading, 

the Commission proposes in § 40.20 to 

require that DCMs establish and 

implement certain pre-trade risk 

controls and order management controls 

that are broadly similar to those that 

would be required of AT Persons and 

clearing member FCMs. The 

Commission’s determination to require 

DCM-implemented controls is 

consistent with several Concept Release 

comments that indicated that pre-trade 

risk and order management controls 

should be placed at the exchange level, 

with one commenter explaining that 

exchanges sit at the center of trading, 

and are therefore best positioned to 

monitor activity across a wide variety of 

participants.488 The Commission notes 

that its approach is consistent with 

ESMA’s 2015 Final Draft Regulatory 

Standards, in that ESMA requires pretrade risk controls at both the 

investment firm and trading venue 

level.489 In addition, with respect to kill 

switch functionality, ESMA’s 2015 Final 

Draft Regulatory Standards set out two 

different obligations: Trading venues 

must have their own kill functionality, 

and separately, investment firms must 

have the ability to cancel unexecuted 

orders.490

The Commission believes that the 

controls required in proposed § 40.20 

are in many cases largely consistent 

with controls already used by DCMs. As 

discussed above, commenters to the 

Concept Release addressing this topic 

generally indicated that exchanges 

already use message rate limits, 

maximum order size limits, and price 

limits. Comments to the Concept 

Release indicated that order 

cancellation systems and connectivity 

monitoring systems are already used by 

DCMs as well. Although some 

commenters did indicate that execution 

throttles are more appropriate for 

trading firms than for DCMs, the 

Commission believes that pre-trade risk 

controls and other measures serve 

different functions and may be designed 

or calibrated distinctly at each entity in 

the life-cycle of an AT Order Message. 

As noted above, proposed § 40.20 and 

other elements of Regulation AT reflect 

the proposed rules’ layered approach to 

risk mitigation in automated trading. In 

this regard, Regulation AT is designed 

to address the diverse needs of market 

participants trading across multiple 

markets, by spreading the requirement 

to impose risk controls across AT 

Persons, clearing member FCMs and 

DCMs and encouraging them to each 

make independent use of such controls. 

The Commission notes that IOSCO 

has recently explained that most trading 

venues have tools used to mitigate the 

operational risks of electronic trading, 

and such tools include price and 

volume controls, messaging throttles, 

and kill switches.491 In addition, 

ESMA’s 2015 Final Draft Regulatory 

Standards require that trading venues 

have price collars that automatically 

block or cancel orders that do not meet 

set price parameters with respect to 

different financial instruments, on an 

order-by-order basis; and maximum 

order value and maximum order volume 

limits.492 ESMA’s regulatory standards 

also require throttles limiting the 

number of orders each member may 

submit per second.493 Trading venues 

must also determine a maximum ratio of 

unexecuted orders to transactions at a 

level they deem appropriate, consistent 

with a calculation methodology 

provided by ESMA.494 ESMA standards 

further require a kill functionality to 

cancel unexecuted orders upon request 

of a market participant that is 

technically unable to delete its own 


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495See id. at 266–67. 

496See FIA Guide, supra note 95 at 14. 

497See id. 

498MFA at 12. 499CME at 23. 

500FIA at 34–38. 

501SIG at 9. 

502MFA at 13. 

orders, when the order book is 

corrupted by erroneous duplicated 

orders, or following a suspension 

initiated by the market operator or the 

competent authority.495

The Commission’s proposed rules do 

not impose a ‘‘one-size-fits-all’’ standard 

on DCMs for compliance. Rather, the 

DCM’s pre-trade risk controls must be 

set at the level of each AT Person, and 

exchanges must evaluate whether the 

controls should be set at a more granular 

level, including by product or one or 

more identifiers of natural persons 

associated with an AT Order Message, 

and then take appropriate action to set 

the controls at that more granular level. 

The Commission expects that it will 

often be beneficial to set controls at a 

more granular level. As noted above, 

while some commenters to the Concept 

Release indicated that Commission 

involvement in setting thresholds for 

these controls might be useful, the 

Commission agrees with those 

commenters indicating that exchanges 

need discretion to determine how these 

controls are implemented. The 

Commission believes that it is not in the 

best position to determine the 

appropriate control parameters for each 

trading strategy, product, capacity of 

exchange matching engine, and every 

other potentially relevant factor that 

should be taken into account by a DCM 

when establishing thresholds. The 

proposed rules do not prescribe 

particular limits or thresholds. Rather, 

they require that the DCM set the 

controls at levels intended to prevent an 

Algorithmic Trading Event. 

The Commission believes that 

allowing DCMs discretion in the design 

and implementation of risk controls is 

particularly important in the area of 

order cancellation functions. FIA has 

stated that ‘‘[a]ctivation of a kill switch 

is based on a decision that such action 

protects market integrity or the financial 

integrity of the counterparties 

involved,’’ and should ‘‘only be invoked 

based on a qualitative decision taken as 

a last resort when other actions have 

failed or may not be feasible.’’ 496

Furthermore, FIA has explained that the 

conditions under which a kill switch 

may be used by an exchange should be 

clearly communicated to the 

counterparties.497 Similarly, MFA 

commented that trading platforms 

should have clear and objective policies 

detailing when a kill switch will be 

used.498 CME indicated that restrictive 

policies governing use of a kill switch 

could be detrimental, given the speed 

with which a kill switch may need to be 

implemented.499 The Commission 

believes that exchanges should have 

clear and public policies governing use 

of a kill switch, but understands that the 

specifics of such policies may different 

depending on the nature of an 

exchange’s market and market 

participants. Therefore, the Commission 

has determined that its proposed rules 

in this area should provide exchanges 

with the discretion to design policies 

and procedures appropriate to their 

market. The Commission stresses that 

exchanges should clearly communicate 

such policies and procedures to market 

participants. 

The Commission notes that § 40.20(d) 

would require a DCM to implement the 

pre-trade and other risk control 

mechanisms described in § 40.20(a) and 

(b)(1)(i) (meaning, message and 

execution throttles and order and price 

parameters and order cancellation 

systems) for orders that do not originate 

from Algorithmic Trading, after making 

any adjustments to such controls that 

the DCM determines are appropriate for 

such orders. The Commission 

recognizes that certain activity that such 

controls are designed to address can be 

caused by manual order entry in 

addition to Algorithmic Trading. For 

example, fat-finger errors are a 

commonly-cited example of an 

unintentional error that can have a 

significant disruptive effect, which can 

be caused by, and may even be more 

likely to occur in the context of, manual 

order entry. 

4. Request for Comments 

79. The Commission proposes to 

require DCMs to set pre-trade risk 

controls at the level of the AT Person, 

and allows discretion to set controls at 

a more granular level. Should the 

Commission eliminate this discretion, 

and require that the controls be set at a 

specific, more granular, level? If so, 

please explain the more appropriate 

level at which pre-trade risk controls 

should be set by a DCM. 

80. The Commission requests public 

comment on the pre-trade and other risk 

controls required of DCMs in proposed 

§ 40.20. Are any of the risk controls 

required in the proposed rules 

unhelpful to operational or other risk 

mitigation, or to market stability, when 

implemented at the DCM level? 

81. Are there additional pre-trade or 

other risk controls that should be 

specifically enumerated in proposed 

§ 40.20? 

82. The Commission proposes, with 

respect to its kill switch requirements, 

to allow DCMs the discretion to design 

a kill switch that allows a market 

participant to submit risk-reducing 

orders. The Commission also does not 

mandate particular procedures for alerts 

or notifications concerning kill switch 

triggers. Does the proposed rule allow 

for sufficient flexibility in the design of 

kill switch mechanisms and the policies 

and procedures concerning their 

implementation? Should the 

Commission consider more prescriptive 

rules in this area? 

83. Does existing § 38.1051 provide 

the Commission with adequate 

authority to require DCMs to adequately 

test planned changes to their matching 

engines and other automated systems? 

O. DCM Test Environments for AT 

Persons—§ 40.21 

The Commission proposes a new 

§ 40.21 to require DCMs to provide a test 

environment that will enable AT 

Persons to simulate production trading. 

1. Concept Release Comments 

The Concept Release contemplated 

that trading platforms must provide to 

their market participants test 

environments that simulate the 

production environment. FIA supports 

DCMs providing robust test 

environments and market participants 

using such environments.500 SIG also 

indicated that DCMs should provide test 

environments.501 MFA indicated that 

many, if not all, exchanges currently 

provide market participants a test 

facility to test trading software and 

algorithms.502

2. Description of Regulation 

Regulation AT proposes a new 

requirement that DCMs (under proposed 

§ 40.21) provide a test environment that 

will enable AT Persons to simulate 

production trading. The required test 

environment should provide access to 

historical transaction, order and 

message data. The test environment 

should also enable AT Persons to 

conduct conformance testing of their 

Algorithmic Trading systems to verify 

compliance with the requirements of 

proposed § 1.80(a)–(c) (which address 

pre-trade risk controls and other 

measures), § 1.81(a)(1)(ii)–(iv) and 

§ 1.81(c)(1) (which address the testing 

and compliance of algorithmic trading 

systems). The Commission anticipates 

that AT Persons would use the DCM test 

environment in connection with the 


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503Concept Release, 78 FR at 56559. 504See, e.g., AIMA at 21; FIA at 4; CME at 47. 

testing of their Algorithmic Trading 

systems, to identify issues that may 

arise in a production environment that 

may not have been identified through 

testing in the AT Person’s development 

environment. 

3. Request for Comments 

84. Should the test environment 

provided by DCMs under proposed 

§ 40.21 offer any other functionality or 

data inputs that will promote the 

effective design and testing of 

Algorithmic Trading by AT Persons? 

P. DCM Review of Compliance Reports 

by AT Persons and Clearing FCMs; DCM 

Rules Requiring Certain Books and 

Records; and DCM Review of Such 

Books and Records as Necessary— 

§ 40.22 

The Commission proposes a new 

§ 40.22 that complements the 

requirement under § 1.83 for AT Persons 

and clearing member FCMs to submit 

compliance reports to DCMs. Sections 

40.22(a) and (b) would require a DCM to 

require each AT Person that trades on 

the DCM, and each FCM that is a 

clearing member for such AT Person, to 

submit the reports described in § 1.83(a) 

and (b) annually. Further, § 40.22(c) 

would require each DCM to establish a 

program for effective review of such 

reports and remediation of any 

deficiencies found. DCMs would have 

considerable latitude, however, in the 

design of their review programs. 

Proposed § 40.22(d) would require 

DCMs to implement rules that require 

each AT Person to keep and provide to 

the DCM books and records regarding 

such AT Person’s compliance with all 

requirements pursuant to § 1.80 and 

§ 1.81, and require each clearing 

member FCM to keep and provide to the 

DCM books and records regarding such 

clearing member FCM’s compliance 

with all requirements pursuant to § 1.82. 

Finally, proposed § 40.22(e) would 

require DCMs to review and evaluate, as 

necessary, books and records 

maintained by AT Persons and clearing 

member FCMs regarding their 

compliance with §§ 1.80 and 1.81 (for 

AT Persons) and § 1.82 (for clearing 

member FCMs). This proposed 

provision also provides DCMs with 

considerable latitude in the 

implementation of their review 

function. The remainder of this section 

presents Concept Release comments on 

this topic, a description of the proposed 

regulation, a discussion of the policy 

justification for the proposal, and a 

request for comments on the proposal. 

1. Concept Release Comments 

As noted in the discussion of 

proposed § 1.83 above, the Concept 

Release requested comment on whether 

it would be appropriate to require 

periodic self-certifications by all market 

participants operating ATSs and by 

clearing firms that provide clearing 

services to those market participants.503

Comments addressing this topic are 

addressed in section IV(I)(1) above. 

2. Description of Regulation 

Proposed § 40.22 complements the 

requirement under § 1.83 for AT Persons 

and clearing member FCMs to submit 

compliance reports to DCMs. Proposed 

§ 40.22(a) requires a DCM to implement 

rules that require each AT Person that 

trades on the DCM, and each FCM that 

is a clearing member of a DCO for such 

AT Person, to submit the reports 

described in § 1.83(a) and (b), 

respectively. Under proposed § 40.22(b), 

a DCM must require the submission of 

such reports by June 30th of each year. 

Proposed § 40.22(c) requires a DCM to 

establish a program for effective 

periodic review and evaluation of 

reports described in paragraph (a) of 

§ 40.22, and of the measures described 

therein. An effective program must 

include measures by the DCM 

reasonably designed to identify and 

remediate any insufficient mechanisms, 

policies and procedures described in 

such reports, including identification 

and remediation of any inadequate 

quantitative settings or calibrations of 

pre-trade risk controls required of AT 

Persons pursuant to § 1.80(a). 

In addition, as an additional 

complement to the compliance report 

review program described above, 

proposed § 40.22(d) requires DCMs to 

implement rules requiring each AT 

Person to keep and provide to the DCM 

books and records regarding their 

compliance with all requirements 

pursuant to § 1.80 and § 1.81, and 

requires each clearing member FCM to 

keep and provide to the DCM market 

books and records regarding their 

compliance with all requirements 

pursuant to § 1.82. Finally, proposed 

§ 40.22(e) requires DCMs to review and 

evaluate, as necessary, books and 

records required to be kept pursuant to 

proposed § 40.22(d), and the measures 

described therein. A DCM could find it 

necessary to conduct such a review if: 

It becomes aware if an AT Person’s kill 

switch is frequently activated, or 

otherwise performs in an unusual 

manner; if a DCM becomes aware that 

an AT Person’s algorithm frequently 

performs in a manner inconsistent with 

its design, which may raise questions 

about the design or monitoring of the 

AT Person’s algorithms; if a DCM 

identifies frequent trade practice 

violations at an AT Person, which are 

related to an algorithm of the AT 

Person; or if an AT Person represents 

significant volume in a particular 

product, thereby requiring heightened 

scrutiny, among other reasons. An 

appropriate review pursuant to 

§ 40.22(e) should include measures by 

the DCM reasonably designed to 

identify and remediate any insufficient 

mechanisms, policies, and procedures 

described in such books and records. 

3. Policy Discussion 

In proposing this regulation, the 

Commission disagrees with comments 

to the Concept Release opposing such a 

review requirement and suggesting that 

it would merely create extra 

administrative costs.504 The 

Commission acknowledges that the 

review program required by § 40.22 

would impose costs on DCMs, but 

believes that Regulation AT must 

include a mechanism to ensure that AT 

Persons and clearing member FCMs are 

complying with the requirement to 

implement certain pre-trade and other 

risk controls. Moreover, an assessment 

of such compliance requires an 

adequate level of expertise and 

knowledge of markets and market 

participants’ technological systems and 

trading strategies. The Commission 

believes that a review program requiring 

AT Persons to describe the pre-trade 

risk controls required by § 1.80(a) and 

clearing member FCMs to describe their 

program for establishing and 

maintaining the pre-trade risk controls 

required by 1.82(a)(1), and requiring 

DCMs to review such information, is the 

most effective method to ensure that all 

market participants are implementing 

measures that are reasonably designed 

to prevent an Algorithmic Trading Event 

or Algorithmic Trading Disruption. The 

requirements of proposed § 40.22(d) and 

(e) will enable DCMs to perform a more 

intensive review, as necessary, of AT 

Persons’ compliance with §§ 1.80 and 

1.81, and clearing member FCMs’ 

compliance with § 1.82, by among other 

factors, helping to ensure that necessary 

books and records are maintained and 

available to a DCM. 

The Commission notes, in particular, 

that DCMs are best positioned to assess 

the measures taken by market 

participants on their exchange, and 

identify outliers that may not have 

implemented adequate measures or 


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505See, e.g., FIA at 4, CME at 27. 

506The Commission is requesting public 

comment in the questions below regarding whether 

it should define ‘‘common beneficial ownership’’ in 

any final rules arising from this NPRM, and if so, 

how the term should be defined. The Commission 

notes in its request for public comment that its 

aggregation rules in § 150.4 are a potential model 

for defining common beneficial ownership in any 

final rules. The Commission is also requesting 

public comment regarding whether the definition of 

common beneficial ownership for purposes of 

§ 40.23 should be left to the individual discretion 

of each DCM. 

507See Section 4c(a) of the CEA, 7 U.S.C. 

6c(a)(2)(A), and Commission regulation 1.38(a). 508See CFTC Glossary, available at: http://

www.cftc.gov/ConsumerProtection/

EducationCenter/CFTCGlossary/index.htm#W. 

particular parameters as compared to 

other market participants. The 

Commission believes that it is in the 

interest of the DCM, as well as all 

market participants trading on the DCM, 

to ensure that no market participants are 

conducting Algorithmic Trading 

without adequate protections in place. 

Some commenters indicated that any 

certification requirements should be 

principles-based.505 The Commission 

agrees that a DCM should have 

discretion in the design and 

implementation of its review program. 

Accordingly, proposed § 40.22 provides 

a general framework for the DCM’s 

review program: e.g., a DCM must 

require the submission of reports by 

June 30 of each year; and the DCM must 

establish a program for effective 

periodic review and evaluation of the 

reports, including measures by the DCM 

reasonably designed to identify and 

remediate any insufficient mechanisms, 

policies and procedures described in 

such reports. Beyond the specific 

requirements set forth in proposed 

§ 40.22, however, each DCM may tailor 

its review program in the manner it 

believes will be most effective to 

understand the measures its market 

participants have taken to address the 

risks of Algorithmic Trading, and 

evaluate whether they are sufficient. 

4. Request for Comments 

85. In lieu of a DCM’s affirmative 

obligation in proposed § 40.22 to review 

AT Person and clearing member FCM 

compliance reports, should DCMs 

instead be permitted to rely on the CEO 

or CCO representations required by 

proposed § 1.83(a)(2)? If so, what events 

in the Algorithmic Trading of an AT 

Person should trigger review obligations 

by the DCM? 

86. Should § 40.22(c) provide more 

specific requirements regarding a DCM’s 

establishment of a program for effective 

periodic review and evaluation of AT 

Person and clearing member FCM 

reports? For example, § 40.22(c) could 

require review at specific intervals (e.g., 

once every two years). Alternatively, 

§ 40.22(c) could provide greater 

discretion to DCMs in establishing their 

programs for the review of reports. 

Please comment on the appropriateness 

of these alternative approaches. 

87. Should § 40.22(e) provide more 

specific requirements regarding the 

triggers for a DCM to review and 

evaluate the books and records of AT 

Persons and clearing member FCMs 

required to be kept pursuant to 

§ 40.22(d)? For example, § 40.22(e) 

could require review at specific 

intervals (e.g., once every two years), or 

it could require review in response to 

specific events related to the 

Algorithmic Trading of AT Persons. 

Please comment on the appropriateness 

of these alternative approaches. 

88. Does § 40.22 leave enough 

discretion to the DCM in determining 

how to design and implement an 

effective compliance review program 

regarding Algorithmic Trading? 

Alternatively, is there any aspect of this 

regulation that should be more specific 

or prescriptive? 

89. Should § 40.22 specifically 

authorize a DCM to establish further 

standards for the organization, method 

of submission, or other attributes of the 

reports described in § 40.22(a)? 

Q. Self-Trade Prevention Tools—§ 40.23 

The Commission understands that 

self-trade activity has grown as trading 

has migrated to an electronic trading 

environment. The Commission has 

determined to propose rules in this area, 

which would address both intentional 

and unintentional self-trading activity, 

with the goal of benefiting market 

participants and enhancing the price 

discovery process. Specifically, the 

Commission is proposing § 40.23(a) to 

require DCMs to implement rules 

reasonably designed to prevent selftrading, excluding certain ‘‘permitted 

self-trades’’ described below. Proposed 

§ 40.23(a) defines self-trading as the 

matching of orders for accounts that 

have common beneficial ownership 506

or are under common control. As 

discussed below, a trade that results 

from the matching of opposing orders 

both generated by a firm or a single or 

commonly owned account does not shift 

risk between different market 

participants. There is a possibility that 

such trades may inaccurately signal the 

level of liquidity in the market and may 

result in a non-bona fide price. Risk 

controls that identify and limit selftrading may result in more accurate 

indications of the level of market 

interest on both sides of the market and 

help ensure arms-length transactions 

that promote effective price discovery. 

The Commission recognizes that there 

could be legitimate reasons for selftrades, and hence is proposing to 

provide DCMs and market participants 

the appropriate flexibility in 

implementation of the self-trade 

prevention tools. DCMs have begun 

offering self-trade prevention tools to 

market participants in recent years, and 

a large fraction of market participants 

have started using these tools. Analysis 

of self-match use at DCMs has found 

that the majority of orders in many 

liquid contracts already make use of this 

tool. While acknowledging the growing 

use of such tools, the Commission is 

interested in strengthening regulatory 

standards to increase transparency and 

ensure more effective limitation of 

unintentional self-trades. By 

standardizing self-trade prevention use 

across firms, it should be easier for the 

marketplace as a whole to differentiate 

permitted self-trading. The 

Commission’s proposed rules on selftrade prevention are also intended as a 

complement to the prohibition under 

the CEA regulations regarding wash 

trades.507 Wash trading has been 

defined as ‘‘entering into, or purporting 

to enter into, transactions to give the 

appearance that purchases and sales 

have been made, without incurring 

market risk or changing the trader’s 

market position.’’ 508 Therefore, 

intentional self-trades could constitute 

wash trades. 

The remainder of this section presents 

Concept Release comments on this 

topic, a Commission analysis of the 

amount of self-trading in the 

marketplace, a description of the 

proposed regulation, a discussion of the 

policy justification for the proposal, and 

a request for comments on the proposal. 

1. Concept Release Comments 

The Concept Release requested 

comment on self-trading controls. The 

Concept Release considered whether 

trading platforms should provide, and 

market participants apply, technologies 

to identify and limit the transmission of 

orders from their systems to a trading 

platform that would result in self-trades. 

Numerous commenters addressed selftrading controls, including the extent of 

their use by industry; the types of trades 

that self-trade controls should prevent; 

and the appropriate design of self-trade 

controls. Commenters disagreed as to 

whether there should be regulation in 

this area, but most either oppose 

regulation or express concern about how 

it would be implemented, for reasons 

similar to those stated by FIA: ‘‘To 


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509FIA at 27–28. 

510FIA at 26; Gelber at 7–9. 

511FIA at 26, 59–60. 

512FIA at 25–27; MFA at 8; Gelber at 7–9; FAIMA 

at 10; IATP at 5. 

513CME at 12. 

514 Id. at 11–12. 

515 ICE at 2. 

516CFE at 6. 

517FIA at 25–27; CME at 10–12; Gelber at 7–9; 

MFA 5, 8; AIMA at 11–12. 

518FIA at 25–27; CME at 11–12; AIMA at 11–12; 

Gelber at 7. 

519OneChicago at 2. 

520 IATP at 5; AFR at 7. 

521SIG at 9. 

522CME at 10. 

523MFA at 8. 

524FIA at 25; Gelber at 9; KCG at 7; AIMA at 11; 

SIG at 9. 

525FIA at 25. 

526See the CME Group Advisory Notice RA 1308- 

5 (Nov. 19, 2013), available at http://

www.cmegroup.com/rulebook/files/cme-groupra1308–5.pdf. The FAQ in the Advisory Notice 

discusses various types of acceptable self-matching 

that would not violate CME Rule 534 (‘‘Wash 

Trades Prohibited’’). 

527FIA at 25; Gelber at 9. 

528SIG at 9. 

529 KCG at 7. 

530FIA at 25–27; Gelber at 7–9; CME at 12; AIMA 

at 10–12; SIG at 9. 

531FIA 25–27; Gelber at 7–9; CME at 12; SIG at 

9. 

532FIA at 27. 

533AIMA at 10–12. 

534SIG at 9. 

535FIA at 25–27; CME at 13, Appendix A–4; 

Gelber at 7–9; KCG at 7; AIMA at 2, 10–11; IATP 

at 5. 

536CME at 13, Appendix A–4; FIA at 25–27. 

537AIMA at 2, 10–11. 

538 Gelber at 7–9; KCG at 7. 

539 Gelber at 7–9. 

540 IATP at 5. 

require the adoption of DCM-based selfmatch prevention as a ‘one-size-fits-all’ 

approach may result in unnecessary 

financial exposure caused by the 

inherent blocking of legitimate 

transactions. . . . The options for this 

type of functionality must be flexible 

enough so that market participants can 

choose the method that best suits their 

business and preserves legitimate 

trading.’’ 509

Commenters indicated that exchangeprovided self-trading controls are 

widely used by market participants.510

The FIA PTG Survey reflected that 25 of 

26 responding firms use such 

controls.511 Both CME and ICE provide 

self-trade prevention controls, a 

capability which was introduced, and 

refined, in recent years.512 CME’s selftrade control is optional rather than 

required. It allows market participants 

to prevent buy and sell orders for the 

same account, or accounts with 

common beneficial ownership, from 

matching with each other. CME noted 

that its self-trade control can be applied 

by market participants at the executing 

firm level or at more granular levels, 

including at an individual user level.513

CME stated that more than 100 firms 

have registered for this control since it 

was launched in June 2013.514 ICE 

noted that its self-trade prevention tool 

is mandatory for proprietary traders 

with DEA.515 Another exchange, CFE, 

commented that it will be employing 

self-trade prevention functionality in 

the near future.516

While FIA believes that DCMs should 

offer self-trading controls, FIA and four 

other commenters (including CME) 

oppose self-trading regulation at this 

time.517 Reasons articulated by FIA and 

other commenters included: The 

technology supporting this risk control 

is not sufficiently developed, although 

industry is already working to improve 

it and is in the best position to do so; 

regulating self-trading controls would 

lock in standards or technology that will 

become obsolete; self-trade controls may 

cause an accumulation of either resting 

orders or new orders, depending on how 

the controls are calibrated, which does 

not advance the regulatory goal of 

protecting the marketplace; and there 

are ways to prevent self-trades without 

using a self-trade prevention tool (i.e., 

trading firms may choose to simply 

modify their trading strategies).518

OneChicago commented that selftrading controls should be implemented 

and calibrated at the clearing firm level, 

not at the DCM level.519

In contrast, IATP and AFR support 

the Commission requiring exchanges 

and market participants to use selftrading controls.520 SIG believes that 

exchanges should offer self-trade 

prevention functionality, with 

parameters set by firms.521

As to cost considerations, CME stated 

that self-trade controls require 

significant investments in technology 

and resources by exchanges and trading 

firms.522 MFA noted that it is more costeffective for exchanges, rather than 

market participants, to develop selftrade controls.523

Finally, comments addressed the 

specific functionality of self-trade 

controls currently used by exchanges 

and firms. For example, five comments 

addressed the type of trades that such 

controls should prevent.524 FIA 

explained that self-trading controls 

should only address trades submitted by 

the same trading desk that are matched 

despite best efforts to avoid self-trading. 

This is different from wash trades, 

which are intentional self-trades that 

Commission and DCM rules already 

effectively address, and bona fide selftrades, which are buy and sell orders for 

accounts with common beneficial 

ownership that are independently 

initiated for legitimate business 

purposes, but which coincidentally 

cross.525 FIA and Gelber stated that 

CME’s November 19, 2013 advisory 

notice on wash trades 526 provides an 

accurate description of when selfmatching is acceptable.527 SIG stated 

that exchanges should focus on trades 

that would create material, not 

immaterial, market misperceptions.528

Finally, KCG stated that it does not 

believe the CFTC needs to prohibit all 

self-trading, but that ‘‘market 

participants must be able to 

demonstrate, through information 

barriers or other effective policies and 

procedures, that any self-trading is 

between unrelated strategies and not 

designed with a manipulative 

intent.’’ 529

Commenters also addressed the 

appropriate level at which self-trade 

controls should be calibrated.530 Several 

stressed that DCMs should allow market 

participants to tailor this control to their 

own needs.531 FIA commented that selftrade controls should be offered at 

varying levels of granularity (i.e., firm 

level, group level, trader ID level, 

customer account level and strategy 

level), and certain levels can be 

combined.532 AIMA stated that selftrade controls set at the firm trader ID 

level could be ‘‘gamed’’ by traders 

creating a shell company under a 

different ID.533 SIG suggested that the 

controls be customizable at the 

‘‘aggregation unit level’’ and ‘‘userdefined tag level.’’ 534

Six comments addressed whether 

exchanges should require market 

participants to use the exchanges’ selftrading controls.535 CME noted that it is 

optional for market participants to use 

its self-trade tools, and FIA supported 

this approach.536 In contrast, AIMA 

suggested mandatory confidential 

flagging of self-trades to the market 

participant, but only optional 

cancellations of orders.537 Gelber and 

KCG support mandatory use at the 

‘‘trader ID’’ level.538 Gelber noted that 

ICE’s controls are mandatory for some 

market participants.539 Finally, IATP 

suggested requiring exchanges to 

provide self-trading controls and apply 

them to all participants and all 

products, arguing that requiring such 

controls for some but not others creates 

arbitrage opportunities.540

Comments also addressed order 

cancellation options in order to prevent 

self-trading, which can include cancel 

resting, cancel new, cancel both, and 

decrement order quantity (canceling the 

smaller order and reducing the larger 


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541FIA at 26; CME at 11. FIA, Gelber and SIG 

support the DCM offering cancellation options to 

the market participant. FIA at 26; Gelber at 7–9; SIG 

at 9. In its comment letter, CME stated that its selfmatch prevention system was, at the time of the 

comment letter, structured to cancel the resting 

order, retaining orders based on more current 

market information. (CME has more recently 

expanded the number of cancellation choices.) The 

benefit of the opposite approach, canceling the 

taking order, is that it favors the priority of orders 

resting in the order book. CME at 11. Similarly, 

MFA stated that it disagrees with the approach of 

canceling the resting order, because it causes a 

participant to lose its resting orders even if the 

orders have been working in the queue. MFA noted 

that other exchanges, such as NYSE Euronext, offer 

options such as cancelling the taking order and 

decrementing order quantity. MFA at 8. AFR 

supports cancellation of the taking order, reasoning 

that the taking order is more likely to be the 

erroneous order. AFR at 7. Finally, AIMA favors 

rejection of both the resting order and the taking 

order. AIMA at 11. 

542Self-trading identified in the Commission’s 

analysis could include trading between accounts 

controlled by separate independent decision 

makers. 

543FIA at 25. See also FIA Guide, supra note 95 

at 13, which describes bona fide and allowable selfmatch trades as ‘‘buy and sell orders for accounts 

with common beneficial ownership that are 

independently initiated for legitimate and separate 

business purposes by independent decision makers 

and which coincidentally cross with each other in 

the competitive market.’’ 544See FIA at 25. 

order by the size of the smaller 

order).541 As described below, the 

Commission’s proposed self-trade 

prevention requirements do not 

mandate a particular technological 

approach, nor do they specify which 

order or set of orders should be canceled 

in order to prevent a self-trade. 

2. Commission Analysis of Amount of 

Self-Trading in the Marketplace 

The pervasive growth of algorithmic 

trading by firms deploying large 

numbers of strategies has likely 

increased the incidence of self-trading 

activity. In order to estimate the 

percentage of self-trading in the 

marketplace, the Commission recently 

reviewed twelve months of trade data 

received from several large DCMs, 

focusing primarily on the most active 

products. Among other findings, the 

Commission learned that intra-firm selftrades, including both proprietary and 

customer trades, can comprise a 

meaningful percentage of daily trading 

activity in individual futures 

contracts.542 For example, in February 

2015 intra-firm self-trades in one 

examined futures contract were almost 

10 percent of all trades in that contract, 

increasing to almost 15 percent on 

individual days. Self-trade rates for a 

few other contracts were around 5 

percent of total activity. The 

Commission found similar patterns at 

individual firm levels, with cumulative 

self-trade volumes at times in the 

millions of contracts for some market 

participants over the course of the 12- 

month sample period. The average size 

of a firm’s self-trades ranged from 

approximately two contracts per trade to 

over two thousand contracts per trade. 

3. Description of Regulation 

The Commission is proposing new 

requirements under § 40.23 that would 

require DCMs to apply, or provide and 

require the use of, tools reasonably 

designed to prevent self-trading. 

Proposed § 40.23 defines self-trading for 

purposes of this regulation as the 

matching of orders for accounts that 

have common beneficial ownership or 

are under common control. These 

requirements are intended to prevent 

self-trading, while still allowing what 

FIA has characterized as ‘‘bona fide and 

desirable self-match trades,’’ i.e. buy 

and sell orders for accounts with 

common beneficial ownership that are 

independently initiated for legitimate 

business purposes, but which 

coincidentally cross.543 While the 

proposed rules contain exceptions for 

bona fide self-match trades (described in 

§ 40.23(b)), they are intended to address 

all unintentional self-trading, and do 

not include a de minimis exception for 

a certain percentage of unintentional 

self-trading. In addition, the proposed 

rules would provide for an important 

new element of transparency around 

bona fide self-match trades to furnish all 

market participants with greater 

information regarding the markets on 

which they trade. 

Description of § 40.23(a). Regulation 

40.23(a) would require a DCM to 

implement rules reasonably designed to 

prevent self-trading by market 

participants, except as specified in 

paragraph (b). The regulation defines 

‘‘self-trading,’’ for purposes of § 40.23, 

as the matching of orders for accounts 

that have common beneficial ownership 

or are under common control. 

Regulation 40.23(a) would require that a 

DCM shall either apply, or provide and 

require the use of, self-trade prevention 

tools that are reasonably designed to 

prevent self-trading and are applicable 

to all orders on its electronic trade 

matching platform. If a DCM does not 

implement and apply self-trade 

prevention tools, then it must provide 

such tools to its market participants and 

require all market participants to use the 

tools. For purposes of complying with 

the requirements of proposed § 40.23, a 

DCM could either determine for itself 

which accounts should be prohibited 

from trading with each other, or require 

market participants to identify to the 

DCM which accounts should be 

prohibited from trading with each other. 

The proposed regulations allow DCMs 

to exercise discretion in the design and 

implementation of self-trade prevention 

tools, in response to Concept Release 

commenter concerns that the technology 

supporting this control is still being 

developed, and overly prescriptive 

regulations in this area may lock in 

standards or technology that will 

become obsolete. 

Description of § 40.23(b). The 

requirements of proposed § 40.23(a) are 

subject to the proviso in § 40.23(b) that 

a DCM may, in its discretion, implement 

rules that permit a self-trade resulting 

from the matching of orders for accounts 

with common beneficial ownership 

where such orders are initiated by 

independent decision makers. A DCM 

could, through its rules, further define 

for its market participants ‘‘independent 

decision makers.’’ This exception is 

closely based on FIA’s comment letter 

description of how a bona fide self-trade 

that should be permitted to occur.544

The Commission considered FIA’s 

concept of permissible self-trading to be 

a reasonable one, which would be easily 

understood by exchanges and market 

participants. In addition to the foregoing 

exception relating to common beneficial 

ownership, § 40.23(b) allows a DCM to 

permit a self-trade resulting from the 

matching of orders for accounts under 

common control where such orders 

comply with the DCM’s cross-trade, 

minimum exposure requirements or 

similar rules, and are for accounts that 

are not under common beneficial 

ownership. 

Description of § 40.23(c). Under 

proposed § 40.23(c), a DCM must 

require market participants to receive 

approval from the DCM to forego selftrade prevention tools with respect to 

specific accounts under common 

beneficial ownership or control, on the 

basis that they meet the criteria of 

paragraph (b). The DCM must require 

that such approval request be provided 

to it by a compliance officer or senior 

officer of the market participant. The 

Commission emphasizes that the 

approval request to not apply self-trade 

prevention tools to certain orders 

should not be made by an individual 

trader or other non-management or more 

junior employee of the trading firm. 

Market participants must withdraw or 

amend an approval request if any 

change occurs that would cause the 

information provided in such approval 

request to be no longer accurate or 

complete. The Commission notes that 

any approval request submitted to the 

DCM would be subject to section 9(a)(4) 


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545See, e.g., CME at 11–12; ICE at 2. 

546See, e.g., FIA at 26; Gelber at 7–9; CME at 11– 

12; ICE at 2. 

547See FINRA, ‘‘Regulatory Notice 14–28: Self 

Trades; SEC Approves FINRA Rule Concerning 

Self-Trades ’’ (June 2014), available at http://

www.finra.org/sites/default/files/NoticeDocument/

p540972.pdf. 

548See FIA Guide, supra note 95 at 13. 

549 Id. 

of the Act, 7 U.S.C. 13(a)(4) (2012), 

which prohibits, inter alia, making false, 

fictitious, or fraudulent statements to a 

registered entity. 

Description of § 40.23(d). Finally, 

proposed § 40.23(d) would require that 

for each product and expiration month 

traded on a DCM in the previous 

quarter, the DCM must prominently 

display on its Web site the following 

information: (i) The percentage of trades 

in such product including all expiration 

months that represent self-trading 

approved (pursuant to paragraph (c) of 

§ 40.23) by the DCM, expressed as a 

percentage of all trades in such product 

and expiration month; (ii) the 

percentage of volume of trading in such 

product including all expiration months 

that represents self-trading approved 

(pursuant to paragraph (c) of § 40.23) by 

the DCM, expressed as a percentage of 

all volume in such product and 

expiration month; and (iii) the ratio of 

orders in such product and expiration 

month whose matching was prevented 

by the self-trade prevention tools 

described in paragraph (a) of § 40.23, 

expressed as a ratio of all trades in such 

product and expiration month. The 

Commission emphasizes that the 

‘‘prominent display’’ of information by 

a DCM precludes such DCM from 

placing information required by this 

rule behind registration, log in, user 

name, password or other walls on the 

DCM’s Web site. 

4. Policy Discussion 

The Commission understands that for 

various reasons, firms might operate 

multiple algorithms, each following a 

different trading strategy, but 

transacting in the same instrument/

futures contract. This can cause buy and 

sell orders for the same instrument to be 

generated at the same instant by 

different algorithms, which in turn can 

get matched with each other as selftrades. Certain firms might choose to 

prevent these self-trades from occurring, 

or limit the extent of self-trades. They 

could choose to do this by building 

tools that scan all orders being 

generated from within the firm and stop 

those that could potentially result in 

self-trades. But there are challenges in 

building efficient firm-level solutions, 

especially in modern low latency 

markets. In response, DCMs have 

implemented self-trade prevention tools 

to help firms manage and limit the 

extent of self-trades that would 

otherwise be generated by these 

algorithms. These trading system-level 

solutions appear to be more efficient in 

helping firms manage their self-trade 

activity. 

The Commission has included selftrade prevention requirements in 

Regulation AT to ensure that there are 

regulatory standards to more effectively 

and fairly limit unintentional selftrading across Commission-regulated 

markets, aiding in the risk management 

and trading efficiency of individual 

firms. 

In addition, while existing 

Commission regulations address market 

manipulation and wash sales, these 

types of violative behavior require some 

level of intent. Therefore, the 

Commission has determined to propose 

regulations in the area of self-trading 

that address both matching of orders for 

accounts that have common beneficial 

ownership or are under common 

control, independent of intent. 

The proposed regulations are 

intended to take into account Concept 

Release comments advising that the 

Commission should not be overly 

prescriptive in requiring specific types 

of self-trade prevention tools, or specific 

settings or controls in connection with 

such tools, because such tools are still 

technologically evolving. Furthermore, 

the Commission agrees with comments 

stating that exchanges are in the 

position, from a technology standpoint, 

to develop these types of controls. 

Accordingly, the Commission proposes 

to require the use of self-trade 

prevention tools in proposed § 40.23, 

but allow exchanges and market 

participants the discretion to tailor the 

design of such tools and how to most 

effectively calibrate them in order to 

prevent unintentional self-matching. 

The Commission believes that the 

requirements of proposed § 40.23 are 

generally consistent with how 

exchange-provided self-trade prevention 

tools currently operate, as indicated by 

comment letters.545 The proposed 

regulations would also require DCMs to 

publish statistics on their Web site 

regarding self-trading that they have 

both authorized and prevented on their 

platform. The Commission is proposing 

this Web site reporting requirement 

because it understands that the design 

of self-trade prevention tools may vary 

among DCMs. These statistics will serve 

a critical purpose in disclosing to 

market participants the extent of selftrading that occurs in each product. The 

Commission believes that such 

transparency is a key element of the 

proposed rules as it will help furnish all 

market participants with better 

information regarding the markets in 

which they trade. 

While some commenters to the 

Concept Release were not supportive of 

Commission action in this area, the 

commenters also indicated that selftrade prevention tools are already 

widely implemented in industry.546

Moreover, FINRA Rules already address 

self-trade prevention. In June 2014, 

FINRA published a regulatory notice 

stating that the SEC had approved new 

supplementary material to FINRA Rule 

5210 (Publications of Transactions and 

Quotations) to address transactions in a 

security resulting from the 

unintentional interaction of orders 

originating from the same firm that 

involve no change in the beneficial 

ownership of the security (selftrades).547 Effective August 25, 2014, 

firms must have policies and procedures 

in place that are reasonably designed to 

review their trading activity for, and 

prevent, a pattern or practice of selftrades resulting from orders originating 

from a single algorithm or trading desk, 

or related algorithms or trading desks. 

In addition, the FIA Guide sets forth 

guidelines for self-trade prevention, and 

recommends that exchanges should 

offer participants a selection of selftrade tools to allow market participants 

to tailor self-trade prevention to their 

individual needs by offering various 

options (e.g., cancel resting, cancel new, 

cancel both, and decrement order size) 

and various levels of granularity (e.g., 

firm level, group level, trader ID level, 

customer account level and strategy 

level).548 The FIA Guide recommends 

that the use of such self-trade tools by 

market participants should remain 

optional.549 The new Regulation AT 

requirements, by contrast, would make 

use of exchange-provided self-trade 

prevention tools mandatory by market 

participants. 

5. Request for Comments 

90. The Commission seeks to require 

self-trade prevention tools that screen 

out unintentional self-trading, while 

permitting bona-fide self-matched trades 

that are undertaken for legitimate 

business purposes. Under the 

regulations proposed above, DCMs shall 

implement rules reasonably designed to 

prevent self-trading (‘‘the matching of 

orders for accounts that have common 

beneficial ownership or are under 

common control’’), but DCMs may in 

their discretion implement rules that 

permit ‘‘the matching of orders for 


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550See FIA Guide, supra note 95 at 13 (discussing 

balance between flexibility and complexity with 

respect to self-trade prevention tools). 

accounts with common beneficial 

ownership where such orders are 

initiated by independent decision 

makers.’’ 

a. Do these standards accomplish the 

goal of preventing only unintentional 

self-trading, or would other standards be 

more effective in accomplishing this 

goal? For example, should the 

Commission consider adopting in any 

final rules arising from this NPRM an 

alternative requirement modeled on 

FINRA Rule 5210 and require market 

participants to implement policies and 

procedures to review their trading 

activity for, and a prevent a pattern of, 

self-trades? 

b. While the regulations contain 

exceptions for bona fide self-match 

trades (described in § 40.23(b)), the 

regulations are intended to prevent all 

unintentional self-trading, and do not 

include a de minimis exception for a 

certain percentage of unintentional selftrading. Should the regulations permit a 

certain de minimis amount of 

unintentional self-trading, and if so, 

what amount should be permitted (e.g., 

as a percentage of monthly trading 

volume)? 

c. The following terms are used in 

proposed § 40.23(a) and (b): (1) Selftrading, (2) common beneficial 

ownership, (3) independent decision 

makers, and (4) common control. Do any 

of these terms require further definition? 

If so, how should they be defined? 

Should any alternatives be used and, if 

so, how should such substitute terms be 

defined? 

d. With respect to ‘‘common 

beneficial ownership,’’ the Commission 

requests comment on the minimum 

degree of ownership in an account that 

should trigger a determination that such 

account is under common beneficial 

ownership. For example, should an 

account be deemed to be under common 

beneficial ownership between two 

unrelated persons if each person 

directly or indirectly has a 10% or more 

ownership or equity interest in such 

account? The Commission refers 

commenters to the aggregation rules in 

part 150 of its regulations, including 

specifically § 150.4, and requests 

comment on a potential Commission 

definition of common beneficial 

ownership that is modeled on § 150.4. 

e. The Commission also requests 

comment on whether ‘‘common 

beneficial ownership’’ should be 

defined in any final rules arising from 

this NPRM, or whether such definition 

should be left to each DCM with respect 

to its program for implementing 

proposed § 40.23. 

91. Are there any other types of selftrading that should be permitted in 

addition to the exceptions permitted in 

§ 40.23(b)(1) and (2)? If so, please 

describe such other types of acceptable 

self-trading and explain why they 

should be permitted. 

92. Proposed § 40.23 provides that 

DCMs may comply with the 

requirement to apply, or provide and 

require the use of, self-trade prevention 

tools by requiring market participants to 

identify to the DCM which accounts 

should be prohibited from trading with 

each other. With respect to this account 

identification process, the Commission’s 

principal goal is to prevent 

unintentional self-trading; the 

Commission does not have a specific 

interest in regulating the manner by 

which market participants identify to 

DCMs the account that should be 

prohibited from trading from each other, 

so long as this goal is met. Should any 

other identification methods be 

permitted in § 40.23? For example, 

please comment on whether the 

opposite approach is preferable: market 

participants would identify to DCMs the 

accounts that should be permitted to 

trade with each other (as opposed to 

those accounts that should be prevented 

from trading with each other). 

93. The Commission believes that its 

requirements concerning self-trade 

prevention tools must strike the 

appropriate balance between flexibility 

(allowing market participants with 

diverse trading operations and strategies 

the discretion in implementation so as 

effectively prevent only unintentional 

self-trades) and simplicity (a variety of 

design and implementation options may 

render this control too complex to be 

effective).550 Does the Commission 

allow sufficient discretion to exchanges 

and market participants in the design 

and implementation of self-trade 

prevention tools? Is there any area 

where the Commission should be more 

prescriptive? The Commission is 

particularly interested in whether there 

is a particular level at which it should 

require implementation of self-trade 

prevention tools, i.e., if the tools must 

prevent matching of orders from the 

same trading firm, the same trader, the 

same trading algorithm, or some other 

level. 

94. Proposed § 40.23(a) would require 

DCMs to either apply, or provide and 

require the use of, self-trade prevention 

tools. Please comment whether 

§ 40.23(a) should, in addition, permit 

market participants to use their own 

self-trade prevention tools to meet the 

requirements of proposed § 40.23(a), 

and if so, what additional regulations 

would ensure that DCMs are able to: 

Ensure that such tools are comparable to 

DCM-provided tools; monitor the 

performance of such tools; and 

otherwise review such tools and ensure 

that they are sufficiently rigorous to 

meet the requirements of § 40.23. 

95. Is it appropriate to require 

implementation of self-trade prevention 

tools with respect to all orders? Should 

such controls be mandatory for only a 

particular subset of orders, i.e., orders 

from AT Persons or orders submitted 

through DEA? 

96. Please comment on the 

requirement that DCMs disclose selftrade statistics. Is the data required to be 

disclosed appropriate? Is there any other 

category of self-trade data that DCMs 

should be required to disclose? 

97. Should DCMs be required to 

disclose the amount of unintentional 

self-trading that occurs each month, 

alongside the self-trade statistics 

required to be published under 

proposed § 40.23(d)? 

98. As noted above, the Commission 

understands that there is some potential 

for self-trade prevention tools to be used 

for wrongful activity that may include 

disruptive trading or other violations of 

the Act or Commission regulations on 

DCMs. Are there ways to design selftrade prevention tools so that they do 

not facilitate disruptive trading (such as 

spoofing) or other violations of the Act 

or Commission regulations on DCMs? 

Are additional regulations warranted to 

ensure that such tools are not used to 

facilitate such activities? 

R. DCM Market Maker and Trading 

Incentive Programs—§§ 40.25–40.28 

Proposed §§ 40.25–40.28 would 

require DCMs to provide additional 

public information regarding their 

market maker and trading incentive 

programs, restrict certain types of 

payments by DCMs in connection with 

such programs, and require DCMs to 

perform surveillance of such programs 

to prevent abusive practices. The 

remainder of this section presents a 

description of the proposed regulation, 

a discussion of the policy justification 

for the proposal, and a request for 

comments on the proposal. 

1. Policy Discussion 

Although not discussed in the 

Concept Release, the Commission has 

determined to address in Regulation AT 

certain aspects of DCM market maker 

and trading incentive programs that it 

believes are particularly relevant in the 


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551The Commission notes that ESMA’s 2015 

Final Draft Regulatory Standards address market 

maker schemes. The standards address the 

circumstances under which an investment firm 

must enter into a market making agreement with a 

trading venue, and the content that should be 

included in such an agreement. See ESMA 

September 2015 Final Draft Standards Report 

Annex 1, supra note 80 at 279–80. 

552See Section IV(Q) above for a discussion of 

self-trading and proposed § 40.23. 

553 In the Final Rule for Provisions Common to 

Registered Entities, the Commission stated with 

respect to market maker and trading incentive 

programs, ‘‘The Commission continues to view 

such programs as ‘‘agreements * * * 

corresponding’’ to a ‘‘trading protocol’’ within the 

§ 40.1 definition of ‘‘rule’’ and, as such, all market 

maker and trading incentive programs must be 

submitted to the Commission in accordance with 

procedures established in part 40.’’ In this Final 

Rule, the Commission also stated, specifically with 

respect to DCMs, that ‘‘[a] DCM’s rules 

implementing market maker and trading incentive 

programs fall within the Commission’s oversight 

authority. Indeed, a number of core principles 

touch upon trading issues that may be implicated 

by the design of such programs. Core Principle 9, 

for example, establishes the Commission’s 

framework for regulating the execution of 

transactions, requiring DCMs . . . to provide a 

competitive, open, and efficient market and 

mechanism for execution. The newly-amended Core 

Principle 12 also requires DCMs to establish and 

enforce rules to protect markets and market 

participants from abusive practices and to promote 

fair and equitable trading on designated contract 

markets. In addition, market maker and trading 

incentive programs frequently touch upon Core 

Principle 19, which requires that DCMs avoid 

adopting any rules or taking any actions that result 

in unreasonable restraints of trade.’’ Final Rule, 

Provisions Common to Registered Entities, 76 FR 

44776, 44777–8 (July 27, 2011). 

context of automated trading.551 Formal 

market making and incentive programs 

were not common in the days of pit 

trading. In the modern trading 

environment, DCM trading incentive 

programs (which may also be called a 

liquidity provider program) typically 

compensate one or more market 

participants with financial or nonfinancial incentives or benefits for 

meeting certain volume thresholds or 

providing liquidity. A market maker 

program (which may also be called, for 

example, a market specialist, designated 

market maker, lead market maker, or 

liquidity provider program) is a more 

focused offering that involves a 

contractual agreement between the DCM 

and a market participant. It typically 

compensates one or more market 

participants with financial or nonfinancial incentives or benefits for 

fulfilling certain affirmative obligations 

in a particular product or products, such 

as maintaining two way prices and 

volumes or a pre-determined minimum 

bid/ask spread for a specified period of 

the trading day. 

The number of such programs selfcertified to the Commission has risen 

sharply in recent years, as has the 

complexity of the programs and size of 

the incentives. In 2010, 56 market maker 

and incentive programs were selfcertified by DCMs; in 2013, DCMs had 

self-certified 341 programs, an increase 

by over 600 percent compared to the 

number of programs self-certified by 

DCMs in 2010. In 2012, nearly every 

contract at one DCM was part of a 

market maker or incentive program, 

including highly liquid contracts. 

The Commission understands that 

DCMs have launched market making 

and other incentive programs to 

encourage liquidity provisioning and 

order flow to their electronic trading 

platforms. While the Commission does 

not object to such goals, the 

Commission’s proposed regulations in 

§§ 40.25–40.28 reflect its concern that 

market maker and trading incentive 

programs could have the potential to 

spur market participants to trade in 

ways designed to collect program 

benefits, independently of any 

contribution they may be making to 

liquidity or price discovery. Such 

practices may potentially also lead to 

abusive trading practices in violation of 

DCM and Commission rules. Notably for 

purposes of Regulation AT, market 

participants using ATSs can magnify 

these concerns in several respects. First, 

the automation and speed of ATSs can 

allow market participants to quickly 

reach market-maker or trading incentive 

program thresholds, depending on the 

liquidity of a market and threshold 

levels. Second, the trading strategies 

pursued through ATSs can sometimes 

result in a large number of trades 

between the same ATS or between two 

or more ATSs owned or controlled by 

the same market participants. In this 

regard, the Commission is also 

proposing new § 40.23 to help prevent 

self-trading on DCMs, and provide 

market participants with greater 

transparency around DCM depth and 

liquidity when self-trading does 

occur.552

Proposed §§ 40.25–40.28 will further 

the Commission’s policy objectives in 

three key areas: (1) Transparency; (2) 

market integrity; and (3) effective selfregulation by all DCMs. The proposed 

regulations would further transparency 

through proposed §§ 40.25 and 40.26, 

which would require greater disclosure 

of information to the public and to the 

Commission regarding market maker 

and trading incentive programs. 

Together with proposed amendments to 

the definition of ‘‘rule’’ in § 40.1(i) to 

explicitly include market maker and 

trading incentive programs, the 

proposed regulations would also help 

eliminate any potential ambiguity that 

may exist regarding the Commission’s 

authority over such programs.553

Proposed § 40.25 will enhance the types 

of information that DCMs should expect 

to provide the Commission when 

requesting approval or self-certifying 

market-maker or trading incentive 

programs, and will also require that 

information regarding market-maker and 

trading incentive programs be easily 

located on a DCM’s Web site. 

The Commission notes that in June 

2012 it adopted core principles and 

final rules modernizing the regulatory 

regime applicable to all DCMs (‘‘DCM 

Final Rules’’). The DCM Final Rules 

emphasized DCMs’ obligations as the 

front-line regulators of their markets, 

including extensive trade practice and 

market surveillance responsibilities. In 

addition, the Commission codified new 

requirements that a DCM offer its 

‘‘members [and] persons with trading 

privileges . . . with impartial access to 

its markets and services,’’ including: (1) 

‘‘Access criteria that are impartial, 

transparent and applied in a nondiscriminatory manner’’ and (2) 

‘‘comparable fee structures . . . for 

equal access to, or services from’’ the 

DCM. Taken together, proposed 

§§ 40.25–40.28 will facilitate the 

Commission’s oversight of DCMs’ 

market maker and trading incentive 

programs, and will also help the 

Commission ensure that market maker 

and trading incentive programs are in 

compliance with Commission rules 

regarding trade practice and market 

surveillance and impartial access 

requirements. 

Importantly, the proposed regulations 

would promote market integrity by 

requiring in proposed § 40.27(a) that 

DCMs implement policies and 

procedures reasonably designed to 

prevent payment of market maker or 

trading incentive program benefits for 

self-trades. In this regard, the proposed 

regulations are designed to ensure that 

market maker or trading incentive 

programs do not incentivize abusive, 

manipulative, or disruptive trading 

practices, and also do not encourage or 

facilitate behavior that distorts markets 

and give the appearance of false market 

depth. Proposed § 40.28 clarifies DCMs’ 

surveillance obligations regarding 

market maker or trading incentive 

programs and their participants. 

Separately, the Commission believes 

that proposed §§ 40.25–40.28 will also 

provide DCMs and market participants 

with greater certainty as to what types 

of trading incentive and market maker 

programs are inappropriate. The 

proposed regulations are described in 

detail below. The proposed rules will 


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554The Commission is cognizant that a DCM may 

consider certain information required by proposed 

§ 40.25(a) to be non-public. In this regard, the 

Commission notes that § 40.8 of its existing 

regulations provides a mechanism for registered 

entities to request confidential treatment when 

submitting rule filings pursuant to §§ 40.5 or 40.6. 

Among other requirements, a registered entity must 

file a ‘‘detailed written justification’’ for its 

confidential treatment request. Regulation 40.8 

remains available to DCMs for any § 40.25(a) filings 

that may be required in the future. See 17 CFR 40.8; 

see also 17 CFR 145.9. 

555Commission staff has historically required 

enhanced DCM surveillance procedures when a 

DCM market maker is operated by an affiliate of the 

DCM. Proposed § 40.25(a)(9) will assist the 

Commission in identifying potential conflicts of 

interest between a DCM, its market makers, and 

participants in market maker or trading incentive 

programs, and also assist the Commission in 

promoting appropriate surveillance in such 

circumstances. 

556The Commission notes that proposed 

§ 40.27(a) prohibits payments for trades between 

accounts (i) identified to the DCM as under 

common beneficial ownership or (ii) known to the 

DCM as under common ownership. This distinction 

reflects that the Commission’s belief that DCMs may 

not always have beneficial ownership information 

unless it has been provided to them, pursuant for 

example to proposed § 40.23. 

work in conjunction with the proposed 

amendments to the definition of ‘‘rule’’ 

in proposed § 40.1(i) to explicitly 

include market maker and trading 

incentive programs. 

In sum, the Commission’s proposed 

amendments to § 40.1(i) and new 

§§ 40.25–40.28 will increase 

transparency around DCM marketmaker and trading incentive programs, 

underline existing regulatory 

expectations, and introduce basic 

safeguards in the conduct of such 

programs. The proposed regulations 

would make clear that market-maker 

and trading incentive programs are 

‘‘rules’’ for purposes of part 40, and 

establish information and disclosure 

requirements when DCMs request 

Commission approval or self-certify new 

rules pursuant to part 40. They would 

also make clear that DCMs’ existing 

surveillance responsibilities in part 38 

apply equally to market-maker and 

trading incentive programs. Finally, the 

proposed regulations would codify the 

Commission’s expectation that DCM 

market-maker and trading incentive 

programs should not provide payments 

or incentives for market-maker or 

trading activity between accounts under 

common ownership. 

2. Description of Regulations 

Proposed §§ 40.25–40.28 would 

require DCMs to provide additional 

public information regarding their 

market maker and trading incentive 

programs. Proposed § 40.25(a) would 

require that, when submitting a rule 

regarding a market maker or trading 

incentive program pursuant to § 40.5 or 

§ 40.6, a DCM must, in addition to 

information required by such sections, 

include specific additional information 

in its public rule filing.554 Additional 

information to be provided would 

include: (1) The name of the market 

maker program or trading incentive 

program, the date on which it will 

begin, and the date on which it will 

terminate (if applicable); (2) an 

explanation of the specific purpose for 

the program; (3) a list of the product(s) 

the trading of which is eligible for 

benefits under the market maker or 

trading incentive program, and list of 

the potential service(s) rendered by a 

market participant to which the market 

maker or trading incentive program 

applies (e.g., trading at certain hours; 

trading originating from certain 

geographic zones; trading originating 

with certain types or categories or 

market participants; or the bid/ask 

spread to be maintained by a market 

participant); (4) a description of any 

eligibility criteria or categories of market 

participants defining who may 

participate in the program; (5) for any 

market maker or trading incentive 

program that is not open to all market 

participants, an explanation of why the 

program is limited to the chosen 

eligibility criteria or categories of market 

participants, and an explanation of how 

such limitation complies with the 

impartial access and comparable fee 

structure requirements of § 38.151(b) for 

DCMs; (6) an explanation of how 

persons eligible for the market maker or 

trading incentive program may apply to 

participate, and how eligibility will be 

evaluated by the DCM; (7) a description 

of any payments, incentives, discounts, 

considerations, inducements or other 

benefits that program participants may 

receive, including any non-financial 

incentives (non-financial incentives 

may include, for example, enhanced 

trading priorities or preferential access 

to market data, including order and 

trade data); (8) a description of the 

obligations, benchmarks, or other 

measures that a participant in a market 

maker or trading incentive program 

must meet to receive the benefits 

described in paragraph (a)(7) of this 

section; and (9) a description of any 

legal affiliation between the DCM and 

any entity acting as a market maker or 

participating in a market maker or 

trading incentive program.555 Proposed 

§ 40.25(b) would require that, in 

addition to any public notice required 

pursuant to part 40 (including without 

limitation the requirements of 

§ 40.5(a)(6) and § 40.6(a)(2)), a DCM 

must ensure that the information 

required by § 40.25(a)(1)–(8) is easily 

located on its public Web site during the 

lifetime of the market maker or trading 

incentive program, that is, from the time 

that the DCM begins accepting 

participants in the program through the 

time the program ceases operation. 

Proposed § 40.25(c) would require a 

DCM to notify the Commission upon the 

termination of a market maker or trading 

incentive program when such program 

terminates prior to the date previously 

notified the Commission. Any extension 

or renewal of a market maker or trading 

incentive program beyond its original 

termination date would require a new 

rule filing pursuant to this part. 

Proposed § 40.26 would require that, 

upon request by the Commission or the 

Director of the Division of Market 

Oversight, a DCM must provide such 

information and data as may be 

requested regarding participation in 

market maker or trading incentive 

programs offered by the DCM, including 

but not limited to, individual program 

agreements, names of program 

participants, benchmarks achieved by 

program participants, and payments or 

other benefits conferred upon program 

participants. 

Proposed § 40.27(a) would require a 

DCM to implement policies and 

procedures reasonably designed to 

prevent payment of market maker or 

trading incentive program benefits, 

including but not limited to payments, 

discounts, or other considerations, for 

trades between accounts that are: (1) 

Identified to the DCM as under common 

beneficial ownership pursuant to the 

approval process described in § 40.23(c); 

or (2) otherwise known to the DCM as 

under common ownership.556

Finally, proposed § 40.28 would 

require that a DCM, consistent with its 

obligations pursuant to subpart C of part 

38, must review all benefits accorded to 

participants in market maker and 

trading incentive programs, including 

but not limited to payments, discounts, 

or other considerations, to ensure that 

such benefits are not earned through 

abusive practices. The Commission 

notes that such determination is not 

intended as a substitute for DCMs’ trade 

practice surveillance, market 

surveillance, and other surveillance 

obligations with respect to all trading. 

3. Request for Comments 

99. To what extent do market 

participants currently trade in ways 

designed primarily to collect market 

maker or trading incentive program 

benefits, rather than for risk 

management purposes? 


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100. To what extent do that market 

maker and trading incentive programs 

currently provide benefits for selftrades? To what extent do market 

participants collect such benefits for 

self-trades? 

101. The Commission requests 

comment regarding whether the 

information proposed to be collected in 

§ 40.25 would be sufficient for it to 

determine whether a DCM’s marketmaker or trading incentive program 

complies with the impartial access 

requirements of § 38.151(b). If 

additional or different information 

would be helpful, please identify such 

information. 

102. The Commission requests 

comment regarding whether DCMs 

should be required to maintain on their 

public Web sites the information 

required by proposed § 40.25(a) and (b) 

for an additional period beyond the end 

of the market maker or trading incentive 

program. The Commission may 

determine to include in any final rules 

arising from this NPRM a requirement 

that such information remain publicly 

available pursuant to proposed 

§ 40.25(b) for an additional period up to 

six months following the end of a 

market maker or trading incentive 

program. 

103. The Commission requests 

comment regarding whether the text of 

proposed § 40.27(a) identifies with 

sufficient particularity the types of 

trades that are not eligible for payments 

or benefits pursuant to a DCM marketmaker or trading incentive program. 

What amendments, if any, are necessary 

to clearly identify trades that are not 

eligible? 

104. Section 40.27(a) provides that 

DCMs shall implement policies and 

procedures that are reasonably designed 

to prevent the payment of market-maker 

or trading incentive program benefits for 

trades between accounts under common 

ownership. Are there any other types of 

trades or circumstances under which 

the Commission should also prohibit or 

limit DCM market-maker or trading 

incentive program benefits? 

105. The Commission is proposing in 

§ 40.27(a) certain requirements 

regarding DCM payments associated 

with market maker and trading 

incentive programs. Please address 

whether the proposed rules will 

diminish DCMs’ ability to compete or 

build liquidity by using market maker or 

trading incentive programs. Does any 

DCM consider it appropriate to provide 

market maker or trading incentive 

program benefits for trades between 

accounts known to be under common 

beneficial ownership? 

106. In any final rules arising from 

this NPRM, should the Commission also 

prohibit DCMs from providing trading 

incentive program benefits where such 

benefits on a per-trade basis are greater 

than the fees charged per trade by such 

DCMs and its affiliated DCO (if 

applicable)? The Commission also 

specifically requests comment on the 

extent, if any, to which one or more 

DCMs engage in this practice. 

107. Proposed § 40.25(b) imposes 

certain transparency requirements with 

respect to both market maker and 

trading incentive programs. The 

Commission requests public comment 

regarding: 

a. The most appropriate place or 

manner for a DCM to disclose the 

information required by proposed 

§ 40.25(b); 

b. The benefits or any harm that may 

result from such transparency, 

including any anti-competitive effect or 

pro-competitive effect among DCMs or 

market participants; 

c. Whether transparency as proposed 

in § 40.25(b) is equally appropriate for 

both market maker programs and 

trading incentive programs, or are the 

proposed requirements more or less 

appropriate for one type of program over 

the other? 

d. Whether any of the enumerated 

items required to be posted on a DCM’s 

public Web site pursuant to proposed 

§ 40.25(b) could reasonably be 

considered confidential information that 

should not be available to the public, 

and if so, what process should be 

available for a DCM to request from the 

Commission an exemption from the 

requirements of proposed § 40.25(b) for 

that specific enumerated item? 

V. Related Matters 

A. Calculation of Number of Persons 

Subject to Regulations 

AT Persons. The Related Matters 

discussion below includes a number of 

hourly burden estimates and cost 

estimates for persons subject to new or 

revised regulations under Regulation 

AT. In order to estimate the number of 

AT Persons, the Commission used a 

sample of orders sent to DCMs. This 

data includes new orders, modifications 

to orders, and cancellations of the same. 

Of those available to the Commission, 

this data set is the one most closely 

related to the requirements included in 

the proposed rules. It includes the data 

elements potentially generated by an 

algorithm, often routed through a 

clearing member, and accepted by the 

matching engine for execution. The data 

set includes identifiers for the firm that 

generated and/or routed the order to the 

exchange, and indicators of whether the 

order is associated to an automated 

system. Using this participant-identified 

data, the Commission estimated the 

number of unique firms actively sending 

in algorithmic orders to the DCMs, 

making them potentially subject to 

requirements of AT Persons. 

Some of the firms included in this 

count, although they use automated 

systems, may not fully satisfy the 

requirements for an AT Person, possibly 

making the current estimate higher than 

the actual number of AT Persons. For 

example, firms identified in the data set 

as submitting algorithmic orders may 

not be required to register with the 

Commission under current or proposed 

rules and thus would not be AT Persons 

(e.g., registration triggers under 

proposed § 1.3(x)(3)(ii) include a DEA 

component in addition to an 

Algorithmic Trading component). 

However, because the Commission does 

not historically receive the complete 

order book audit trail, the estimate by 

necessity only used a subset of all 

orders sent into the DCMs. To generate 

an accurate estimate of automated order 

activity, the estimate included many of 

the most active products on the DCMs, 

where participant diversity would be 

greatest. This analysis resulted in 

approximately 350 potential AT 

Persons. To further address AT Persons 

that may not be identified in its data set, 

the Commission increased its finding of 

approximately 350 potential AT Persons 

by 20 percent, yielding a total of 420 

potential AT Persons subject to the rules 

proposed herein. The Commission 

understands and acknowledges that this 

could lead to estimates which are 

incomplete, and welcomes any 

comments which might provide a more 

complete and/or more accurate count of 

AT Persons. This estimate of 420 AT 

Persons is used for purposes of the 

calculations in the Related Matters 

discussion below. 

Floor Traders (A Component of AT 

Persons). As noted in section IV(E) 

above, the Commission proposes to 

require the registration of proprietary 

traders using DEA for Algorithmic 

Trading on a DCM. In order to achieve 

registration, the Commission proposes 

amending the definition of ‘‘Floor 

trader’’ in Commission Regulation 

1.3(x). Newly registered floor traders 

would be included in the definition of 

AT Persons. In order to estimate the 

number of these firms, the Commission 

made use of reference information for 

the connection methods used by active 

futures trading firms. These data files 

include information about the 

characteristics of the connection, 

including the location where orders are 


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557See CFTC, Financial Data for FCMs, available 

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

DataforFCMs/index.htm. 558See CFTC, DCM Industry Filings, available at 

http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=Trading

Organizations&implicit=true&type=DCM&Custom

ColumnDisplay=TTTTTTTT. 559The SIFMA Report on Management & 

Professional Earnings in the Securities Industry 

(2013) (‘‘2013 SIFMA Report’’), available at http:// 

www.sifma.org/research/item.aspx?id=8589940603. 

560The hourly wage rate represents the total mean 

2012 compensation with bonus divided by 1800 

hours and multiplied by 1.3 to account for overhead 

and other benefits. 

561See 2013 SIFMA Report, supra note 559 at 

273. 

562See id.at 136. 

563 Id. 

564See id.at 395. 

565See id.at 113. 

566See id. at 104. 

567See id. at 119. 

568See id. at 279. 

569 5 U.S.C. 601 et seq. 

570 5 U.S.C. 601(2), 603, 604 and 605. 

571See 47 FR 18618 (April 30, 1982) (FCMs); and 

76 FR 71626 at 71680 (November 18, 2011) and 76 

FR 43851 at 43860 (July 22, 2011) (clearing 

members). 

572 76 FR 44776, 44789 (July 27, 2011) 

(‘‘Provisions Common to Registered Entities’’); see 

66 FR 45064, 45609 (Aug. 29, 2001); 47 FR 18618, 

18619 (Apr. 30, 1982). 

573See respectively and as indicated: 47 FR 

18618, 18619 (April 30, 1982) (FCMs, CPOs); 72 FR 

34417 at 34418 (June 22, 2007) (foreign brokers); 76 

FR 71626 at 71680 (November 18, 2011) (SDs); 77 

FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs). See 

also 5 U.S.C. 601(6) (natural persons are not entities 

for purposes of the RFA). 

generated. In order to identify direct 

connections, the Commission isolated 

those connections associated with colocation or other services likely related 

to DEA. These filters generated an 

estimate of approximately 100 potential 

firms that may need to register under 

proposed § 1.3(x)(3). This calculation 

did not exclude those firms which may 

already be registered with the 

Commission in some capacity. As a 

result, the 100 estimate is potentially 

higher than the actual number of floor 

traders that would register under the 

new provision. 

Clearing member FCMs and DCMs. 

Finally, the Commission estimated the 

number of clearing member FCMs and 

DCMs that would be subject to proposed 

Regulation AT. The Commission arrived 

at an estimate of 57 clearing member 

FCMs, based on the financial data for 

FCMs reported on the CFTC Web site. 

This data states that there were 57 FCMs 

in March 2015 that required 

‘‘Customer’s Segregation of Funds.’’ 557

The Commission arrived at an estimate 

of 15 DCMs, based on the list of 

designated DCMs as of the date of this 

NPRM, as reported on the CFTC Web 

site.558 This number does not include 

dormant or pending DCMs. 

1. Request for Comments 

108. The Commission requests 

comment on its calculation of the 

number of AT Persons, newly registered 

floor traders, clearing member FCMs, 

and DCMs that will be subject to 

Regulation AT. 

B. Calculation of Hourly Wage Rates 

Used in Related Matters 

The Related Matters discussion below 

estimates the cost of various regulations 

proposed under Regulation AT. These 

costs incorporate hourly wage rates 

derived from salary information 

compiled by the Securities Industry and 

Financial Markets Association 

(‘‘SIFMA’’). Specifically, the hourly 

wage rates are based on salaries and 

bonuses across different professions that 

are listed in the SIFMA Report on 

Management & Professional Earnings in 

the Securities Industry 2013, modified 

to account for an 1800-hour work-year 

and multiplied by 1.3 to account for 

overhead and other benefits.559 The 

following professions and hourly wages 

are referenced throughout the Related 

Matters: 

2013 SIFMA report profession and code Description of role in related matters 

Total mean 2012 

compensation with 

bonus—2013 

SIFMA report 

Hourly wage rate 

(rounded) 560

Project Manager (1030) .......................................... Project Manager ..................................................... 561 97,138 $70 

Business Analyst (Intermediate) (602) ................... Business Analyst .................................................... 562 72,650 52 

Business Analyst (Intermediate) (602) ................... Tester ..................................................................... 563 72,650 52 

Programmer Analyst (Senior) (1607) ..................... Developer ............................................................... 564 103,851 75 

Compliance Examiner (Senior) (409) ..................... Senior Compliance Examiner ................................ 565 79,992 58 

Compliance Specialist (Senior) (406) ..................... Senior Compliance Specialist ................................ 566 78,250 57 

Chief Compliance Officer (Mutual Funds/Investment Advisory Services) (413).Chief Compliance Officer ....................................... 567 192,367 139 

Compliance Attorney (1103) ................................... Compliance Attorney .............................................. 568 133,059 96 

C. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the rules they propose will 

have a significant economic impact on 

a substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis regarding the 

impact.569 A regulatory flexibility 

analysis or certification is typically 

required for ‘‘any rule for which the 

agency publishes a general notice of 

proposed rulemaking’’ pursuant to the 

notice-and-comment provisions of the 

Administrative Procedure Act, 5 U.S.C. 

553(b).570

1. FCMs and DCMs 

The Commission has previously 

determined that FCMs and clearing 

members are not small entities for 

purposes of the RFA.571 The 

Commission has also previously 

determined that DCMs are not small 

entities for purposes of the RFA.572

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the 

rules proposed in Regulation AT 

imposing requirements on FCMs and 

DCMs would not have a significant 

economic impact on a substantial 

number of small entities. The 

Commission invites public comment on 

this determination. 

2. AT Persons 

Regulation AT would also impose 

requirements on ‘‘AT Persons,’’ a 

definition that includes: FCMs, floor 

brokers, SDs, MSPs, CPOs, CTAs or IBs, 

as well as ‘‘floor traders’’ as defined in 

proposed § 1.3(x)(3), that engage in 

Algorithmic Trading. 

The Commission has previously 

determined that FCMs, foreign brokers, 

SDs, MSPs, CPOs, and natural persons 

are not small entities for purposes of the 

RFA.573 As indicated above, the 

Commission believes that it is likely 

that no natural persons will be AT 


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574See 47 FR 18618, 18620 (Apr. 30, 1982) (floor 

brokers); and 58 FR 19575, 19588 (Apr. 15, 1993) 

(floor traders); 47 FR at 18619 (CTAs); 48 FR 35248, 

35276–77 (Aug. 3, 1983) (IBs). 

575See Commission, Final Rule: Registration of 

Intermediaries, 77 FR 51898, 51901 (Aug. 28, 2012). 

576 7 U.S.C. 6c(a)(6) (rulemaking authority with 

respect to disruptive trading practices); 7 U.S.C. 

6s(b)(4) (rulemaking authority with respect to swap 

dealers and major swap participants); 7 U.S.C. 

1a(23) (Definitions); 7 U.S.C. 5(b) (Findings and 

purpose); 7 U.S.C. 12a(5) (Rules and Regulations). 

577 15 U.S.C. 601(3) (defining ‘‘small business’’ to 

have the same meaning as the term ‘‘small business 

concern’’ in the Small Business Act); 15 U.S.C. 

632(a)(1) (defining ‘‘small business concern’’ to 

include an agricultural enterprise with annual 

receipts not in excess of $750,000); 13 CFR 121.201 

(establishing size standards for small business 

concerns). 

578See NFA Directories, available at: http://

www.nfa.futures.org/NFA-registration/NFAdirectories.HTML. 

579See id. 

Persons, given the technological and 

personnel costs associated with 

Algorithmic Trading. The Commission, 

pursuant to question #106 below, asks 

whether this assumption is correct. 

The Commission has previously 

decided to evaluate, within the context 

of a particular rule proposal, whether all 

or some floor brokers, floor traders, 

CTAs, and IBs should be considered to 

be small entities, and if so, to analyze 

the economic impact on them of any 

such rule.574 In 2012, the Commission 

stated that it has not made a 

determination regarding floor traders, 

since all registered traders at the time 

were individuals, and individuals are 

not subject to the small entity analysis 

under the RFA.575

Accordingly, the Commission must 

address whether, in the context of 

Regulation AT, floor brokers, floor 

traders, CTAs, and IBs that engage in 

Algorithmic Trading should be 

considered small entities for purposes of 

the RFA. As discussed below, the 

Commission believes that the proposed 

rules regarding pre-trade and other risk 

controls, as well as standards relating to 

the design, testing, and supervision of 

Algorithmic Trading, are already being 

widely implemented in industry. 

Accordingly, while Regulation AT 

would have a significant economic 

impact on entities that are not currently 

implementing such measures, based on 

its best understanding, the Commission 

believes that it would not have a 

significant economic impact on a 

substantial number of small entities. 

However, the Commission is not in a 

position to determine how many of such 

entities would be affected, or the extent 

of such impact, given the varying sizes, 

technological systems, and business 

strategies of such entities. Therefore, 

pursuant to 5 U.S.C. 603, the 

Commission offers for public comment 

this initial regulatory flexibility analysis 

addressing the impact of Regulation AT 

on small entities: 

i. A Description of the Reasons Why 

Action Is Being Considered 

The Commission is taking action 

because the increased use of algorithmic 

trading and increasingly interconnected 

nature of markets means that a 

technological malfunction or error can 

have widespread, significant impact on 

many market participants. In this time 

of technological change, the 

Commission believes that it is necessary 

to enact new and amended regulations 

requiring risk controls, testing standards 

and other measures that will safeguard 

the integrity of markets. 

ii. A Succinct Statement of the 

Objectives of, and Legal Basis for, the 

Proposals 

The objective of Regulation AT is to 

address the risks of algorithmic trading 

through a series of pre-trade risk 

controls and other measures that AT 

Persons, clearing member FCMs and 

DCMs must implement. The legal 

authority for the proposed rules is 

Sections 4c(a)(6), 4s(b)(4) 1a(23), 3(b) 

and 8a(5) of the CEA.576

iii. A Description of and, Where 

Feasible, an Estimate of the Number of 

Small Entities to Which the Proposed 

Rules Will Apply 

The small entities to which the 

proposed amendments may apply are 

those floor brokers, floor traders (as 

defined in proposed § 1.3(x)(3)), CTAs 

and IBs that engage in Algorithmic 

Trading and fall within the definition of 

a ‘‘small entity’’ under the RFA, 

including size standards established by 

the Small Business Administration.577

Each of the categories of persons 

discussed below would fall within the 

definition of ‘‘AT Persons.’’ As 

discussed in section V(A) above, the 

Commission estimates that 

approximately 420 persons will be AT 

Persons. 

• Floor brokers. The Commission’s 

best understanding is that at this time, 

all floor brokers are natural persons. 

Given the technological and personnel 

costs associated with Algorithmic 

Trading, the Commission’s expectation 

is that only entities, not natural persons, 

will meet the definition of ‘‘AT Person.’’ 

Accordingly, the Commission estimates 

that no floor brokers will be ‘‘small 

entities’’ for purposes of the RFA. 

• Floor traders. The Commission 

estimates that there is a maximum of 

100 proprietary firms engaged in 

Algorithmic Trading that will be 

considered ‘‘floor traders’’ under 

proposed § 1.3(x)(3) of Regulation AT. 

See section V(A) above for a discussion 

of how the Commission generated this 

estimate. 

• CTAs. Based on NFA’s registration 

directory, the Commission estimates 

that there are approximately 2,464 

CTAs.578 The Commission notes that 

some registered CTAs are individuals, 

and not all CTAs will be engaged in 

Algorithmic Trading. It is not feasible 

for the Commission to estimate what 

portion of the 420 AT Persons will be 

CTAs. 

• IBs. Based on NFA’s registration 

directory, the Commission estimates 

that there are approximately 1,375 

IBs.579 The Commission notes that some 

registered IBs are individuals, and not 

all IBs will be engaged in Algorithmic 

Trading. It is not feasible for the 

Commission to estimate what portion of 

the 420 AT Persons will be IBs. 

Beyond the above estimates of the 

maximum number of floor brokers, floor 

traders (as defined in proposed 

§ 1.3(x)(3)), CTAs and IBs, it is not 

feasible for the Commission to provide 

a more exact estimate of the number of 

small entities to which Regulation AT 

will apply. The Commission estimates 

that no floor brokers will be ‘‘small 

entities’’ for purposes of the RFA, and 

that a maximum of 100 proprietary 

firms engaged in Algorithmic Trading 

will be considered ‘‘floor traders’’ under 

§ 1.3(x)(3) of the proposed rulemaking. 

The Commission estimates that the 

information collection will apply to no 

more than a total of 320 CTAs and IBs, 

and likely significantly less than 320. 

Based on the numbers described above, 

the Commission does not believe that a 

substantial number of small entities will 

be impacted by the information 

collection. Further, the definition of AT 

Person is limited to entities that conduct 

Algorithmic Trading and, the definition 

of new floor traders under proposed 

§ 1.3(x)(3) is further limited to those 

entities with Direct Electronic Access. 

The Commission believes that entities 

with such capabilities are generally not 

small entities. This NPRM asks specific 

questions on the issue of how the 

proposed regulations may affect small 

entities, in particular, whether sole 

proprietorships would be considered 

AT Persons and whether Regulation AT 

requirements should vary depending on 

the size, sophistication or other 

attributes of the AT Person. 


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580Pursuant to part 3 of its regulations, the 

Commission has delegated its registration functions 

to the National Futures Association (NFA). Nonnatural person floor trader entities register with the 

Commission and apply for membership in NFA via 

CFTC Form 7–R. Principals of non-natural person 

floor trader entities register via Form 8–R. Based on 

a review of the principals associated with registered 

FCMs, the Commission estimates that each nonnatural person floor trader entity will have 

approximately 10 principals and therefore need to 

file approximately 10 Forms 8–R. In the event that 

a natural person meets the definition of Floor 

Trader in proposed § 1.3(x)(3), and is therefore 

required to register with the Commission and 

become a member of NFA, such person would only 

be required to complete Form 8–R and would face 

substantially lower costs than those estimated here. 

Because registration with the Commission and 

membership in NFA make use of the same forms 

and process, the Commission anticipates that the 

costs associated with proposed § 1.3(x)(3) and 

proposed § 170.18 will be one and the same. 

581The Commission notes that NFA is currently 

the only entity registered as an RFA. The 

Commission estimates for RFA membership dues 

are based on its analysis of NFA dues. 

582AIMA indicated that many market participants 

use maximum order size limits, and Gelber, a 

trading firm, stated that it uses this risk control. See 

AIMA at 13; Gelber at 10. 

583FIA at 59–60. 

584CME at Appendix A–4; CFE at 9–10. In 

addition, FIA characterized cancel-on-disconnect as 

a ‘‘widely adopted DCM-hosted pre-trade risk 

control.’’ See FIA at 14. 

585CME at 23–24; CFE at 11. 

586FIA PTG, ‘‘Recommendations for Risk 

Controls for Trading Firms,’’ (Nov. 2010) at 4–5. 

587ESMA Guidelines, supra note 61 at 14–15. 

588CFTC TAC Recommendations, supra note 34 

at 2–3. 

589TMPG, ‘‘Best Practices for Treasury, Agency 

Debt, and Agency Mortgage-Backed Securities 

Markets’’ (June 2015). 

590See SEC, Responses to Frequently Asked 

Questions Concerning Risk Management Controls 

for Brokers or Dealers with Market Access, supra 

note 37. 591The Commission notes that trading firms can 

choose not to develop these controls internally, but 

rather may purchase a solution from an outside 

vendor (or DCM or clearing member) in order to 

comply with § 1.80. The Commission has requested 

comments providing estimates of such costs. 

iv. A Description of the Projected 

Reporting, Recordkeeping, and Other 

Compliance Requirements of the Rules, 

Including an Estimate of the Classes of 

Small Entities Which Will Be Subject to 

the Requirements and the Type of 

Professional Skills Necessary for 

Preparation of the Report or Record 

The following section discusses the 

projected reporting, recordkeeping, and 

other compliance requirements that will 

be imposed upon AT Persons under the 

proposed rules. 

• § 1.3(x)(3)—New Registration of Floor 

Traders 

Regulation AT would impose new 

registration requirements on certain 

entities with Direct Electronic Access as 

a result of the proposed amendment to 

the definition of ‘‘Floor trader’’ in 

Commission Regulation 1.3(x). The 

Commission provides detailed estimates 

of the costs associated with registration 

as a floor trader in section E below. As 

discussed more fully below, the 

Commission estimates that new 

registrants will incur a one-time cost of 

approximately $2,106 per registrant 

($1,050 in application fees plus $1,056 

in preparation costs). Accordingly, 

assuming (as discussed above) that there 

are 100 new registrants as Floor traders, 

the total one-time cost of registration 

would be approximately $210,600.580

• § 170.18—AT Persons Must Become 

Members of an RFA 

Regulation AT would require all 

registrants that are AT Persons that are 

not otherwise required to become 

members of an RFA pursuant to 

§§ 170.15, 170.16, or 170.17 to become 

members of an RFA. Taken together, 

§§ 170.15, 170.16, and 170.17 require 

most registrants who may be considered 

AT Persons to become RFA members. 

The Commission estimates that the 

requirements of proposed § 170.18 will 

result in requiring the 100 new floor 

traders that will be registered pursuant 

§ 1.3(x)(3) to become members of an 

RFA. The Commission estimates that 

the floor trader registrants will incur 

initial and annual RFA membership 

dues of $5,625.581 Accordingly, 

assuming (as discussed above) that there 

are 100 new floor trader members, the 

total initial cost of RFA membership 

would be approximately $562,500 and 

the annual cost would be approximately 

$562,500. 

• § 1.80—Pre-Trade Risk Controls 

Based on Concept Release comments, 

best practices documents issued by 

industry or regulatory organizations, as 

well as existing regulations, the 

Commission believes that a significant 

number of trading firms already 

implement the specifically-enumerated 

pre-trade and other risk controls 

required pursuant to proposed § 1.80. 

For example, in its survey of member 

firms, PTG found the following: (i) 25 

out of 26 responding firms use message 

and execution throttles; (ii) all 26 

responding firms use maximum order 

size limits, either using their own 

technology, the exchange’s technology, 

or some combination; 582 and (iii) 24 out 

of 26 responding firms use either price 

collars or trading pauses.583 As to order 

management controls, two comments to 

the Concept Release from exchanges 

stated that they provide an optional 

cancel-on-disconnect functionality.584

Those exchanges also indicated that 

they provide kill switch functionality to 

market participants.585 In addition, the 

types of controls required by proposed 

§ 1.80 have been included in best 

practices documents for years, such 

those best practices documents issued 

by FIA PTG,586 ESMA,587 the CFTC 

TAC588 and the TMPG.589 Finally, 

many trading firms that do securities 

trading in addition to futures trading 

may already have these systems in place 

in order to comply with the SEC’s 

Market Access Rule, which requires 

brokers and dealers to have risk controls 

that prevent the entry of erroneous 

orders, by rejecting orders that exceed 

appropriate price or size parameters, on 

an order-by-order basis or over a short 

period of time, or that indicate 

duplicative orders.590

Nevertheless, the Commission 

recognizes that there may be some 

trading firms within a given registration 

category that do not yet implement the 

risk controls required by Regulation AT, 

or that may need to upgrade their 

systems in order to comply with 

Regulation AT. Accordingly, Regulation 

AT would impose technology and 

personnel costs on this subset of trading 

firms; these costs would likely include 

both initial risk control creation costs 

and ongoing maintenance costs. 

The Commission provides detailed 

estimates of the implementation costs of 

risk controls in section E below.591 The 

Commission considered the possibility 

that a trading firm already implements 

the controls required by proposed 

§ 1.80, but the controls may not comply 

with every aspect of the regulation. In 

such a case, as discussed in greater 

detail below, the Commission estimates 

that it will cost an AT Person 

approximately $79,680 to upgrade its 

controls (i.e., evaluate current systems, 

modify or create new code, and test 

systems) in order to comply with § 1.80. 

Accordingly, assuming (as discussed 

above) that there are 420 AT Persons, 

the Commission estimates that the total 

industry cost to implement § 1.80 would 

be approximately $33,465,600. 

• § 1.81—Standards for Development, 

Testing and Monitoring of Algorithmic 

Trading Systems 

The Commission believes that most 

market participants and DCMs have 

implemented controls regarding the 

design, testing, and supervision of 

ATSs, in light of the numerous best 

practices and regulatory requirements 

promulgated in this area. These efforts 

include the FIA PTG’s November 2010 

‘‘Recommendations for Risk Controls for 

Trading Firms,’’ FIA’s March 2012 

‘‘Software Development and Change 

Management Recommendations,’’ 

ESMA and MiFID II guidelines and 


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592See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

directives on the development and 

testing of algorithmic systems, Reg SCI 

requirements on the development, 

testing, and monitoring of SCI systems, 

FINRA’s March 2015 Notice 15–09 on 

effective supervision and control 

practices for market participants that 

use algorithmic trading strategies in the 

equities market, IOSCO’s April 2015 

Consultation Report, summarizing best 

practices that should be considered by 

trading venues when developing and 

implementing risk mitigation 

mechanisms, and the Senior 

Supervisors Group (SSG) April 2015 

Algorithmic Trading Briefing Note, 

which described how large financial 

institutions currently monitor and 

control for the risks associated with 

algorithmic trading during the trading 

day. 

Notwithstanding the standards 

described above, the Commission has 

calculated a maximum cost to an AT 

Person that has not implemented any of 

the design, testing, and supervision 

standards required by proposed § 1.81. 

Development and Testing. The 

Commission estimates that an AT 

Person that has not implemented any of 

the requirements of proposed § 1.81(a) 

(development and testing of Algorithmic 

Trading Systems) would incur a total 

cost of $349,865 to implement these 

requirements. This cost is broken down 

as follows: 1 Project Manager, working 

for 1,707 hours (1,707 × $70 = 

$119,490); 2 Business Analysts, working 

for 853 hours (853 × $52 = $44,356); 3 

Testers, working for a combined 2,347 

hours (2,347 × $52 = $122,044); and 2 

Developers, working for a combined 853 

hours (853 × $75 = $63,975).592

Monitoring. The Commission 

estimates that an AT Person that has not 

implemented any of the requirements of 

§ 1.81(b) (monitoring of Algorithmic 

Trading Systems) would incur a total 

cost of $196,560 to implement these 

requirements. This cost is broken down 

as follows: 1 Senior Compliance 

Specialist, working for 2,080 hours 

(2,080 × $57 = $118,560); and 1 

Business Analyst, working for 1,500 

hours (1,500 × $52 = $78,000). 

Compliance. The Commission 

estimates that an AT Person that has not 

implemented any of the requirements of 

§ 1.81(c) (compliance of Algorithmic 

Trading Systems) would incur a total 

cost of $174,935 to implement these 

requirements. This cost is broken down 

as follows: 1 Project Manager, working 

for 853 hours (853 × $70 = $59,710); 2 

Business Analysts, working for a 

combined 427 hours (427 × $52 = 

$22,204); 3 Testers, working for a 

combined 1,173 hours (1,173 × $52 = 

$60,996); and 2 Developers, working for 

a combined 427 hours (427 × $75 = 

$32,025). 

Designation and Training of Staff. The 

Commission estimates that an AT 

Person that has not implemented any of 

the requirements of proposed § 1.81(d) 

(designation and training of Algorithmic 

Trading staff) would incur a total cost of 

$101,600 to implement these 

requirements. This cost is broken down 

as follows: 1 Senior Compliance 

Specialist, working for 500 hours (500 × 

$57 = $28,500); 1 Project Manager, 

working for 500 hours (500 × $70 = 

$35,000); 1 Developer, working for 300 

hours (300 × $75 = $22,500); and 1 

Business Analyst, working for 300 hours 

(300 × $52 = $15,600). 

Notwithstanding these estimates, the 

Commission believes that proposed 

§ 1.81 standardizes existing industry 

practices in this area, but does not 

impose additional requirements that are 

not already followed by the majority of 

market participants. As a result, the 

Commission does not believe that § 1.81 

would impose additional costs on AT 

Persons. 

• § 1.83(a)—Compliance Reports 

Submitted by AT Persons 

Proposed § 1.83 would require AT 

Persons and FCMs that are clearing 

members for AT Persons to annually 

submit reports regarding their 

compliance with § 1.80(a) and pursuant 

to § 1.82(a)(1), respectively, to each 

DCM on which they operate. The report 

prepared by an AT Person pursuant to 

§ 1.83(a) would include a description of 

the AT Person’s pre-trade risk controls 

and the parameters and specific 

quantitative settings used for such pretrade risk controls. Together with the 

annual report, each AT Person would be 

required to submit copies of the written 

policies and procedures developed to 

comply with § 1.81(a) and (c). The 

report would also be required to include 

a certification by the chief executive 

officer or chief compliance officer of the 

AT Person that, to the best of his or her 

knowledge and reasonable belief, the 

information contained in the report is 

accurate and complete. 

AT Person Compliance Reports. AT 

Persons will incur the cost of annually 

preparing and submitting the reports to 

their DCMs. The Commission estimates 

that an AT Person will incur a total 

annual cost of $4,240 to draft the report 

required by proposed § 1.83(a). This cost 

is broken down as follows: 1 Senior 

Compliance Specialist, working for 50 

hours (50 × $57 per hour = $2,850) and 

1 Chief Compliance Officer, working for 

10 hours (10 × $139 per hour = $1,390) 

for a total cost of $4,240 per year. The 

approximately 420 AT Persons to which 

§ 1.83(a) would apply would therefore 

incur a total annual cost of $1,780,800 

(420 × $4,240) to prepare and submit the 

report required by § 1.83(a). 

• § 1.83(c)—AT Person Recordkeeping 

Requirements 

Proposed § 1.83(c) would require each 

AT Person to keep, and provide upon 

request to each DCM on which such AT 

Person engages in Algorithmic Trading, 

books and records regarding such AT 

Person’s compliance with all 

requirements pursuant to proposed 

§§ 1.80 and 1.81. 

The Commission estimates that, on an 

initial basis, an AT Person will incur a 

cost of $5,130 to draft and update 

recordkeeping policies and procedures 

and make technology improvements to 

recordkeeping infrastructure. This cost 

is broken down as follows: 1 

Compliance Attorney, working for 30 

hours (30 × $96 = $2,880); and 1 

Developer, working for 30 hours (30 × 

$75 = $2,250). The 420 AT Persons 

would therefore incur a total initial cost 

of $2,154,600 (420 × $5,130). 

The Commission estimates that, on an 

annual basis, an AT Person will incur a 

cost of $2,670 to ensure continued 

compliance with DCM recordkeeping 

rules relating to § 1.82 compliance, 

including the updating of policies and 

procedures and technology 

infrastructure, and in respond to DCM 

record requests. This cost is broken 

down as follows: 1 Compliance 

Attorney, working for 20 hours (20 × 

$96 = $1,920); and 1 Developer, working 

for 10 hours (10 × $75 = $750). The 420 

AT Persons would therefore incur a 

total annual cost of $1,121,400 (420 × 

$2,670). 

• § 40.23(c)—Approval Requests 

Submitted by Market Participants re: 

Self-Trading Controls 

Market participants will incur costs in 

the event that they prepare and submit 

the self-trading approval requests 

contemplated by proposed § 40.23(c). 

This provision, which is discussed in 

more detail in section IV(Q) above, 

requires market participants to request 

approval from the DCM that self-trade 

prevention tools not be applied with 

respect to specific accounts under 

common beneficial ownership or 

control. The Commission estimates that, 

on an annual basis, a market participant 

will incur a cost of $3,810 to prepare 

and submit these approval requests. 

This cost is broken down as follows: 1 

Business Analyst, working for 30 hours 

(30 × $52 per hour = $1,560); and 1 


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593See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

594See section V(A) above for the calculation of 

the number of person subject to Regulation AT. 

Developer, working for 30 hours (30 × 

$75 per hour = $2,250).593

The Commission cannot predict how 

many market participants would likely 

submit the approval requests 

contemplated by proposed § 40.23(c) on 

an annual basis. The Commission 

believes that not all market participants 

trading on a DCM would submit such 

requests. In the view of the Commission, 

for example, a limited subset of market 

participants will own two or more 

accounts, but operate them through 

‘‘independent decision makers,’’ as 

contemplated by proposed § 40.23(b). 

Similarly, a limited subset of market 

participants will find it advantageous to 

incur the costs associated with the selftrading described by § 40.23(b), such as 

trading costs and clearing fees. In 

addition, the Commission believes that 

market participants submitting orders 

through Algorithmic Trading are more 

likely than traders submitting orders 

manually to inadvertently self-trade 

through independent decision-makers. 

The Commission estimates that, 

notwithstanding the fact that the DCM 

rules described in § 40.23(c) are directed 

to all market participants, the number of 

market participants that will submit the 

approval requests described therein are 

equivalent to the number of AT Persons 

calculated above (420).594 On this basis, 

the Commission estimates that market 

participants will incur a total annual 

cost of $1,600,200 to submit the 

approval requests contemplated by 

§ 40.23(c) ($3,810 per market participant 

× 420 market participants). 

v. An Identification, to the Extent 

Practicable, of All Relevant Federal 

Rules Which May Duplicate, Overlap or 

Conflict With the Rules 

The Commission is unaware of any 

Federal rules that could duplicate, 

overlap, or conflict with the proposal. 

vi. A description of any significant 

alternatives to the proposed rule which 

accomplish the stated objectives of 

applicable statutes and which minimize 

any significant impact of the proposed 

rule on small entities. These may 

include, for example, (1) the 

establishment of differing compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; (2) the 

clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the rule 

for such small entities; (3) the use of 

performance rather than design 

standards; and (4) an exemption from 

coverage of the rule, or any part thereof, 

for such small entities. 

A potential alternative to Regulation 

AT that would minimize any significant 

impact on small entities would be to 

amend or propose new rules requiring 

trading firms implement pre-trade and 

other risk controls, but limit application 

of such requirements to entities that 

would not be considered ‘‘small 

entities’’ for purposes of the RFA. 

However, the Commission does not 

believe that this is a viable alternative. 

A principal basis for Regulation AT’s 

risk control requirements is that a 

technological malfunction or error can 

have a significant, detrimental impact 

on other market participants across 

Commission-regulated markets. 

Importantly, such a technological 

malfunction or error can arise from any 

size of firm, including a very small 

proprietary trading firm with few 

employees. In today’s interconnected 

markets, where a small error can cause 

a severe disruption in minutes, it is 

equally important that small firms have 

risk controls as large firms. The 

Commission believes that the risk 

controls required by Regulation AT will 

help ensure that all entities—not just 

large entities with the most 

technological and financial resources— 

will have effective risk controls. The 

Commission is aware that smaller firms 

may have different trading strategies 

and technology than larger firms; 

accordingly, the proposed regulations 

allow all trading firms, including small 

entities, the discretion to design 

controls appropriate to their own 

business and to implement them in the 

most cost-effective manner. 

The Commission is also considering 

alternatives with respect to proposed 

§ 1.83, which would require AT Persons 

to submit compliance reports to DCMs 

on an annual basis. Such reports would 

need to be submitted and certified 

annually by the chief executive officer 

or the chief compliance officer of the AT 

Person. Proposed § 40.22 would require 

DCMs to establish a program for 

effective periodic review and evaluation 

of these reports. The Commission has 

proposed these regulations, using the 

deadlines described above, because it 

believes they represent an appropriate 

balancing of the transparency and risk 

reduction provided by the reports 

against the burden placed on AT 

Persons and DCMs of providing and 

reviewing the reports. The Commission 

is considering the alternative of 

requiring AT Persons to submit such 

reports more or less frequently than 

annually. The Commission is also 

considering the alternatives of placing 

the responsibility for certifying the 

reports required by proposed § 1.83 only 

on the chief executive officer, only on 

the chief compliance officer, or 

permitting certification from other 

officers of the AT Person. The 

Commission notes that it considered the 

alternative of requiring additional 

information to be included in the § 1.83 

reports, such as descriptions of how AT 

Persons comply with § 1.81 

requirements and how clearing member 

FCMs comply with all § 1.82 

requirements. In the interest of 

minimizing costs to AT Persons and 

clearing member FCMs, the Commission 

determined at this time to require, 

pursuant to proposed § 1.83(c) and (d), 

that AT Persons and clearing member 

FCMs instead retain and provide to 

DCMs books and records regarding their 

compliance with §§ 1.80, 1.81 and 1.82 

requirements. Proposed § 40.22(d) 

includes a corresponding requirement 

that DCMs implement rules requiring 

AT Persons and clearing member FCMs 

to keep and provide such books and 

records. 

Finally, the Commission is 

considering alternatives with respect to 

proposed § 40.23. This proposed 

regulation provides that DCMs may 

comply with the requirement to apply, 

or provide and require the use of, selftrade prevention tools by requiring 

market participants to identify to the 

DCM which accounts should be 

prohibited from trading with each other. 

With respect to this account 

identification process, the Commission’s 

principal goal is to prevent 

unintentional self-trading; the 

Commission does not have a specific 

interest in regulating the manner by 

which market participants identify to 

DCMs the account that should be 

prohibited from trading from each other, 

so long as this goal is met. The 

Commission has considered whether 

other identification methods should be 

made available to market participants 


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595 44 U.S.C. 3501 et seq. 596 7 U.S.C. 5. 

when submitting the approval requests 

described in § 40.23. For example, the 

Commission has requested comment on 

whether the opposite approach is 

preferable: Market participants would 

identify to DCMs the accounts that 

should be permitted to trade with each 

other (as opposed to those accounts that 

should be prevented from trading with 

each other). 

3. Request for Comments 

109. The Commission requests 

comment on each element of its RFA 

analysis. In particular, the Commission 

specifically invites comment on the 

accuracy of its estimates of potential 

firms that could be considered ‘‘small 

entities’’ for RFA purposes. 

110. The Commission also requests 

comment on whether any natural 

persons will be designated as AT 

Persons under the proposed definition 

of that term. 

D. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) 595 imposes certain 

requirements on Federal agencies in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. This 

proposed rulemaking would result in 

new collection of information 

requirements within the meaning of the 

PRA. The Commission therefore is 

submitting this proposal to the Office of 

Management (OMB) for review in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. The following 

requirements of this rulemaking will 

result in new collection of information 

requirements within the meaning of the 

PRA: § 1.83(a) would require AT 

Persons to submit reports to DCMs 

concerning compliance with § 1.80(a), 

as well as copies of the written policies 

and procedures developed to comply 

with § 1.81(a) and (c); § 1.83(b) would 

require clearing member FCMs to 

submit reports to DCMs concerning 

compliance with § 1.82(a)(1); § 1.83(c) 

and (d) would require AT Persons and 

clearing member FCMs, respectively, to 

keep and provide upon request to DCMs 

books and records regarding their 

compliance with §§ 1.80 and 1.81 (for 

AT Persons) and § 1.82 (for clearing 

member FCMs); § 40.23(c) states that a 

DCM must require market participants 

to request approval from the DCM that 

self-trade prevention tools not be 

applied with respect to certain types of 

accounts; § 40.23(d) would require that 

DCMs display information about 

percentage and ratio of self-trading. The 

title for this collection of information is 

Regulation Automated Trading. An 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid control 

number. The OMB has not yet assigned 

this collection a control number. As 

used below, ‘‘burden’’ means the total 

time, effort, or financial resources 

expended by persons to generate, 

maintain, retain, disclose or provide 

information to or for a federal agency. 

Additional Regulation AT 

requirements will amend existing 

collections of information. Proposed 

§ 1.3(x)(3) (requiring certain persons 

with DEA to prepare and submit forms 

to register with the Commission) would 

amend existing collection of 

information ‘‘Registration Under the 

Commodity Exchange Act,’’ OMB 

Control Number 3038–0023. Proposed 

§ 38.401(a) and (c) (requiring DCMs to 

publicly post information regarding 

certain aspects of their electronic 

matching platforms) and § 40.26 

(permitting the Commission or the 

director of DMO to require certain 

information from DCMs regarding their 

market-maker or trading incentive 

programs) would amend existing 

collection of information ‘‘Core 

Principles and Other Requirements for 

DCMs,’’ OMB Control Number 3038– 

0052. Finally, proposed § 40.25 

(requiring DCMs to provide the 

Commission with certain information 

regarding their market-maker and 

trading incentive programs when 

submitting such programs as rules 

pursuant to part 40) would amend 

existing collection of information ‘‘Part 

40, Provisions Common to Registered 

Entities,’’ OMB Control Number 3038– 

0093. 

The collections of information under 

these proposed regulations are 

necessary to implement certain 

provisions of the CEA, as amended by 

the Dodd-Frank Act. Section 8a(5) of the 

CEA provides the Commission with 

authority to promulgate rules as 

reasonably necessary to effectuate any of 

the provisions or to accomplish any of 

the purposes of the Act, and Section 

4c(a)(6) of the CEA provides rulemaking 

authority to prohibit disruptive trading 

practices. As provided in Section 3(b) of 

the CEA, it is the purpose of the CEA 

to deter and prevent price manipulation 

or any other disruptions to market 

integrity; to ensure the financial 

integrity of all transactions subject to 

this chapter and the avoidance of 

systemic risk; to protect all market 

participants from fraudulent or other 

abusive sales practices and misuses of 

customer assets; and to promote 

responsible innovation and fair 

competition among boards of trade, 

other markets and market 

participants.596 Proposed regulations 

requiring registration with the 

Commission, submission of compliance 

reports to DCMs, implementation of 

self-trade prevention tools and 

increased disclosure of certain aspects 

of electronic matching platforms and 

market maker and trading incentive 

programs, will help prevent or mitigate 

technological malfunctions that will 

disrupt market integrity, protect market 

participants from fraudulent or 

disruptive practices, and promote fair 

competition among boards of trade, 

other markets and market participants. 

If the proposed regulations are 

adopted, responses to the collections of 

information would be mandatory. The 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR part 145, 

‘‘Commission Records and 

Information.’’ In addition, Section 

8(a)(1) of the CEA strictly prohibits the 

Commission, unless specifically 

authorized by the CEA, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ The Commission is also 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

1974, 5 U.S.C. 552a. 

1. Information Provided by Reporting 

Entities/Persons 

The following is a brief description of 

the PRA responsibilities of various 

entities under Regulation AT. In 

summary, § 1.3(x)(3) would require 

certain floor traders with DEA to 

prepare and submit forms to register 

with the Commission; § 1.83(a) and (b) 

would require AT Persons and clearing 

member FCMs to submit reports to 

DCMs concerning compliance with 

§ 1.80(a) and § 1.82(a)(1), respectively; 

§ 1.83(c) and (d) would require AT 

Persons and clearing member FCMs, 

respectively, to keep and provide upon 

request to DCMs books and records 

regarding their compliance with §§ 1.80 

and 1.81 (for AT Persons) and § 1.82 (for 

clearing member FCMs); § 38.401(a) and 

(c) would require DCMs to publicly post 

information regarding certain aspects of 

their electronic matching platforms; 

§ 40.23(c) states that a DCM must 

require market participants to request 

approval from the DCM that self-trade 

prevention tools not be applied with 

respect to certain types of accounts; 

§ 40.23(d) would require that DCMs 


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597CFTC Form 7–R is used to apply for 

registration with the Commission as a non-natural 

person floor trader, and is also used for such 

entities to apply for membership in NFA. Form 8– 

R is used to identify principals of non-natural 

person floor trader entities. As noted previously, 

the Commission estimates that each non-natural 

person floor trader entity will have approximately 

10 principals and therefore need to file 

approximately 10 Forms 8–R. In the event that a 

natural person meets the definition of Floor Trader 

in proposed § 1.3(×)(3) and is therefore required to 

register with the Commission and become a 

member of NFA, such person would only be 

required to complete Form 8–R and would face 

substantially lower costs than those estimated here. 

Because registration with the Commission and 

membership in NFA make use of the same forms 

and process, the Commission anticipates that the 

costs associated with proposed § 1.3(×)(3) and 

proposed § 170.18 will be one and the same. 

598See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

599See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

600See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

601See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

602See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

603See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

display information about percentage 

and ratio of self-trading; § 40.25 would 

require DCMs to provide the 

Commission with certain information 

regarding their market-maker and 

trading incentive programs when 

submitting such programs as rules 

pursuant to part 40; and § 40.26 would 

permit the Commission or the director 

of DMO to require certain information 

from DCMs regarding their marketmaker or trading incentive programs. 

a. § 1.3(×)(3)—Submissions by Newly 

Registered Floor Traders 

The Commission estimates that the 

proposed rules requiring certain floor 

traders with Direct Electronic Access to 

register will result in 11 hours of burden 

per affected entity, and 1100 burden 

hours in total. The Commission 

estimates that each affected entity will 

require 1 hour to prepare and submit 

one Form 7–R (for the entity) and 10 

hours to prepare and submit 10 Forms 

8–R (one form for each principal of the 

entity).597 The estimated burden was 

calculated as follows: 

Burden: Complete Form 7–R and 8–R 

to register as a floor trader. 

Respondents/Affected Entities: 100 

new floor traders. 

Estimated number of responses: 100. 

Estimated total burden on each 

respondent: 11 hours. 

Frequency of collection: One-time 

initial registration fee. 

Burden statement-all respondents: 

100 respondents × 1 hour = 100 Burden 

Hours. 

The Commission estimates that a new 

registrant will incur a one-time cost of 

$96 to complete one Form 7–R and a 

one-time cost of $960 to complete 10 

Forms 8–R. These costs represent the 

work of 1 Compliance Attorney per 

affected entity, working for 1 hour per 

form (a total of 11 hours × $96 = 

$1,056).598 The 100 entities that will be 

subject to the registration requirement 

under § 1.3(×)(3) would therefore incur 

a total one-time cost of $105,600 (100 × 

$1,506).599

b. § 1.83(a)—Compliance Reports 

Submitted by AT Persons to DCMs 

The Commission estimates that the 

proposed rules requiring AT Persons to 

submit annual reports regarding their 

pre-trade risk controls required 

pursuant to proposed § 1.80(a) (as well 

as copies of the written policies and 

procedures developed to comply with 

§ 1.81(a) and (c)) to each DCM on which 

they operate will result (on an annual 

basis) in 60 hours of burden per AT 

Person, and 25,200 burden hours in 

total. The estimated burden was 

calculated as follows: 

Burden: Compliance reports 

submitted by AT Persons to DCMs. 

Respondents/Affected Entities: 420 

AT Persons. 

Estimated number of responses: 420. 

Estimated total burden on each 

respondent: 60 hours. 

Frequency of collection: Annual. 

Burden statement-all respondents: 

420 respondents × 60 hours = 25,200 

Burden Hours per year. 

The Commission estimates that, on an 

annual basis, an AT Person will incur a 

cost of $4,240 to submit the compliance 

reports required by proposed § 1.83(a). 

This cost is broken down as follows: 1 

Senior Compliance Specialist, working 

for 50 hours (50 × $57 = $2,850); and 1 

Chief Compliance Officer, working for 

10 hours (10 × $139 = $1,390).600 The 

420 AT Persons that will be subject to 

§ 1.83(a) would therefore incur a total 

annual cost of $1,780,800 (420 

×$4,240).601

c. § 1.83(b)—Compliance Reports 

Submitted by Clearing Member FCMs to 

DCMs 

The Commission estimates that the 

proposed rules requiring clearing 

member FCMs to submit annual reports 

(describing the clearing member FCM’s 

program for establishing and 

maintaining the pre-trade risk controls 

required by proposed § 1.82(a)(1) for its 

AT Person customers in the aggregate) 

to each DCM on which they operate will 

result (on an annual basis) in 110 hours 

of burden per clearing member, and 

6,270 burden hours in total. The 

estimated burden was calculated as 

follows: 

Burden: Compliance reports 

submitted by clearing member FCMs to 

DCMs. 

Respondents/Affected Entities: 57 

clearing member FCMs. 

Estimated number of responses: 57. 

Estimated total burden on each 

respondent: 110 hours. 

Frequency of collection: Annual. 

Burden statement-all respondents: 57 

respondents × 110 hours = 6,270 Burden 

Hours per year. 

The Commission estimates that, on an 

annual basis, a clearing member FCM 

will incur a cost of $7,090 to submit the 

compliance reports required by 

§ 1.83(b). This cost is broken down as 

follows: 1 Senior Compliance Specialist, 

working for 100 hours (100 × $57 = 

$5,700); and 1 Chief Compliance 

Officer, working for 10 hours (10 × $139 

= $1,390).602 The 57 clearing member 

FCMs that will be subject to § 1.83(b) 

would therefore incur a total annual 

cost of $404,130 (57 ×$7,090).603

d. § 1.83(c)—AT Person Retention and 

Production of Books and Records 

Initial Costs. The Commission 

estimates that rules pursuant to 

proposed § 1.83(c) requiring AT Persons 

to keep and provide books and records 

relating to §§ 1.80 and 1.81 compliance 

will result in initial costs of 60 hours of 

burden per AT Person, and 25,200 

burden hours in total. The estimated 

burden was calculated as follows: 

Burden: Rule requiring AT Persons to 

keep and produce records relating to 

§§ 1.80 and 1.81 compliance. 

Respondents/Affected Entities: 420 

AT Persons. 

Estimated total burden on each 

respondent: 60 hours. 

Burden statement&all respondents: 

420 respondents × 60 hours = 25,200 

Burden Hours initial year. 

The Commission estimates that, on an 

initial basis, an AT Person will incur a 

cost of $5,130 to draft and update 

recordkeeping policies and procedures 

and make technology improvements to 

recordkeeping infrastructure. This cost 

is broken down as follows: 1 

Compliance Attorney, working for 30 

hours (30 × $96 = $2,880); and 1 

Developer, working for 30 hours (30 × 

$75 = $2,250). The 420 AT Persons 

would therefore incur a total initial cost 

of $2,154,600 (420 × $5,130). 

Annual Costs. The Commission 

estimates that rules pursuant to 

proposed § 1.83(c) requiring AT Persons 

to keep and provide books and records 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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604See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

605See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

relating to §§ 1.80 and 1.81 compliance 

will result in annual costs of 30 hours 

of burden per AT Person, and 12,600 

burden hours in total. The estimated 

burden was calculated as follows: 

Burden: Rules requiring AT Persons 

to keep and produce records relating to 

§§ 1.80 and 1.81 compliance. 

Respondents/Affected Entities: 420 

AT Persons. 

Estimated number of responses: 420. 

Estimated total burden on each 

respondent: 30 hours. 

Frequency of collection: 

Intermittent.Burden statement-all 

respondents: 420 respondents × 30 

hours = 12,600 Burden Hours per year. 

The Commission estimates that, on an 

annual basis, an AT Person will incur a 

cost of $2,670 to ensure continued 

compliance with the § 1.83(c) 

recordkeeping rules relating to § 1.82 

compliance, including the updating of 

policies and procedures and technology 

infrastructure, and to respond to DCM 

record requests. This cost is broken 

down as follows: 1 Compliance 

Attorney, working for 20 hours (20 × 

$96 = $1,920); and 1 Developer, working 

for 10 hours (10 × $75 = $750). The 420 

AT Persons would therefore incur a 

total annual cost of $1,121,400 (420 × 

$2,670). 

e. § 1.83(d)—Clearing Member FCM 

Retention and Production of Books and 

Records 

Initial Costs. The Commission 

estimates that rules pursuant to 

proposed § 1.83(d) requiring clearing 

member FCMs to keep and provide 

books and records relating to § 1.82 

compliance will result in initial costs of 

60 hours of burden per clearing member 

FCM, and 3,420 burden hours in total. 

The estimated burden was calculated as 

follows: 

Burden: Rules requiring clearing 

member FCMs to keep and produce 

records relating to § 1.82 compliance. 

Respondents/Affected Entities: 57 

clearing member FCMs. 

Estimated total burden on each 

respondent: 60 hours. 

Burden statement-all respondents: 57 

respondents × 60 hours = 3,420 Burden 

Hours initial year. 

The Commission estimates that, on an 

initial basis, a clearing member FCM 

will incur a cost of $5,130 to draft and 

update recordkeeping policies and 

procedures and make technology 

improvements to recordkeeping 

infrastructure. This cost is broken down 

as follows: 1 Compliance Attorney, 

working for 30 hours (30 × $96 = 

$2,880); and 1 Developer, working for 

30 hours (30 × $75 = $2,250). The 57 

clearing member FCMs would therefore 

incur a total initial cost of $292,410 (57 

× $5,130). 

Annual Costs. The Commission 

estimates that that DCM rules pursuant 

to proposed § 1.83(d) requiring clearing 

member FCMs to keep and provide 

books and records relating to § 1.82 

compliance will result in annual costs 

of 30 hours of burden per clearing 

member FCM, and 1,710 burden hours 

in total. The estimated burden was 

calculated as follows: 

Burden: Rules requiring clearing 

member FCMs to keep and produce 

records relating to § 1.82 compliance. 

Respondents/Affected Entities: 57 

clearing member FCMs. 

Estimated number of responses: 57. 

Estimated total burden on each 

respondent: 30 hours. 

Frequency of collection: Intermittent. 

Burden statement-all respondents: 57 

respondents × 30 hours = 1,710 Burden 

Hours per year. 

The Commission estimates that, on an 

annual basis, a clearing member FCM 

will incur a cost of $2,670 to ensure 

continued compliance with the § 1.83(d) 

recordkeeping rules relating to § 1.82 

compliance, including the updating of 

policies and procedures and technology 

infrastructure, and to respond to DCM 

record requests. This cost is broken 

down as follows: 1 Compliance 

Attorney, working for 20 hours (20 × 

$96 = $1,920); and 1 Developer, working 

for 10 hours (10 × $75 = $750). The 57 

clearing member FCMs would therefore 

incur a total annual cost of $152,190 (57 

× $2,670). 

f. § 38.401(a) and (c)—Public 

Dissemination of Information by DCMs 

Pertaining to Electronic Matching 

Platforms 

The proposed amendments to 

regulations 38.401(a) and 38.401(c) 

require DCMs to publicly post 

information regarding certain aspects of 

their electronic matching platforms. 

DCMs should already be performing 

tests on their electronic matching 

platforms that would identify such 

attributes; therefore the added burden 

under the proposed amendments would 

be limited to drafting the description of 

such attributes and making the 

description available on the DCM’s Web 

site. The Commission estimates that the 

proposed rules will result (on an annual 

basis) in 200 hours of burden per DCM, 

and 3,200 burden hours in total. This 

estimate assumes that DCMs are already 

compliant with the requirements to post 

the specifications of their electronic 

matching platform under current 

regulation 38.401(a). 

Burden: Public Dissemination of 

Information by DCMs—Electronic 

Matching Platforms. 

Respondents/Affected Entities: 15 

DCMs. 

Estimated total burden on each 

respondent: 200 hours per year. 

Frequency of collection: Intermittent. 

Burden statement-all affected entities: 

15 affected entities × 200 hours = 3,000 

Burden Hours per year. 

The Commission estimates that, on an 

annual basis, a DCM will incur a cost of 

$19,200 to comply with amended 

§ 38.401(a) and (c). This cost represents 

the work of 1 Compliance Attorney, 

working for 200 hours (200 × $96 = 

$19,200).604 The 15 DCMs that will be 

subject to amended §§ 38.401(a) and (c) 

would therefore incur a total annual 

cost of $288,000 (15 × $19,200).605 The 

Commission anticipates that this figure 

would decrease in subsequent years as 

the descriptions provided would only 

need to be amended to reflect changes 

to the electronic matching platform or 

the discovery of previously unknown 

attributes. 

g. § 40.23—Information Publicly 

Disseminated by DCMs Regarding SelfTrade Prevention 

Regulation AT proposes a new 

requirement (§ 40.23) that a DCM shall 

implement rules reasonably designed to 

prevent self-trading by market 

participants, except as specified in 

paragraph (b) of § 40.23. Section 

40.23(b) states that a DCM may, in its 

discretion, implement rules that permit 

the matching of orders for accounts with 

common beneficial ownership where 

such orders are initiated by independent 

decision makers. A DCM may also 

permit under § 40.23(b) the matching of 

orders for accounts under common 

control where such orders comply with 

the DCM’s cross-trade, minimum 

exposure requirements or similar rules, 

and are for accounts that are not under 

common beneficial ownership. Section 

40.23(c) states that a DCM must require 

market participants to request approval 

from the DCM that self-trade prevention 

tools not be applied with respect to 

specific accounts under common 

beneficial ownership or control, on the 

basis that they meet the criteria of 

paragraph (b). 

Proposed § 40.23(d) would require 

that for each product and expiration 

month traded on a DCM in the previous 

quarter, the DCM must prominently 

display on its Web site the following 


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606See section V(E)(8)(b) below for a discussion 

of how this estimate of affected entities was 

performed. 

607See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

608See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

609See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

610See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

information: (1) The percentage of 

trades in such product including all 

expiration months that represent selftrading approved (pursuant to paragraph 

(c)(2) of § 40.23) by the DCM, expressed 

as a percentage of all trades in such 

product and expiration month; (2) the 

percentage of volume of trading in such 

product including all expiration months 

that represents self-trading approved 

(pursuant to paragraph (c)(2) of § 40.23) 

by the DCM, expressed as a percentage 

of all volume in such product and 

expiration month; and (3) the ratio of 

orders in such product and expiration 

month whose matching was prevented 

by the self-trade prevention tools 

described in paragraph (a) of § 40.23, 

expressed as a ratio of all trades in such 

product and expiration month. 

Market Participant Approval 

Requests. Market participants will incur 

costs in the event that they prepare and 

submit the approval requests 

contemplated by proposed § 40.23(c). 

This provision requires market 

participants to request approval from 

the DCM that self-trade prevention tools 

not be applied with respect to specific 

accounts under common beneficial 

ownership or control. The Commission 

estimates that § 40.23(c) will result (on 

an annual basis) in 60 hours of burden 

per market participant, and 185,340 

burden hours in total. The estimated 

burden was calculated as follows: 

Burden: Market Participant 

Submission of Self-Trade Approval 

Requests. 

Respondents/Affected Entities: 

420.606

Estimated number of responses: 1 per 

respondent per year. Market 

participants may choose to submit 

approval requests more frequently, but 

regardless of how frequently market 

participants submit approval requests, 

the Commission estimates a total burden 

of 60 hours per market participant per 

year. 

Estimated total burden on each 

respondent: 60 hours per year. 

Burden statement—all respondents: 

420 respondents × 60 hours per year = 

25,200 Burden Hours per year. 

The Commission estimates that, on an 

annual basis, a market participant will 

incur a cost of $3,810 to prepare and 

submit the approval requests 

contemplated by 40.23(c). This cost is 

broken down as follows: 1 Business 

Analyst, working for 30 hours (30 × $52 

per hour = $1,560); and 1 Developer, 

working for 30 hours (30 × $75 per hour 

= $2,250).607 The estimated 420 market 

participants that will be subject to 

§ 40.23(c) would therefore incur a total 

annual cost of $1,600,200 (420 x 

$3,810).608

DCM Publication of Statistics 

Regarding Self-Trade Prevention. The 

Commission estimates that the 

requirement under proposed § 40.23(d) 

that DCMs publish statistics regarding 

self-trade prevention will result (on an 

annual basis) in 100 hours of burden per 

DCM, and 1,500 burden hours in total 

for all 15 DCMs. The estimated burden 

was calculated as follows: 

Burden: DCM Publication of Statistics 

Regarding Self-Trade Prevention. 

Respondents/Affected Entities: 15 

DCMs. 

Estimated total burden on each 

affected entity: 100 hours per year for 

DCMs to generate and publish statistics. 

Frequency of collection: 4 DCM Web 

site updates per year (one per quarter). 

Burden statement-all affected entities: 

15 respondents × 100 hours of DCM 

time per year = 1,500 Burden Hours per 

year. 

The Commission estimates that, on an 

annual basis, a DCM will incur a cost of 

$6,650 to publish the statistics required 

by proposed § 40.23(d). This cost is 

broken down as follows: 1 Senior 

Compliance Examiner, working for 50 

hours (50 × $58 per hour = $2,900); and 

1 Developer, working for 50 hours (50 

× $75 per hour =$3,750).609 The 15 

DCMs that will be subject to § 40.23(d) 

would therefore incur a total annual 

cost of $99,750 (15 × $6,650).610

h. § 40.25—Information in Public Rule 

Filings Provided by DCMs Regarding 

Market Maker and Trading Incentive 

Programs 

Proposed § 40.25 would require DCMs 

to provide the Commission with certain 

information regarding their marketmaker and trading incentive programs 

when submitting such programs as rules 

pursuant to part 40. Among other 

information, DCMs would be required to 

provide a description of any categories 

of market participants or eligibility 

criteria limiting who may participate in 

the program. They would also be 

required to provide an explanation of 

the specific purpose for a market-maker 

or trading incentive program; a list of all 

products or services to which the 

program applies; a description of any 

payments, incentives, discounts, 

considerations, inducements or other 

benefits that program participants may 

receive; and other requirements. To 

ensure public transparency in marketmaker and trading incentive programs, 

proposed § 40.25 would require DCMs 

to ensure that the information described 

above is easily located on their public 

Web sites. 

While proposed § 40.25 may appear 

on its face to require substantial new 

information from DCMs regarding their 

market-maker or trading incentive 

programs, the proposed rule is largely 

similar to existing rule filing 

requirements in part 40. For example, 

existing §§ 40.5 and 40.6 each require a 

DCM requesting approval or selfcertifying rules to provide the 

Commission with the rule text; the 

proposed effective date or date of 

intended implementation; and an 

‘‘explanation and analysis of the 

operation, purpose, and effect’’ of the 

proposed rule. Existing §§ 40.5 and 40.6 

also require each DCM to provide the 

Commission with an assessment of the 

rule’s ‘‘compliance with applicable 

provisions of the Act, including core 

principles, and the Commission’s 

regulations thereunder;’’ and ‘‘a brief 

explanation of any substantive opposing 

views expressed to [the DCM] by 

governing board or committee members, 

members of the entity or market 

participants that were not incorporated 

into the rule . . . .’’ Further, these 

existing provisions each require a DCM 

to certify that the DCM posted on its 

public Web site a notice of pending rule 

or certification and to also post a copy 

of the DCM’s submission to the 

Commission on the DCM’s Web site. 

The Commission believes proposed 

§ 40.25 adds important clarity to 

existing rule filing requirements in part 

40 when such filings pertain to marketmaker or trading incentive programs. 

However, the Commission also believes 

that there is significant overlap between 

proposed § 40.25 and existing 

requirements for DCMs in §§ 40.5 and 

40.6. Proposed § 40.25 does not create a 

new category of rule filings, nor does it 

or require more frequent filings. For 

these reasons, the Commission believes 

that any additional Paperwork 

Reduction Act obligations in proposed 

§ 40.25 will be minor per DCM. 

Burden: Information regarding market 

maker and trading incentive program 

rule filings pursuant to part 40. 

Respondents/Affected Entities: 15 

DCMs. 

Estimated total burden on each 

affected entity: 156 hours of DCM time 

per year. 

Frequency of collection: Intermittent. 


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611 7 U.S.C. 19(a). 

612FIA at 60; CME at 41. 

613FIA at 60. 

614See id. 

615CME at 41. 

616See id. 

617CFE at 2. 

618TCL at 18. 

619AFR at 2. 

620 IATP at 3. 

Burden statement-all affected entities: 

15 respondents × 156 hours of DCM 

time per year = 2,340 Burden Hours per 

year. 

i. § 40.26—Information Provided by 

DCMs to the Division of Market 

Oversight Upon Request Regarding 

Market Maker and Trading Incentive 

Programs 

Proposed § 40.26 would permit the 

Commission or the director of DMO to 

require certain information from DCMs 

regarding their market-maker or trading 

incentive programs. The Commission 

believes that proposed § 40.26 will 

impose no additional Paperwork 

Reduction Act burdens on DCMs. The 

proposed regulation permits the 

Commission or the director of DMO to 

require information from a DCM 

regarding the DCM’s market-maker or 

trading incentive programs. It is a more 

targeted iteration of existing § 38.5, 

which requires a DCM to file with the 

Commission such ‘‘information related 

to its business as a designated contract 

market’’ as the Commission may 

require. Section 38.5 also requires a 

DCM upon request by the Commission 

or the director of DMO to file ‘‘a written 

demonstration’’ that the DCM ‘‘is in 

compliance with one or more core 

principles as specified in the request’’ or 

‘‘satisfies its obligations under the Act,’’ 

including ‘‘supporting data, information 

and documents.’’ Proposed § 40.26 does 

not alter a DCM’s existing obligations 

under § 38.5, but rather makes clear that 

Commission and DMO information 

requests may pertain specifically to 

market-maker and trading incentive 

programs. It imposes no new obligation 

to provide information, and does not 

increase the frequency which 

information must be provided. 

Burden: Information requests from the 

Commission or the Director of the 

Division of Market Oversight. 

Respondents/Affected Entities: 15 

DCMs. 

Estimated total burden on each 

affected entity: 0 hours of DCM time per 

year. 

Frequency of collection: Intermittent. 

Burden statement-all affected entities: 

15 respondents × 0 hours of DCM time 

per year = 0 Burden Hours per year. 

2. Information Collection Comments 

The Commission invites the public to 

comment on any aspect of the 

paperwork burdens discussed herein. 

Copies of the supporting statements for 

the collections of information from the 

Commission to OMB are available by 

visiting RegInfo.gov. Pursuant to 44 

U.S.C. 3506(c)(2)(B), the Commission 

solicits comments in order to: (i) 

Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 

collections of information; (iii) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information proposed to be 

collected; and (vi) minimize the burden 

of the proposed collections of 

information on those who are to 

respond, including through the use of 

appropriate automated collection 

techniques or other forms of information 

technology. 

Those desiring to submit comments 

on the proposed information collection 

requirements should submit them 

directly to the Office of Information and 

Regulatory Affairs, OMB, by fax at (202) 

395–6566, or by email at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that all 

comments can be summarized and 

addressed in the final rule preamble. 

Refer to the ADDRESSES section of this 

notice of proposed rulemaking for 

comment submission instructions to the 

Commission. 

E. Cost Benefit Considerations 

1. The Statutory Requirement for the 

Commission To Consider the Costs and 

Benefits of Its Actions 

Section 15(a) of the CEA requires the 

Commission to ‘‘consider the costs and 

benefits’’ of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders.611

Section 15(a) further specifies that the 

costs and benefits must be evaluated in 

light of the following five broad areas of 

market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission 

considers the costs and benefits 

resulting from its discretionary 

determinations with respect to the 

section 15(a) factors below. As a general 

matter, the Commission considers the 

incremental costs and benefits of these 

proposed rules, taking into account 

what it believes is industry practice 

given the Commission’s existing 

regulations and industry best practices, 

as described below. Where reasonably 

feasible, the Commission has 

endeavored to estimate quantifiable 

costs and benefits. The Commission also 

identifies and describes costs and 

benefits qualitatively. 

2. Concept Release Comments Regarding 

Costs and Benefits 

In the Concept Release, the 

Commission sought comments on most 

of the measures now addressed by 

Regulation AT. Six commenters made 

general points on cost-benefit 

considerations. Specifically, FIA and 

CME noted that the cost of 

implementing risk controls varies 

widely.612 FIA stated that many of the 

risk controls addressed in the Concept 

Release are already used in the futures 

industry and their benefit is clearly 

understood.613 FIA further stated that 

the implementation cost to individual 

firms varies widely based on the 

systems they have and the market and 

products they trade.614 Similarly, CME 

indicated that as to risk controls, 

specific costs as to development, 

implementation and ongoing 

operational figures will vary widely 

across the futures industry supply 

chain.615 CME declined to provide 

detailed analysis as to its own 

expenditures.616

CFE commented that if the 

Commission proposes risk control 

requirements, it should perform a 

careful cost-benefit analysis and allow 

DCMs at least two years to implement 

the controls.617 TCL stated that most 

entities have the technology to address 

the ‘‘spirit’’ of the controls described in 

the Concept Release.618 AFR noted that 

cost-benefit analysis should be based on 

costs and benefits to the public as a 

whole, not on private benefits to 

individual actors.619 Finally, IATP 

stated that the Concept Release asked 

more frequently about costs of risk 

controls as compared to benefits of 

increased market stability, which can be 

more difficult to quantify.620

3. The Commission’s Cost-Benefit 

Consideration of Regulation AT— 

Baseline Point 

As a preliminary matter, the 

Commission notes that certain aspects 

of Regulation AT, as discussed below, 

codify existing norms and best practices 

of trading firms, clearing member FCMs 


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621FIA at 3, 59–60. 622 7 U.S.C. 2(i). 

and DCMs. In that regard, in 2013, FIA 

surveyed FCMs and FIA PTG member 

firms regarding their use of risk controls 

and self-trade controls and found that 

all or most respondents currently use 

such controls.621 Comment letters to the 

Concept Release indicated that 

implementation of pre-trade and other 

risk controls was already widespread. 

Moreover, existing statutory schemes 

(e.g., the SEC’s Market Access Rule and 

the CFTC’s requirements relating to 

financial risk) means that many entities 

will already have systems in place 

relevant to the controls proposed in 

Regulation AT. Accordingly, as 

discussed below, the existing norms or 

best practices serve as the Commission’s 

guide for determining the status quo 

baseline against which to measure the 

incremental costs and benefits of the 

proposed regulations. The Commission 

recognizes, however, that some 

individual firms currently may not be 

operating at industry best practice 

levels; for such firms costs and benefits 

attributable to the proposed regulations 

will be incremental to a lower status 

quo baseline. In many cases, the 

Commission assumes that compliance 

with regulations will require an upgrade 

to existing systems, rather than building 

risk control systems from scratch. 

To assist the Commission and the 

public in assessing and understanding 

the economic costs and benefits of the 

proposed rule, the Commission has 

analyzed the costs of the proposed 

regulations that impose additional 

requirements on trading firms, clearing 

member FCMs and DCMs above and 

beyond the baseline. In many instances, 

full quantification of the costs is not 

reasonably feasible because costs 

depend on the size, structure, and 

practices of trading firms, clearing 

member FCMs and DCMs. Within each 

category of entity, the size, structure and 

practices of such entities will vary 

markedly. In addition, the 

quantification may require information 

or data that the Commission does not 

have or was not provided in response to 

the Concept Release or other requests. 

The Commission notes that to the extent 

that the regulations proposed in this 

rulemaking results in additional costs, 

those costs will be realized by trading 

firms, clearing member FCMs and 

exchanges in order to protect market 

participants and the public. Finally, in 

general, full quantification of the 

benefits of the proposed rule is also not 

reasonably feasible, due to the difficulty 

in quantifying the benefits of a 

reduction in market disruptions and 

other significant market events due to 

the risk controls and other measures 

proposed in Regulation AT. 

4. The Commission’s Cost-Benefit 

Consideration of Regulation AT—CrossBorder Effects 

The Commission notes that the 

consideration of costs and benefits 

below is based on the understanding 

that the markets function 

internationally, with many transactions 

involving U.S. firms taking place across 

international boundaries; with some 

Commission registrants being organized 

outside of the United States; with 

leading industry members typically 

conducting operations both within and 

outside the United States; and with 

industry members commonly following 

substantially similar business practices 

wherever located. Where the 

Commission does not specifically refer 

to matters of location, the below 

discussion of costs and benefits refers to 

the effects of the proposed rules on all 

activity subject to the proposed and 

amended regulations, whether by virtue 

of the activity’s physical location in the 

United States or by virtue of the 

activity’s connection with or effect on 

U.S. commerce under CEA Section 

2(i).622 In particular, the Commission 

notes that some AT Persons are located 

outside of the United States. 

5. General Request for Comment 

111. Beyond specific questions 

interspersed throughout its discussion, 

the Commission generally requests 

comment on all aspects of its 

consideration of costs and benefits, 

including: (a) Identification, 

quantification, and assessment of any 

costs and benefits not discussed therein; 

(b) whether any of the proposed 

regulations may cause FCMs or DCMs to 

raise their fees for their customers, or 

otherwise result in increased costs for 

market participants and, if so, to what 

extent; (c) whether any category of 

Commission registrants will be 

disproportionately impacted by the 

proposed regulations, and if so whether 

the burden of any regulations should be 

appropriately shifted to other 

Commission registrants; (d) what, if any, 

costs would likely arise from market 

participants engaging in regulatory 

arbitrage by restructuring their trading 

activities to trade on platforms not 

subject to the proposed regulations, or 

taking other steps to avoid costs 

associated with the proposed 

regulations; (e) quantitative estimates of 

the impact on transaction costs and 

liquidity of the proposals contained 

herein; (f) the potential costs and 

benefits of the alternatives that the 

Commission discussed in this release, 

and any other alternatives appropriate 

under the CEA that commenters believe 

would provide superior benefits relative 

to costs; (g) data and any other 

information to assist or otherwise 

inform the Commission’s ability to 

quantify or qualitatively describe the 

benefits and costs of the proposed rules; 

and (h) substantiating data, statistics, 

and any other information to support 

positions posited by commenters with 

respect to the Commission’s 

consideration of costs and benefits. 

6. The Commission’s Cost-Benefit 

Consideration of Regulation AT— 

Proposed Definitions 

The Commission notes that 

Regulation AT proposes certain defined 

terms, including ‘‘AT Person,’’ 

‘‘Algorithmic Trading,’’ and ‘‘Direct 

Electronic Access’’ (as an element of the 

revised definition of the term ‘‘Floor 

Trader’’). While the defined terms 

themselves do not impose costs, the 

Commission recognizes that the scope of 

such definitions will impact the 

potential costs of other regulations. For 

example, proposed § 1.80 imposes risk 

control requirements on ‘‘AT Persons,’’ 

and the defined term ‘‘Algorithmic 

Trading’’ is an element of the term AT 

Person. The broader the definition of AT 

Person and Algorithmic Trading, the 

greater the number of firms that would 

be required to meet the requirements of 

§ 1.80. 

The Commission believes its 

definition of AT Person is appropriate 

and its inclusion of ‘‘floor traders,’’ 

consistent with the proposed changes to 

§ 1.3(x), will mean that certain currently 

unregistered market participants who 

actively trade on Commission-regulated 

markets will be subject to risk control 

requirements that will prevent or 

mitigate the risks of malfunctioning 

algorithmic trading systems. Similarly, 

the proposed definition of Algorithmic 

Trading captures such trading activity 

that has the potential, when there is a 

technological malfunction, to harm 

market participants and disrupt markets 

at a speed that is difficult to mitigate. 

The Commission asks questions 

concerning the scope of the definition of 

Algorithmic Trading, for example 

whether order routing systems should 

be included within such definition. The 

Commission acknowledges that any 

change made to scope of AT Person and 

Algorithmic Trading made in 

accordance with any comments received 

will impact the cost of regulations that 

use those definitions. 


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623AIMA indicated that many market participants 

use maximum order size limits, and Gelber, a 

trading firm, stated that it uses this risk control. See 

AIMA at 13; Gelber at 10. 

624FIA at 59–60. 

625CME Appendix at A–4; CFE at 9–10. In 

addition, FIA characterized cancel-on-disconnect as 

a ‘‘widely adopted DCM-hosted pre-trade risk 

control.’’ See FIA at 14. 

7. Pre-Trade Risk Controls, Testing and 

Supervision of Automated Systems, 

Requirement To Submit Compliance 

Reports, and Other Related Algorithmic 

Trading Requirements 

a. Summary of Proposed Rules 

This section addresses the following 

proposed regulations: (i) The 

requirement that AT Persons implement 

pre-trade risk controls and other related 

measures (§ 1.80); (ii) standards for the 

development, testing, and monitoring of 

Algorithmic Trading systems by AT 

Persons (§ 1.81); (iii) registered futures 

association (‘‘RFA’’) standards for 

algorithmic trading systems (‘‘ATSs’’) 

operated by their members and clearing 

member FCMs with respect to customer 

orders originating with ATSs (§ 170.19); 

(iv) the requirement that AT Persons 

must become a member of a futures 

association (§ 170.18); (v) the 

requirement that clearing member FCMs 

implement pre-trade risk controls and 

other related measures (§ 1.82); (vi) the 

requirements of § 1.83, including that: 

AT Persons submit compliance reports 

to DCMs regarding their § 1.80(a)- 

required risk controls, as well as copies 

of the written policies and procedures 

developed to comply with § 1.81(a) and 

(c) (§ 1.83(a)); clearing member FCMs 

submit compliance reports to DCMs 

regarding their program for establishing 

and maintaining the pre-trade risk 

controls required by § 1.82(a)(1) for AT 

Person customers (§ 1.83(b)); AT 

Persons keep and provide upon request 

to DCMs books and records regarding 

their compliance with §§ 1.80 and 1.81 

(§ 1.83(c)); and clearing member FCMs 

keep and provide upon request to DCMs 

books and records regarding their 

compliance with § 1.82 (§ 1.83(d)); (vii) 

the requirement that DCMs implement 

pre-trade risk controls and other related 

measures (§§ 38.255 and 40.20); (viii) 

the requirement that DCMs provide test 

environments where AT Persons may 

test their ATSs (§ 40.21); and (ix) the 

requirements of § 40.22, including that 

DCMs: implement rules requiring AT 

Persons and clearing member FCMs to 

submit compliance reports each year 

(§ 40.22(a) and (b)), establish a program 

for effective periodic review and 

evaluation of the reports (§ 40.22(c)), 

implement rules that require each AT 

Person to keep and provide to the DCM 

books and records regarding their 

compliance with all requirements 

pursuant to § 1.80 and § 1.81, and 

require each clearing member FCM to 

keep and provide to the DCM market 

books and records regarding their 

compliance with all requirements 

pursuant to § 1.82 (§ 40.22(d)), and 

require DCMs to review and evaluate, as 

necessary, books and records required to 

be kept pursuant to § 40.22(d), and the 

measures described therein (§ 40.22(e)). 

The pre-trade risk controls and other 

measures required by §§ 1.80, 1.82, 

38.255, and 40.20 would require the 

following enumerated pre-trade risk 

controls: Maximum AT Order Message 

and execution frequencies, price 

parameters, and maximum order size 

limits. The regulations would also 

require certain order management 

controls, including kill switch and 

cancel-on-disconnect functionalities. 

Proposed § 170.19 would require an 

RFA to adopt certain membership 

rules—as deemed appropriate by the 

RFA—relevant to ATSs and algorithmic 

trading for each category of member in 

the RFA. Proposed § 170.18 would 

require all AT Persons to be registered 

as a member of an RFA. 

Proposed § 1.81 would require AT 

Persons to establish policies and 

procedures that accomplish a number of 

objectives relating to the design, testing, 

and supervision of Algorithmic Trading. 

More specifically, proposed § 1.81 

would require each AT Person to: 

Implement written policies and 

procedures for the development and 

testing of ATSs (§ 1.81(a)); implement 

written policies and procedures 

reasonably designed to ensure that each 

of its ATSs is subject to continuous realtime monitoring and supervision by 

knowledgeable and qualified staff while 

such ATS is engaged in trading 

(§ 1.81(b)); implement written policies 

and procedures reasonably designed to 

ensure that ATSs operate in a manner 

that complies with the CEA and the 

rules and regulations thereunder, and 

ensure that staff are familiar with the 

CEA and the rules and regulations 

thereunder, the rules of any DCM to 

which such AT Person submits orders 

through Algorithmic Trading, the rules 

of any RFA of which such AT Person is 

a member, the AT Person’s own internal 

requirements, and the requirements of 

the AT Person’s clearing member FCM, 

in each case as applicable (§ 1.81(c)); 

and implement written policies and 

procedures to designate and train staff 

responsible for Algorithmic Trading 

(§ 1.81(d)). As a complement to the 

proposed design and testing 

requirements, proposed § 40.21 would 

require DCMs to provide a test 

environment that will enable market 

participants to simulate production 

trading and conduct exchange-based 

conformance testing of their 

Algorithmic Trading systems. 

Proposed § 1.83(a) would require AT 

Persons to submit annual reports to each 

DCM on which they operate regarding 

their pre-trade risk controls as required 

by § 1.80(a). Together with such annual 

reports, each AT Person would also be 

required to submit copies of the written 

policies and procedures developed to 

comply with § 1.81(a) and (c). Proposed 

§ 1.83(b) would require clearing member 

FCMs for AT Persons to submit reports 

to DCMs describing their program for 

establishing and maintaining the pretrade risk controls required by 

§ 1.82(a)(1). The Commission is also 

proposing a new § 40.22(c) to require 

that each DCM that receives a report 

described in § 1.83 establishes a 

program for effective periodic review 

and evaluation of the reports. In 

addition, proposed § 1.83(c) and (d) 

would require AT Persons and clearing 

member FCMs for AT Persons to keep 

and provide upon request to DCMs 

books and records regarding their 

compliance with §§ 1.80 and 1.81 (for 

AT Persons) and § 1.82 (for clearing 

member FCMs). The Commission is also 

proposing a new § 40.22(d) and (e) to 

require that DCMs implement rules 

requiring AT Persons and clearing 

member FCMs to keep and provide such 

books and records, and to require DCMs 

to review and evaluate such books and 

records, and identify and remediate any 

insufficient mechanisms, policies and 

procedures therein. 

b. Costs and Benefits 

i. § 1.80 Costs—Pre-Trade and Other 

Risk Controls (AT Persons) 

Based on Concept Release comments, 

best practices documents issued by 

industry or regulatory organizations, as 

well as existing regulations, the 

Commission believes that a significant 

number of AT Persons already 

implement the specifically-enumerated 

pre-trade and other risk controls 

required pursuant to proposed § 1.80. 

Specifically, in its survey of member 

firms, PTG found the following: (i) 25 

out of 26 responding firms use message 

and execution throttles; (ii) all 26 

responding firms use maximum order 

size limits, either using their own 

technology, the exchange’s technology, 

or some combination; 623 and (iii) 24 out 

of 26 responding firms use either price 

collars or trading pauses.624 As to order 

management controls, two comments to 

the Concept Release from exchanges 

stated that they provide an optional 

cancel-on-disconnect functionality.625


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626CME at 23–24; CFE at 11. 

627FIA PTG, ‘‘Recommendations for Risk 

Controls for Trading Firms,’’ (Nov. 2010) at 4–5. 

628ESMA Guidelines, supra note 61 at 14–15. 

629See 17 CFR 240.15c3–5(e); SEC, Responses to 

Frequently Asked Questions Concerning Risk 

Management Controls for Brokers or Dealers with 

Market Access (Apr. 15, 2014), supra note 37. 

630CFTC TAC Recommendations, supra note 34 

at 2–3. 

Those exchanges also indicated that 

they provide kill switch functionality to 

market participants.626

The Commission notes that these 

types of controls have been included in 

industry best practices for years. For 

example, FIA PTG recommended, 

among other things, that trading firms 

implement message limits, a repeated 

automated execution throttle, fat-finger 

limits and price collars, as well as 

‘‘heartbeats’’ with the exchange, use of 

exchange-provided cancel-ondisconnect functionality, and a kill 

button that disables the system’s ability 

to trade and cancels all resting 

orders.627 In addition, ESMA guidelines 

from 2012 recommended, among other 

things, that investment firms implement 

messaging traffic controls and price or 

size parameters.628 The Commission 

also notes that the SEC’s Market Access 

Rule, adopted in November 2010, 

requires brokers and dealers to have risk 

controls that prevent entry of erroneous 

orders, by rejecting orders that exceed 

appropriate price or size parameters, on 

an order-by-order basis or over a short 

period of time, or that indicate 

duplicative orders.629 Given that many 

firms are registered both with the SEC 

and the CFTC, it is likely that there is 

overlap between the set of firms covered 

under the SEC’s Market Access Rule and 

this Proposed Rule. Finally, in 2011, the 

CFTC TAC recommended, among other 

things, that trading firms implement 

message and execution throttles, 

maximum quantity limits, price collars, 

and a kill button.630

The Commission also notes that, as 

discussed in detail above in section 

II.E.1, NFA has provided guidance 

regarding ATSs to industry participants 

since 2002. Such guidance includes 

NFA Interpretive Notice 9046, which 

addresses the ‘‘Supervision of the Use of 

Automated Order-Routing Systems’’ in 

the context of NFA’s overarching 

supervision requirements in 

Compliance Rule 2–9 (Supervision). 

This rule and interpretive notice are 

widely applicable to almost all 

registered futures market participants 

and therefore apply to many AT 

Persons. In particular, Compliance Rule 

2–9 requires each NFA member to 

‘‘diligently supervise its employees and 

agents in the conduct of their 

commodity futures activities for or on 

behalf of the Member.’’ Interpretive 

Notice 9046, first issued in 2002 and 

revised in 2006, provided, among other 

things, that an AORS should allow the 

Member to set limits for each customer 

based on commodity, quantity, and type 

of order or based on margin 

requirements, and should allow the 

Member to impose limits pre-execution 

and to automatically block any orders 

that exceed those limits. In addition, the 

interpretive notice provided that when 

authorizing use of a direct access 

system, the Member should utilize preexecution controls, if available, to set 

pre-execution limits for each customer, 

regardless of the nature of the customer. 

Although proposed § 1.80 is 

consistent with accepted industry best 

practices of long standing and existing 

Commission and SEC regulations to 

which many AT Persons now comply, 

Regulation AT’s risk control 

requirements will impose technology 

and personnel costs on AT Persons. 

These costs include initial risk control 

creation costs and possibly ongoing 

maintenance costs. Many AT Persons 

already have the controls required by 

Regulation AT in place, and will only 

need to upgrade such controls to ensure 

compliance. To the extent some AT 

Persons may be outliers that do not 

currently implement risk controls 

consistent with industry best practice— 

a number the Commission lacks data to 

accurately identify and quantify—these 

firms would incur costs greater than 

‘‘upgrade’’ costs. The costs to any such 

outlier firms would vary based on each 

firm’s unique size, business model, 

technology and existing risk controls. 

The Commission recognizes that some 

firms will already have entirely 

compliant systems requiring no upgrade 

and, at the other end of the spectrum, 

some firms may not be currently 

implementing the § 1.80 required risk 

controls at all. Accordingly, the 

Commission estimates the ‘‘upgrade’’ 

costs for AT Persons to comply with 

Regulation AT risk control 

requirements, and welcomes comment 

on the accuracy of such estimates. 

Aside from costs to individual AT 

Persons in creating and maintaining the 

controls required by Regulation AT, in 

quantifying costs of § 1.80, the 

Commission considered that this 

regulation may impose general costs to 

the marketplace as a whole. For 

example, while the Commission expects 

that most AT Persons will only need to 

upgrade systems in order to comply 

with Regulation AT, it is possible that 

costs related to the implementation of 

new risk controls could lead to adverse 

effects. For example, compliance costs 

may cause some AT Persons to reduce, 

or cease, their activities in certain 

markets. This may result in a decrease 

in market liquidity, which may cause 

the costs of trading to increase. In order 

to mitigate these potential concerns, the 

Commission has (as discussed further in 

the consideration of alternatives) 

limited the compliance requirements to 

what it preliminarily believes is the 

minimum level needed to protect 

market participants and the public. In 

addition, as discussed in section (ii) 

below, the Commission believes that the 

standardization of risk controls may 

result in the provision of additional 

liquidity. 

Other potential costs related to risk 

controls are similarly hard to quantify. 

Kill switches aim to cease unintended 

message behavior, and the potential 

losses and disruption associated with 

such behavior. However, the mandatory 

triggering of a kill switch when not 

appropriate to a particular firm could 

also prevent the firm’s legitimate, riskreducing activity, and instead result in 

increased costs for such firm. This 

distinction emphasizes the need to 

appropriately calibrate risk controls on 

an individual basis, and the 

Commission has proposed rules that 

accommodate that need. While the 

Commission attempts to quantify costs 

to individual firms, the Commission is 

also aware of the broader impact of the 

proposed rules on markets once firms 

apply the proposed risk controls, 

including potential effects on liquidity. 

The Commission welcomes comments 

on these and other potential marketwide effects of the proposed regulations. 

In addition to the potential costs to 

the market as a whole discussed above, 

individual AT Persons may incur costs 

of risk control implementation, in 

particular the cost of upgrading systems 

in order to comply with the proposed 

regulations. Specifically, if a particular 

AT Person’s systems are not already 

compliant with § 1.80, it will need to 

comply with the pre-trade and other risk 

controls in one of several ways: By 

internally developing such controls 

from scratch, upgrading existing 

systems, or through purchasing a risk 

management solution from an outside 

vendor. Each approach potentially has 

initial costs and annual ongoing costs. 

Based on responses to the FIA survey, 

industry best practice standards, and 

existing regulations both in 

Commission-regulated markets as well 

as SEC-regulated markets, the 

Commission believes that many AT 

Persons will be able to substantially 

satisfy the risk control requirements of 

Regulation AT with their existing 

systems and controls. For others, the 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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631For example, the needs of a particular AT 

Person will vary based on its current systems and 

controls in place, the comprehensiveness of its 

controls and procedures, the types of trading 

strategies it uses, and the volume and speed of its 

trading activity. 

632CME Group, ‘‘Risk Management Tools 

Introduction,’’ available at: http:// 

www.cmegroup.com/globex/trading-cme-groupproducts/risk-management-tools.html. 

633NASDAQ OMX Group, Inc., ‘‘Pre-Trade Risk 

Management—Genium INET,’’ available at: http:// 

www.nasdaqomx.com/nordicprm/geniuminet. 

634The Commission also assumes that the most 

difficult control to implement will be message and 

execution throttles because such throttles will need 

to be coordinated among many complex algorithms 

running simultaneously. 

635See Securities Exchange Act Release No. 

61379 (January 19, 2010), 75 FR 4007 (January 26, 

2010) (File No. S7–03–10). 636See id. at 4022. 637See id. 638See id. 639See id. 

costs of upgrading and introducing the 

required systems would vary 

considerably based on current controls 

and procedures, as well as particular 

business models.631

Rather than develop or upgrade its 

own systems, AT Persons may choose to 

purchase a risk management solution 

from a third-party vendor, a DCM, or a 

clearing member FCM. These costs 

could similarly vary, depending on the 

AT Persons’ current systems and 

controls in place, the types of trading 

strategies it uses, the volume and speed 

of its trading activity, and the pricing 

model utilized by the software vendor. 

As one example, the Commission notes 

that CME provides a number of risk 

management tools to its market 

participants and clearing firms. These 

tools include: Cancel-on-disconnect, 

CME Globex credit controls, a Risk 

Management Interface (RMI) (which 

allows clearing members to manage 

risk), drop copy, FirmSoft (the ability to 

view and cancel orders), a kill switch (a 

single step shutdown of trading activity) 

and self-trade prevention.632 As another 

example, NASDAQ OMX Group, Inc. 

offers risk management tools that 

include fat finger price checks, 

maximum order quantity checks, daily 

accumulated quantity checks, maximum 

order rate per second checks, disconnect 

safeguards, email notifications when 

limits or warning levels are breached, 

and an administration interface that 

allows emergency actions.633 Many of 

these mirror, or complement, risk 

controls included within this proposed 

rule. 

The Commission estimated the costs 

for AT Persons to comply with proposed 

§ 1.80. In making its estimates, the 

Commission made several assumptions. 

The Commission assumes that the effort 

to adjust any one control (by ‘‘control,’’ 

in this context, the Commission means 

the pre-trade risk controls, order 

cancellation systems, and connectivity 

systems required by § 1.80) would 

require assessment and possible 

modifications to all controls.634 The 

required programming changes could be 

applied using flexible and generalizable 

methods and leveraged across all 

algorithms. The Commission recognizes 

that execution speed is considered to be 

a significant factor in algorithmic 

trading, and understands that controls 

have the potential to impact execution 

speed; however, the Commission 

believes that requiring a base set of risk 

controls will, rather than further 

increasing speed disadvantages across 

market participants, partially reduce 

them by ensuring that no firm avoids 

the use of a given control to gain an 

advantage. Because each AT Person is 

unique and technological systems across 

AT Persons will vary, the following 

estimates reflect staff’s best efforts, and 

the Commission welcomes comments 

on their accuracy. 

Estimate—Upgrade of Controls. The 

Commission considered the scenario 

where an AT Person already 

implements controls as required by 

proposed § 1.80, but the controls may 

not comply with every aspect of the 

regulation. In such instance, an AT 

Person will need to evaluate its current 

risk control systems to determine 

whether it is compliant with new 

regulatory requirements; modify 

existing code or creating new code to 

address any gaps between current risk 

control systems and new regulatory 

requirements; and test current systems 

and new code to verify correct operation 

and compliance. The Commission 

assumes that AT Persons will generally 

already have some code in place for the 

basic controls required by § 1.80, or for 

something similar that can be added to 

or modified, rather than need to build 

entire pre-trade systems from scratch. 

For example, an AT Person may have an 

existing library of ‘‘code blocks,’’ with a 

block being useful for multiple related 

purposes. 

Accordingly, the Commission 

estimates that an AT Person would 

incur a one-time cost of $79,680 to 

upgrade its systems to comply with 

proposed § 1.80. This cost is broken 

down as follows: 1 Project Manager, 

working for 320 hours (320 × $70 per 

hour = $22,400); 1 Business Analyst, 

working for 320 hours (320 × $52 per 

hour = $16,640); 1 Tester, working for 

320 hours (320 × $52 per hour = 

$16,640); and 1 Developer, working for 

320 hours (320 × $75 per hour = 

$24,000). The Commission estimates 

that if an AT Person already has at least 

some of the controls required by § 1.80, 

there will be no additional annual costs 

to maintain the modifications required 

to bring the systems into compliance 

with § 1.80. Assuming (as discussed 

above) that there are 420 AT Persons, 

the Commission estimates that the total 

one-time industry cost to implement 

§ 1.80 would be approximately 

$33,465,600. 

The Commission notes that AT 

Persons could choose not to develop 

these controls internally, but rather may 

purchase a solution from an outside 

vendor (or DCM or clearing member 

FCM) in order to comply with § 1.80. 

The Commission welcomes comments 

providing estimates concerning the cost 

for an AT Person to use an outside 

vendor to comply with this proposed 

regulation. 

SEC Estimates. The proposing release 

for the SEC’s Market Access Rule, which 

requires brokers and dealers to have risk 

controls in place before providing their 

customers with access to the market, 

provided compliance costs estimates.635

The Commission’s upgrade estimates 

are generally consistent with the cost 

estimates provided by the SEC. For 

example, the SEC estimated that it 

would cost a broker-dealer 

approximately $270,404 ($167,904 in 

technology personnel costs and 

$102,500 in hardware and software 

costs) to build a risk control 

management system from scratch and 

that it would cost a broker-dealer 

$39,401 ($27,984 for technology 

personnel and $11,517 for hardware and 

software) to substantially upgrade an 

existing risk control system.636 The SEC 

estimated that the total annual ongoing 

cost to maintain an in-house risk control 

management system would be $47,300 

per broker-dealer ($26,800 for 

technology personnel and $20,500 for 

hardware and software).637 Finally, with 

respect to outsourcing such controls, the 

SEC estimated that a broker-dealer 

would pay approximately $8,000 per 

month ($96,000 annually) for a startup 

contract.638 To be conservative, the SEC 

estimated the same amount for an 

annual ongoing cost.639

The Commission notes that in 

addition to the general requirements of 

proposed § 1.80 to implement pre-trade 

risk controls, order cancellation systems 

and connectivity systems, § 1.80 

imposes additional requirements 

relating to such controls. Regulation 

§ 1.80(a)(2) provides requirements as to 

the level at which pre-trade risk controls 

should be set and § 1.80(a)(3) requires 

that natural person monitors be 

promptly alerted when such parameters 

are breached. The Commission assumes 


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640See SEC Knight Capital Release, supra note 39. 

641See id. 

642See id. 

643See id. 

that such requirements impose no 

additional costs or are part of the costs 

described above. Establishing particular 

parameters of controls is a necessary 

part of establishing and implementing 

any control. In addition, as discussed 

below, the Commission assumes that it 

is already industry practice to employ a 

natural person to test and monitor a 

firm’s algorithmic trading systems. 

Accordingly, requiring that natural 

person monitors at the AT Person be 

alerted with pre-trade risk control 

parameters are breached should not 

impose additional costs on AT Persons. 

Proposed § 1.80(d) requires each AT 

Person, prior to its initial use of 

Algorithmic Trading, to submit a 

message or order to a DCM’s trading 

platform, must notify its clearing 

member FCM and the DCM on which it 

will be trading that it will engage in 

Algorithmic Trading. Subject to 

consideration of relevant comments, the 

Commission preliminarily believes that 

this requirement of this initial 

notification to clearing firms and DCMs 

will impose minimal or no costs on AT 

Persons. The Commission welcomes 

comment on the costs, if any, of this 

notification requirement. 

Proposed § 1.80(e) requires AT 

Persons to implement a DCM’s self-trade 

prevention tools. The Commission’s 

self-trade prevention requirements are 

principally directed toward DCMs, in 

that § 40.23 would require DCMs to 

apply, or provide and require the use of, 

self-trade prevention tools. The 

Commission believes that DCMs would 

incur the costs of developing or 

upgrading such tools as necessary to 

comply with § 40.23. To the extent that 

AT Persons are not already complying 

with DCM-provided self-trade 

prevention tools already used in 

industry, the Commission believes that 

the cost to an AT Person in calibrating 

or otherwise applying such a tool would 

be a minimal, involving provision of the 

relevant account or other necessary 

information in the DCM in order to 

apply the tool. The Commission 

welcomes comment on the costs, if any, 

to an AT Person in complying with 

§ 1.80(e). 

Finally, proposed § 1.80(f) requires 

that each AT Person shall periodically 

review its compliance with § 1.80 to 

determine whether it has effectively 

implemented sufficient measures 

reasonably designed to prevent an 

Algorithmic Trading Event. AT Persons 

must take prompt action to document 

and remedy deficiencies in such 

policies and procedures. The 

Commission believes that this periodic 

review is necessary to comply with 

§ 1.83(a), which, as discussed below, 

requires AT Persons to annually submit 

reports regarding their pre-trade risk 

controls required pursuant to proposed 

§ 1.80(a) and copies of the written 

policies and procedures developed to 

comply with § 1.81(a) and (c) to each 

DCM on which they operate. 

Accordingly, the Commission believes 

that articulating such requirement 

explicitly in the final subsection of this 

rule will not engender costs separate 

from those previously discussed and 

considered. 

The Commission emphasizes that 

costs for each AT Person will vary. 

Finally, the Commission notes that, as 

indicated above, these estimates may 

overstate the actual costs to the 

industry. Based on Concept Release 

comments, best practices issued by 

industry and regulatory organizations, 

as well as existing regulations, the 

Commission believes that all or most AT 

Persons are already using the pre-trade 

and other risk controls required by 

proposed § 1.80. The Commission 

welcomes public comment on the above 

analysis and estimates. 

ii. § 1.80 Benefits—Pre-Trade and 

Other Risk Controls (AT Persons) 

Proposed § 1.80 should benefit market 

participants by mitigating credit, 

market, and operational risks faced by 

trading firms. Standardization of pretrade and other risk controls is 

particularly critical in the context of 

potential outlier trading firms that have 

chosen not to implement appropriate 

risk controls in the absence of 

regulation. As noted above (for example, 

with respect to the Knight Capital 

incident), a technological malfunction at 

such a single firm can have far-reaching 

impact across markets and market 

participants. Credit, market and 

operational risks are mitigated through 

ensuring that each order accurately 

reflects the intentions of the participant 

and does not otherwise violate the CEA 

or Commission regulations. The pretrade and other risk controls required by 

proposed § 1.80 should improve both 

price efficiency and price transparency 

in Commission-regulated markets by 

reducing the chances of large, 

unintended orders moving prices away 

from appropriate market values. Absent 

protections, unintended and erroneous 

trades resulting from a malfunctioning 

trading system could potentially expose 

not just the original market participant, 

but any participant exposed to the given 

market, to unexpected financial burdens 

as a result of price moves. These 

burdens may include the financial 

impact on market participants with 

open positions impacted by price 

moves, or market participants with 

market orders in the order book. In 

addition to these losses, and potentially 

uncertain trading positions, sudden, 

large unintentional market activity can 

disrupt the efficiency, competitiveness 

and financial integrity of the futures 

markets. Because much of the impact of 

such unintended trades is independent 

of connection method, it is in the 

individual trading firm’s interest, and 

the interest of Commission-regulated 

markets as a whole, to have all types of 

algorithmic trading orders, regardless of 

access method, be subjected to sound 

risk controls. 

As noted, the Commission believes 

that proposed regulation § 1.80 

standardizes existing industry practices 

in this area, and does not impose 

additional requirements beyond existing 

best practices that most market 

participants satisfy. Accordingly, the 

Commission notes that many of the 

benefits of § 1.80 are already being 

realized. This proposed rule, however, 

may serve to limit a ‘‘race to the 

bottom’’ in which certain entities 

sacrifice effective risk controls in order 

to minimize costs or increase the speed 

of trading. The proposed rules, by 

standardizing the risk controls required 

to be used by firms, would help ensure 

that the benefits of these risk controls 

are more evenly distributed across a 

wide set of market participants, and 

reduce the likelihood that an outlier 

firm without sufficient risk controls 

causes significant market disruption. 

Incidents like the one involving 

Knight Capital highlight the importance 

of using pre-trade and other risk control 

protections. Specifically, an SEC 

investigation found that Knight Capital 

did not have adequate safeguards in 

place to limit the risks posed by its 

access to the markets, and, as a result, 

failed to prevent the entry of millions of 

erroneous orders.640 Knight Capital also 

failed to conduct adequate reviews of 

control effectiveness.641 The SEC 

charged Knight Capital with multiple 

violations of the SEC’s Market Access 

Rule, which included failure to have 

adequate controls at a point 

immediately prior to its submission of 

orders to the market, such as a control 

to compare orders leaving the router 

with those entered.642 Knight also failed 

to adequately review its business 

activity in connection with its market 

access to ensure the overall 

effectiveness of its risk management 

controls and supervisory procedures.643


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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644See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

645As discussed above, the Commission notes 

that staff persons who are responsible for 

monitoring the trading of other AT Person staff 

should not simultaneously be actively engaged in 

trading. The Commission believes that it would not 

be possible to adequately and consistently monitor 

trading of other AT Person staff while engaged in 

trading activities. 

As a result of these failures, the SEC 

found that Knight put not only 

themselves, but the markets in general, 

at risk. The Commission views 

prevention of disruptive events like that 

involving Knight Capital as an 

important benefit of § 1.80 that impacts 

all market participants and the public. 

By requiring, and standardizing, 

certain risk controls implemented by 

traders and trading firms, the 

Commission intends to foster a level 

playing field across market participants, 

and avoid a situation where firms with 

stronger risk control systems face speed 

disadvantages. The Commission also 

recognizes that in the absence of a rule 

requiring implementation of certain risk 

controls, some market participants may 

be compelled by competitive and 

economic pressures to submit orders, or 

allow the submission of orders, without 

appropriate controls to safeguard against 

the risks of a malfunctioning algorithm. 

The race for speed may reduce the 

incentive to add risk controls, and the 

absence of risk controls can magnify the 

effect, and cost, of errors in the high 

speed trading environment. In addition, 

the mitigation of significant system risks 

should help ensure market integrity and 

provide the investing public with 

greater confidence that all transactions, 

along with the resulting price 

movements, are intentional and bona 

fide. Regulation AT should promote 

investor confidence as well as enhance 

the fair and efficient operation of the 

markets. 

The Commission believes that market 

participants, in particular those 

currently using risk controls, may face 

a number of disadvantages due to the 

fact that risk controls for algorithmic 

trading are not standardized, and that 

these disadvantages may discourage 

market participants from providing 

liquidity. Market participants may be 

concerned about their exposure to 

potential losses due to Algorithmic 

Trading events and various market 

abuses in the absence of standardized 

risk controls and other measures. 

Market participants may also be 

concerned whether market orders and 

trades in fact reflect the intent of the 

market participants submitting them. 

The Commission thus expects, subject 

to consideration of comments, that 

standardization of risk control 

requirements for all AT Persons via 

Regulation AT will reduce such costs 

and trading disincentives for market 

participants arising from Algorithmic 

Trading events and market abuses. The 

Commission also expects, subject to 

consideration of comments, that 

standardization will reduce unexpected 

costs that market participants currently 

experience when unfavorable price 

movements occur due to the behavior of 

another market participant’s faulty 

algorithm. As a result, the Commission, 

subject to consideration of comments, 

views the proposed standardized risk 

controls as a tool likely to encourage AT 

Persons and other market participants to 

provide additional liquidity, mitigating 

the potential negative impact on market 

liquidity from certain costs associated 

with Regulation AT, as previously 

discussed in section (i) above. 

iii. § 1.81 Costs—Development, 

Testing and Supervision of Algorithmic 

Systems (AT Persons) 

The Commission believes that most 

market participants and DCMs have 

implemented controls regarding the 

design, testing, and supervision of 

Algorithmic Trading systems, in light of 

the numerous best practices and 

regulatory requirements promulgated in 

this area. For this fully compliant 

majority, the codification of such 

standards in proposed § 1.81 should not 

engender additional costs. For any 

market participants that are not fully 

compliant, some additional costs may 

be expected. These efforts include the 

FIA PTG’s November 2010 

‘‘Recommendations for Risk Controls for 

Trading Firms,’’ FIA’s March 2012 

‘‘Software Development and Change 

Management Recommendations,’’ 

ESMA and MiFID II guidelines and 

directives on the development and 

testing of algorithmic systems, SEC 

Regulation SCI requirements on the 

development, testing, and monitoring of 

SCI systems, FINRA’s March 2015 

Notice 15–09 on effective supervision 

and control practices for market 

participants that use algorithmic trading 

strategies in the equities market, 

IOSCO’s April 2015 Consultation 

Report, summarizing best practices that 

should be considered by trading venues 

when developing and implementing risk 

mitigation mechanisms, and the Senior 

Supervisors Group (SSG) April 2015 

Algorithmic Trading Briefing Note, 

which described how large financial 

institutions currently monitor and 

control for the risks associated with 

algorithmic trading during the trading 

day. 

The Commission has calculated an 

estimated maximum cost to an AT 

Person that has not implemented any of 

the design, testing, and supervision 

standards required by proposed § 1.81 

as further described below. To the 

extent an AT Person is already in partial 

compliance with § 1.81, as the 

Commission believes many are likely to 

be, their costs should be less than the 

maximum described. 

Development and Testing. The 

Commission estimates that an AT 

Person that has not implemented any of 

the requirements of proposed § 1.81(a) 

(development and testing of Algorithmic 

Trading Systems) would incur a total 

cost of $349,865 to implement these 

requirements. This cost is broken down 

as follows: 1 Project Manager, working 

for 1,707 hours (1,707 × $70 = 

$119,490); 2 Business Analysts, working 

for a combined 853 hours (853 × $52 = 

$44,356); 3 Testers, working for a 

combined 2,347 hours (2,347 × $52 = 

$122,044); and 2 Developers, working 

for a combined 853 hours (853 × $75 = 

$63,975).644

Monitoring. The Commission 

estimates that an AT Person that has not 

implemented any of the requirements of 

proposed § 1.81(b) (monitoring of 

Algorithmic Trading Systems) would 

incur a total cost of $196,560 to 

implement these requirements. This 

cost is broken down as follows: 1 Senior 

Compliance Specialist, working for 

2,080 hours (2,080 × $57 = $118,560); 

and 1 Business Analyst, working for 

1,500 hours (1,500 × $52 = $78,000).645

Compliance. The Commission 

estimates that an AT Person that has not 

implemented any of the requirements of 

proposed § 1.81(c) (compliance of 

Algorithmic Trading Systems) would 

incur a total cost of $174,935 to 

implement these requirements. This 

cost is broken down as follows: 1 Project 

Manager, working for 853 hours (853 × 

$70 = $59,710); 2 Business Analysts, 

working for a combined 427 hours (427 

× $52 = $22,204); 3 Testers, working for 

a combined 1,173 hours (1,173 × $52 = 

$60,996); and 2 Developers, working for 

a combined 427 hours (427 × $75 = 

$32,025). 

Designation and Training of Staff. 

The Commission estimates that an AT 

Person that has not implemented any of 

the requirements of proposed § 1.81(d) 

(designation and training of Algorithmic 

Trading staff) would incur a total cost of 

$101,600 to implement these 

requirements. This cost is broken down 

as follows: 1 Senior Compliance 

Specialist, working for 500 hours (500 × 

$57 = $28,500); 1 Project Manager, 

working for 500 hours (500 × $70 = 

$35,000); 1 Developer, working for 300 

hours (300 × $75 = $22,500); and 1 


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646 IATP at 7. 

647See SEC Knight Capital Release, supra note 39. 

648See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

649 In this regard, the Commission estimates that 

total costs for an RFA could range between $11,400 

and $34,200 based on the amount of work invested 

before the RFA determined not to pursue additional 

membership rules pursuant to proposed § 170.19. 

Business Analyst, working for 300 hours 

(300 × $52 = $15,600). 

Notwithstanding these estimates, the 

Commission believes that proposed 

§ 1.81 standardizes existing industry 

practices in this area, but does not 

impose additional requirements that are 

not already followed by the majority of 

market participants. As a result, subject 

to consideration of relevant comments, 

the Commission preliminarily believes 

that regulation § 1.81 would not impose 

additional costs on the majority of AT 

Persons and that the costs imposed on 

AT Persons that are in partial 

compliance with § 1.81 will be less than 

the amounts described above. 

iv. § 1.81 Benefits—Development, 

Testing and Supervision of Algorithmic 

Systems (AT Persons) 

The rules proposed with respect to 

the design, testing, and supervision of 

Algorithmic Trading systems are 

intended to further mitigate the risk of 

Algorithmic Trading. In their response 

to the Concept Release, IATP noted that, 

out of all the safeguards discussing in 

the Release, they believed ATS testing 

had the greatest potential to reduce 

market disruptions.646 By standardizing 

principles in this area, Regulation AT is 

intended to reduce the risk of disorderly 

trading, including the risk that orders 

will be unintentionally sent into the 

marketplace by a poorly designed or 

insufficiently supervised algorithm. 

For example, the regulations proposed 

under § 1.81 may reduce the risk of 

market disruptions such as the 2012 

incident involving Knight Capital. The 

SEC later concluded that, among other 

failures, Knight Capital did not have 

adequate controls and procedures for 

code deployment and testing for its 

order router, did not have sufficient 

controls and written procedures to 

guide employees’ responses to 

significant technological and 

compliance incidents, and did not have 

an adequate written description of its 

risk management controls.647 Proposed 

§ 1.81 requires written policies and 

procedures relating to the following: 

Testing of all Algorithmic Trading code 

and relates systems and any changes to 

such code and systems prior to their 

implementation; regular stress tests of 

ATSs to verify their ability to operate in 

the manner intended under a variety of 

market conditions; a plan of internal 

coordination and communication 

between compliance staff of the AT 

Person and staff of the AT Person 

responsible for Algorithmic Trading 

regarding Algorithmic Trading design, 

changes, testing, and controls; and 

procedures for documenting the strategy 

and design of proprietary Algorithmic 

Trading software used by an AT Person, 

among other controls. The 

standardization of such written policies 

and procedures may make disruptive 

events like the Knight Capital incident 

less likely in the future. 

As noted, the Commission believes 

that proposed regulation § 1.81 

standardizes existing industry practices 

in this area, and does not impose 

additional requirements that are not 

already followed by the majority of 

market participants. Accordingly, the 

Commission notes that many of the 

benefits of § 1.81 are already being 

realized. The proposed rule would help 

ensure that the benefits of the required 

testing and supervision will be fully 

realized and sustained into the future. 

v. § 170.19 Costs—RFA Standards for 

Automated Trading and Algorithmic 

Trading Systems (RFAs) 

Proposed § 170.19 requires an RFA to 

establish and maintain a program for the 

prevention of fraudulent and 

manipulative acts and practices, the 

protection of the public interest, and 

perfecting the mechanisms of trading on 

designated contract markets through 

membership rules, as deemed 

appropriate by the RFA, requiring: (1) 

Pre-trade risk controls and other 

measures for ATSs; (2) standards for the 

development, testing, monitoring, and 

compliance of ATSs; (3) designation and 

training of algorithmic trading staff; and 

(4) operational risk management 

standards for clearing member FCMs 

with respect to customer orders 

originating with algorithmic trading 

systems. 

Proposed § 170.19 will impose costs 

on an RFA to establish and maintain a 

program as described in the rule. 

However, RFAs would only be required 

to adopt rules as they deem appropriate; 

any rulemaking pursuant to proposed 

§ 170.19 would be entirely at the 

discretion of the RFA. The Commission 

believes that the costs to an RFA of 

proposed § 170.19 cannot reasonably be 

quantified given RFAs’ complete 

discretion to adopt many, several, or no 

rules in the foreseeable future pursuant 

to § 170.19. In addition, relevant 

rulemaking by an RFA is likely to be 

episodic, as circumstances warranting 

rulemaking will typically not arise on 

an annual basis. With those caveats, 

however, for purposes of this analysis 

and as a basis for comment, the 

Commission is using its own experience 

to quantify the potential costs of 

proposed § 170.19 to an RFA on those 

occasions when it determines to adopt 

rules. For purposes of this exercise, the 

Commission anticipates that an RFA 

could potentially seek to codify industry 

best practices in order to establish a 

baseline of regulatory standardization 

around such practices. 

The Commission believes that the 

work of adopting these rules would fall 

primarily to legal, information 

technology, and compliance staff within 

an RFA. It estimates 450 hours of 

burden for an RFA to adopt rules. This 

includes analysis of existing industry 

best practices, consultation with market 

participants, drafting rules, further 

consultations, including potentially 

with Commission staff, and adoption of 

final rules. The Commission estimates a 

total cost of $34,200 for these efforts. 

This cost is broken down as follows: 2 

Compliance Attorneys, working for a 

combined 150 hours (150 hours × $96 

per hour = $14,400); 2 Developers, 

working for a combined 150 hours (150 

hours × $75 per hour = $11,250); and 2 

Senior Compliance Specialists, working 

for a combined 150 hours (150 hours × 

$57 per hour = $8,550), for a total cost 

of $34,200.648

The Commission notes that an RFA, 

after familiarizing itself with relevant 

best practices, may determine that 

additional membership rules pursuant 

to proposed § 170.19 are unnecessary. 

Under those circumstances, elements of 

the work described above would not be 

required, and the total estimated cost of 

$34,200 would not be incurred. The 

Commission believes, for example, that 

Compliance Attorneys, Developers, and 

Senior Compliance Specialists could 

analyze best practices and determine 

that additional membership rules are 

not required after a combined 150 hours 

of work (50 hours of work for each 

professional role). The Commission 

estimates a total cost of $11,400 for 

these efforts. This cost is broken down 

as follows: 2 Compliance Attorneys, 

working for a combined 50 hours (50 

hours × $96 per hour = $4,800); 2 

Developers, working for a combined 40 

hours (50 hours × $75 per hour = 

$3,750); and 2 Senior Compliance 

Specialists, working for a combined 50 

hours (50 hours × $57 per hour = 

$2,850), for a total cost of $11,400.649


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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650Currently, while floor traders and floor brokers 

register with the NFA, they do not become NFA 

members, and, thus, do not pay membership dues. 

651See, e.g., the discussion of benefits related to 

proposed §§ 1.80, 1.81, and 1.82. 

vi. § 170.19 Benefits—RFA Standards 

for Automated Trading and Algorithmic 

Trading Systems (RFAs) 

The Commission believes that 

proposed § 170.19, by requiring RFAs to 

establish and maintain a program 

addressing the automated trading and 

algorithmic trading systems of its 

members, will help to advance the goals 

described in § 170.19: Prevention of 

fraudulent and manipulative acts and 

practices, the protection of the public 

interest, and perfecting the mechanisms 

of trading on designated contract 

markets. 

RFAs serve a vital regulatory function 

as frontline regulators of their members, 

which would include all AT Persons 

pursuant to proposed § 170.18. RFAs 

promulgate binding membership rules 

and can supplement Commission rules 

as appropriate. RFAs can also operate 

examination programs to monitor 

members’ compliance with association 

rules, and can sanction members for 

non-compliance. The Commission 

believes that because RFAs have these 

and other tools at their disposal, RFAs 

are well-positioned to address rules in 

areas experiencing rapid evolution in 

market practices and technologies, 

including particularly §§ 1.80, 1.81, and 

1.82. 

The Commission believes that the 

structure of proposed §§ 1.80, 1.81, and 

1.82 makes it particularly appropriate to 

give RFAs a discretionary role in 

augmenting the requirements of 

Regulation AT for AT Persons. Proposed 

§§ 1.80, 1.81, and 1.82 address only a 

subset of potentially responsive risk 

controls and other measures. Each AT 

Person remains free to adopt additional 

safeguards reasonably designed to 

prevent an Algorithmic Trading Event 

given its trading strategies, technologies, 

or the markets in which it participates. 

The proposed rules also provide a 

degree of flexibility regarding the 

design, implementation, or calibration 

of those pre-trade risk control or other 

measures that are specifically required 

in §§ 1.80, 1.81, and 1.82, again 

allowing each AT Person to adapt the 

rules to its own trading and technology. 

Given the degree of flexibility 

embedded in these rules, RFAs will be 

well positioned to work with their 

member AT Persons to develop 

standards that are appropriate to each 

AT Person’s specific trading approach 

and technology, and that best serve to 

promote the goals described in § 170.19. 

vii. § 170.18 Costs—AT Person 

Membership in a Registered Futures 

Association (AT Persons) 

Proposed § 170.18 requires each 

registrant that is an AT Person that is 

not otherwise required to be a member 

of an RFA pursuant to §§ 170.15, 170.16, 

or 170.17 to become and remain a 

member of at least one RFA that 

provides for the membership of such 

registrant, unless no such futures 

association is so registered. Proposed 

§ 170.18 would only affect those entities 

that are not required to become 

members of an RFA pursuant to 

§§ 170.15, 170.16, or 170.17. Floor 

brokers and floor traders, who have 

historically been overseen by the DCMs 

on which they operate, are not required 

by §§ 170.15, 170.16, or 170.17 to 

become members of an RFA and would 

likely be the entities impacted by 

proposed regulation 170.18. The new 

membership requirements would 

require affected entities to pay initial 

and annual NFA membership dues. 

NFA charges each FCM registrant 

$5,625 in initial membership dues and 

$5,625 per year for continuing NFA 

membership where NFA is the SRO. 

The Commission estimates that 

membership dues for AT Person floor 

traders or floor brokers may also be 

$5,625, but that actual dues may be 

different than this. This is because 

while NFA will generally have more 

limited oversight responsibilities for AT 

Person floor traders and floor brokers, it 

may pass on the costs of proposed 

§ 170.19 to AT Person members in the 

form of higher dues.650 The Commission 

estimates that there will be 

approximately 100 entities that are AT 

Persons and will register as floor traders 

under the new registration requirements 

of § 1.3(x)(3). It is likely that these 100 

entities will be the only entities that 

will be required to become members of 

an RFA pursuant to proposed regulation 

170.18. Accordingly, the Commission 

estimates that entities affected by 

proposed regulation 170.18 will incur a 

total initial cost of about $562,500 for 

NFA membership dues (about $5,625 in 

annual membership dues per registrant, 

paid each year by 100 registrants) and 

a total annual cost of about $562,500. 

The Commission also preliminarily 

believes that the rule may impose 

certain compliance costs on affected 

entities. However, such costs should not 

be substantially different from or 

significantly exceed the costs associated 

with current Commission regulations 

and proposed Regulation AT generally. 

As discussed above, proposed § 170.18 

will likely only affect those floor traders 

that were required to register with the 

Commission pursuant to § 1.3(x)(3). 

NFA, as the only currently registered 

RFA, has not to date promulgated any 

rules specific to floor traders or AT 

Persons. As a result, the only current 

NFA membership rules that these 

entities would be required to follow are 

those rules that are generally applicable 

to all NFA members. Many of these 

rules are general in nature and mirror 

current Commission regulations or those 

proposed in Regulation AT. 

Accordingly, these entities would not 

incur any additional general, ongoing 

compliance costs as a result of NFA 

membership. 

viii. § 170.18 Benefits—AT Person 

Membership in a Registered Futures 

Association (AT Persons) 

Because entities that are not members 

of an RFA are not bound by the rules of 

the RFA, the Commission is proposing 

§ 170.18 to ensure that all AT Persons 

(including newly registered floor 

traders) would become members of an 

RFA and would therefore be subject to 

any membership rules promulgated by 

such RFA. Regulation AT proposes to 

establish a role for RFAs in setting the 

framework in which AT Persons 

operate. Proposed § 170.19, which is 

described in greater detail above, 

requires an RFA to adopt rules, as 

deemed appropriate by the RFA, 

requiring (i) pre-trade risk controls for 

ATSs; (ii) standards for the 

development, testing, monitoring and 

compliance of ATSs; (iii) designation 

and training of algorithmic trading staff; 

and (iv) operational risk management 

standards for clearing member FCMs 

with respect to customer orders 

originating with ATSs. The benefits of 

these risk controls and other measures 

are described in more detail throughout 

this section.651

ix. § 1.82 Costs—Pre-Trade and Other 

Risk Controls (FCMs) 

Based on Concept Release comments, 

best practices documents issued by 

industry or regulatory organizations, as 

well as existing regulations, the 

Commission believes that clearing 

member FCMs already implement the 

specifically-enumerated pre-trade and 

other risk controls required pursuant to 

proposed § 1.82. Specifically, in its 

survey of FCMs, FIA found that all 

responding firms used message and 

execution throttles, maximum order 

sizes, price collars, and order 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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652FIA at 60. 653FIA at 13. Two exchanges commented that 

they provide technology allowing clearing members 

to set maximum order size limits. See CME at 23– 

24; CFE at 11. 

654CME at 23–24; CFE 11. 

655FIA Market Access Working Group, ‘‘Market 

Access Risk Management Recommendations,’’ 

(April 2010) at 8–10. 

656ESMA defines direct market access as an 

investment firm’s client transmitting orders to a 

trading platform using the investment firm’s 

infrastructure, and sponsored access as a client 

transmitting orders directly to a trading platform 

without such orders passing through the investment 

firm’s infrastructure. See ESMA Guidelines, supra 

note 61 at 4–5. 

657See id. at 14–15, 21–23. 

658See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

659See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

cancellation capabilities, including a 

kill switch, either administered 

internally or at the exchange level.652

FIA also indicated that most DCMs 

provide tools to allow the FCM to set 

pre-trade controls for their customers, 

which are a prerequisite for an FCM to 

provide direct access to a market 

participant without routing orders 

through the FCM’s infrastructure.653

Two exchanges commented that their 

kill switch functionality allows clearing 

firms to cancel orders.654

The Commission notes that these 

types of controls have been subject of 

industry best practices for years. For 

example, FIA’s Market Access Risk 

Management Recommendations from 

2010 recommended, among other 

things, that a clearing firm providing 

direct access to a market should 

implement maximum quantity limits, 

price banding or dynamic price limits 

and exchange-provided order 

cancellation capabilities.655 The ESMA 

Guidelines from 2012 recommended 

that firms providing direct market 

access or sponsored access (as such 

terms are defined by ESMA) 656 must, 

among other things, implement controls 

that limit messaging traffic and establish 

price and size parameters.657

Nevertheless, the Commission 

recognizes that there could be costs 

associated with implementation of the 

risk controls in § 1.82. Specifically, for 

purposes of Direct Electronic Access 

(DEA), defined in proposed § 1.3(yyyy), 

if clearing members do not already use 

DCM-provided systems, they will need 

to implement additional DCM-provided 

systems. For non-DEA orders, clearing 

firms will need to internally develop 

such controls from scratch, upgrade 

existing systems, or purchase a risk 

management solution from an outside 

vendor. Each approach potentially has 

initial costs and annual ongoing costs, 

although the costs of upgrading and 

implementing the required systems 

would vary considerably based on 

current controls and procedures, as well 

as particular business models. For 

example, the needs of a clearing 

member will vary based on its current 

systems and controls in place, the 

comprehensiveness of its controls and 

procedures, the types of trading 

strategies its customers use, and the 

volume and speed of its customers’ 

trading activity. 

Estimate-DEA Orders, Update to 

Controls. The Commission also 

estimated costs to a clearing member 

that already uses DCM-provided 

controls with respect to DEA orders and 

only needs to assess and update its 

implementation in order to ensure it 

fully complies with § 1.82. The 

Commission assumed that message 

handling already exists and little is 

needed to update the clearing member’s 

systems in order to comply with § 1.82. 

As noted above with respect to AT 

Persons and compliance with § 1.80, the 

Commission believes that upgrading 

existing systems to comply with § 1.82 

would involve evaluating current risk 

control systems to determine 

compliance with new regulatory 

requirements; modifying existing code 

or creating new code to address gaps 

between current risk control systems 

and new regulatory requirements; and 

testing current systems and new code to 

verify correct operation and compliance. 

The Commission estimates that the cost 

for a clearing member to assess and 

update its implementation of controls 

required by § 1.82 is $49,800. This cost 

is broken down as follows: 1 Project 

Manager, working for 200 hours (200 × 

$70 per hour = $14,000); 1 Business 

Analyst, working for 200 hours (200 × 

$52 per hour = $10,400); 1 Tester, 

working for 200 hours (200 × $52 per 

hour = $10,400); and 1 Developer, 

working for 200 hours (200 × $75 per 

hour = $15,000). The 57 clearing 

members that will be subject to § 1.82 

would therefore incur a total one-time 

cost of $2,838,600 (57 × $49,800) to 

update their controls.658 The 

Commission estimates that if a clearing 

member already implements at least 

some of the DCM-provided controls 

required by § 1.82, there will be no 

additional annual costs to maintain the 

modifications required to bring the 

clearing member’s systems into 

compliance with § 1.82. 

Estimate-Non-DEA Orders, Update to 

Controls. The Commission also 

estimated costs to clearing members to 

comply with § 1.82’s requirements with 

respect to non-DEA orders assuming 

that the clearing member already has the 

pre-trade and other risk controls in 

place, and must only update the 

controls to ensure that they comply with 

the regulation. The Commission 

estimates that the cost for a clearing 

member to assess and update its 

implementation of such controls is 

$159,360. This cost is broken down as 

follows: 1 Project Manager, working for 

640 hours (640 × $70 per hour = 

$44,800); 1 Business Analyst, working 

for 640 hours (640 × $52 per hour = 

$33,280); 1 Tester, working for 640 

hours (640 × $52 per hour = $33,280); 

and 1 Developer, working for 640 hours 

(640 × $75 per hour = $48,000). The 57 

clearing members that will be subject to 

§ 1.82 would therefore incur a total onetime cost of $9,083,520 (57 × $159,360) 

to update their controls.659 The 

Commission estimates that if a clearing 

member already implements at least 

some of the DCM-provided controls 

required by § 1.82, there will be no 

additional annual costs to maintain the 

modifications required to bring the 

clearing member’s systems into 

compliance with § 1.82. 

The Commission emphasizes that 

costs listed above are estimates, and it 

welcomes comment on their accuracy. 

The Commission further emphasizes 

that the costs for each clearing member 

will vary. Finally, the Commission notes 

that, as indicated above, these estimates 

may overstate the actual costs to the 

industry. Based on Concept Release 

comments, best practices issued by 

industry and regulatory organizations, 

as well as existing regulations, the 

Commission believes that clearing 

members are largely already using the 

pre-trade and other risk controls 

required by § 1.82. 

x. § 1.82 Benefits—Pre-Trade and 

Other Risk Controls (FCMs) 

The Commission notes that many of 

the benefits discussed above with 

respect to pre-trade and other risk 

controls required of trading firms 

pursuant to § 1.80 also apply with 

respect to the benefits of controls that 

FCMs must implement pursuant to 

proposed § 1.82. Specifically, requiring 

such controls contributes to orderly 

markets by preventing orders that are 

outside of pre-determined parameters 

and ensuring a level-playing field 

among clearing members. The benefits 

also include allowing clearing members 

to have control over the trading flow of 

their customers, regardless of their 

customers’ method of access—DEA or 

non-DEA. 

In addition, given that different 

entities have differing information about 

the trading activities of their customers/ 


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78904 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

users, identification of unintended 

market behavior may be easier for 

certain entity types, such as trading 

firms. For example, with respect to 

trading firms that mostly trade through 

a single clearing member, but across a 

disparate set of products, these metrics 

may be more easily calculated at the 

FCM than at the DCM. To protect 

against the broadest set of errors, there 

are benefits to implementing risk 

controls at multiple points in the order 

chain, including the FCM. 

As noted, the Commission believes 

that proposed § 1.82 standardizes 

existing industry practices in this area, 

and some of the requirements are 

already followed by the majority of 

clearing members. Accordingly, the 

Commission notes that many of the 

benefits of § 1.82 are already being 

realized. This proposed rule may serve 

to limit a ‘‘race to the bottom’’ in which 

some entities sacrifice effective risk 

controls in order to minimize costs or 

increase the speed of trading. Thus, the 

proposed rule would help ensure that 

the benefits of the required risk controls 

will be fully realized. 

xi. § 1.83 Costs—AT Persons and FCM 

Clearing Members Must Submit 

Compliance Reports and Maintain 

Certain Books and Records 

Proposed § 1.83 would require AT 

Persons and FCMs that are clearing 

members for AT Persons to annually 

submit reports regarding compliance 

with § 1.80(a) and § 1.82(a)(1), 

respectively, to each DCM on which 

they operate. The reports prepared by 

AT Persons would have descriptions of 

the AT Person’s pre-trade risk controls 

as required by proposed § 1.80(a). The 

reports prepared by FCMs that are 

clearing members for AT Persons would 

have a description of the FCM’s program 

for establishing and maintaining the 

pre-trade risk controls required by 

proposed § 1.82(a)(1) for its AT Persons 

at the DCM. The reports would also be 

required to include a certification by the 

chief executive officer or chief 

compliance officer of the AT Person or 

clearing member FCM, as applicable, 

that, to the best of his or her knowledge 

and reasonable belief, the information 

contained in the report is accurate and 

complete. 

In addition, proposed § 1.83(c) and (d) 

would require AT Persons and clearing 

member FCMs for AT Persons to keep 

and provide upon request to DCMs 

books and records regarding their 

compliance with §§ 1.80 and 1.81 (for 

AT Persons) and § 1.82 (for clearing 

member FCMs). The Commission is also 

proposing pursuant to § 40.22(d) that 

DCMs must require each AT Person to 

keep and provide to the DCM books and 

records regarding the AT Person’s 

compliance with all §§ 1.80 and 1.81 

requirements, and each clearing member 

FCM to keep and provide to the DCM 

books and records regarding such 

clearing member FCM’s compliance 

with all § 1.82 requirements. The 

proposed recordkeeping requirements 

will cause AT Persons and clearing 

member FCMs to incur costs, as 

discussed below. 

AT Person Compliance Reports. AT 

Persons and FCMs that are clearing 

members of AT Persons will incur the 

cost of annually preparing and 

submitting the reports to their DCMs, as 

well as the written policies and 

procedures developed to comply with 

§ 1.81(a) and (c). The Commission 

estimates that an AT Person will incur 

a total annual cost of $4,240 to draft the 

report and submit the policies and 

procedures as required by § 1.83(a). This 

cost is broken down as follows: 1 Senior 

Compliance Specialist, working for 50 

hours (50 × $57 per hour = $2,850) and 

1 Chief Compliance Officer, working for 

10 hours (10 × $139 per hour = $1,390) 

for a total cost of $4,240 per year. The 

approximately 420 AT Persons to which 

§ 1.83(a) would apply would therefore 

incur a total annual cost of $1,780,800 

(420 × $4,240) to prepare and submit the 

report and written policies and 

procedures required by § 1.83(a). 

Clearing Member FCM Compliance 

Reports. The Commission further 

estimates that an FCM will incur a total 

cost annually of $7,090 to draft the 

report required by § 1.83(b). This cost is 

broken down as follows: 1 Senior 

Compliance Specialist, working for 100 

hours (100 × $57 per hour = $5,700) and 

1 Chief Compliance Officer, working for 

10 hours (10 × $139 per hour = $1,390), 

for a total cost of $7,090 per year. The 

57 FCMs to which § 1.83(b) would apply 

would therefore incur a total annual 

cost of $404,130 (57 × $7,090) to prepare 

and submit the report required by 

§ 1.83(b). 

AT Person and Clearing Member FCM 

Retention of Books and Records. As 

discussed above, the Commission 

believes that AT Persons and clearing 

member FCMs already implement the 

risk controls, testing standards and 

other measures that would be required 

pursuant to §§ 1.80, 1.81, and 1.82. 

Retention of records relating to such 

measures is prudent business practice 

and the Commission anticipates that 

many AT Persons and clearing member 

FCMs already maintain some form of 

these records in the ordinary course of 

their business. Accordingly, the 

Commission believes that AT Persons 

and clearing member FCMs will adapt 

their current infrastructure to 

accommodate new DCM rules relating to 

recordkeeping, and AT Persons and 

clearing member FCMs will not have 

substantial expenditures related to new 

recordkeeping technology or reprogramming existing recordkeeping 

technology. The Commission expects 

that additional expenditure related to 

§ 1.83(c) and (d) recordkeeping 

requirements would be limited to the 

drafting and maintenance of 

recordkeeping policies and procedures 

by in-house counsel and programmer 

burden hours associated with 

recordkeeping technology 

improvements, as well as annual costs 

in ensuring that recordkeeping policies 

and procedures and related technology 

comply with DCM rules. As noted 

below, with respect to § 40.22(e), the 

Commission estimates that a DCM 

would find it necessary to review the 

books and records of approximately 

10% of AT Persons and clearing 

member FCMs on an annual basis. The 

production of such records would result 

in additional burden hours by AT 

Person and clearing member FCM inhouse counsel, a consideration which 

the Commission included in its annual 

cost estimates below. 

AT Person Recordkeeping Costs. The 

Commission estimates that, on an initial 

basis, an AT Person will incur a cost of 

$5,130 to draft and update 

recordkeeping policies and procedures 

and make technology improvements to 

recordkeeping infrastructure. This cost 

is broken down as follows: 1 

Compliance Attorney, working for 30 

hours (30 × $96 = $2,880); and 1 

Developer, working for 30 hours (30 × 

$75 = $2,250). The 420 AT Persons 

would therefore incur a total initial cost 

of $2,154,600 (420 × $5,130). 

The Commission estimates that, on an 

annual basis, an AT Person will incur a 

cost of $2,670 to ensure continued 

compliance with DCM recordkeeping 

rules relating to § 1.82 compliance, 

including the updating of policies and 

procedures and technology 

infrastructure, and in respond to DCM 

record requests. This cost is broken 

down as follows: 1 Compliance 

Attorney, working for 20 hours (20 × 

$96 = $1,920); and 1 Developer, working 

for 10 hours (10 × $75 = $750). The 420 

AT Persons would therefore incur a 

total annual cost of $1,121,400 (420 × 

$2,670). 

Clearing Member FCM Recordkeeping 

Costs. The Commission estimates that, 

on an initial basis, a clearing member 

FCM will incur a cost of $5,130 to draft 

and update recordkeeping policies and 

procedures and make technology 

improvements to recordkeeping 


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infrastructure. This cost is broken down 

as follows: 1 Compliance Attorney, 

working for 30 hours (30 × $96 = 

$2,880); and 1 Developer, working for 

30 hours (30 × $75 = $2,250). The 57 

clearing member FCMs would therefore 

incur a total initial cost of $292,410 (57 

× $5,130). 

The Commission estimates that that 

DCM rules pursuant to proposed 

§ 40.22(d) requiring clearing member 

FCMs to keep and provide books and 

records relating to § 1.82 compliance 

will result in annual costs of 30 hours 

of burden per clearing member FCM, 

and 1,710 burden hours in total. The 

estimated burden was calculated as 

follows: 

The Commission estimates that, on an 

annual basis, a clearing member FCM 

will incur a cost of $2,670 to ensure 

continued compliance with DCM 

recordkeeping rules relating to § 1.82 

compliance, including the updating of 

policies and procedures and technology 

infrastructure, and in respond to DCM 

record requests. This cost is broken 

down as follows: 1 Compliance 

Attorney, working for 20 hours (20 × 

$96 = $1,920); and 1 Developer, working 

for 10 hours (10 × $75 = $750). The 57 

clearing member FCMs would therefore 

incur a total annual cost of $152,190 (57 

× $2,670). 

As discussed further in the 

consideration of § 15(a) factors below, 

the Commission also acknowledges that 

the compliance requirements of 

Regulation AT could have adverse 

effects on small clearing firms. Any 

compliance costs that go beyond 

existing industry practice could 

potentially cause some FCMs to scale 

back operation. Thus the rule has some 

potential to contribute to increased 

concentration among clearing firms, i.e., 

fewer competing clearing firms. 

The Commission emphasizes that 

costs listed above are estimates, and it 

welcomes comment on their accuracy. 

The Commission further emphasizes 

that the costs for each AT Person and 

each FCM will vary. 

xii. § 1.83 Benefits—AT Persons and 

FCM Clearing Members Must Submit 

Compliance Reports and Maintain 

Certain Books and Records 

Proposed § 1.83 would require AT 

Persons and FCMs that are clearing 

members for AT Persons to annually 

submit reports regarding compliance 

with § 1.80(a) and § 1.82(a)(1), 

respectively, to each DCM on which 

they operate. Proposed § 1.83(c) and (d) 

would require AT Persons and clearing 

member FCMs, respectively, to keep and 

provide upon request to DCMs books 

and records regarding their compliance 

with §§ 1.80 and 1.81 (for AT Persons) 

and § 1.82 (for clearing member FCMs). 

The reports and recordkeeping proposed 

by § 1.83, and the review program 

proposed by § 40.22, will enable DCMs 

to have a clearer understanding of the 

pre-trade risk controls of all AT Persons 

that are engaged in Algorithmic Trading 

on such DCM. The proposed reports 

will also enable DCMs to set up the 

review program required by § 40.22. The 

review program would improve the 

standardization of market participants’ 

pre-trade risk controls. The 

standardization of such systems and 

procedures should further reduce the 

risk that a market participant will 

engage in disorderly trading due to 

inadequate pre-trade risk controls. 

xiii. § 38.255(b) and (c) Costs—DCMs 

Must Provide Controls to FCMs 

As noted above with respect to 

proposed § 1.82, based on Concept 

Release comments, best practices 

documents issued by industry or 

regulatory organizations, as well as 

existing regulations, the Commission 

believes that most DCMs already have 

established the specifically-enumerated 

pre-trade and other risk controls for use 

by clearing members that would be 

required pursuant to revised § 38.255. 

The Commission also notes that existing 

§ 38.607 requires that DCMs that permit 

direct electronic access must have in 

place effective systems and controls 

reasonably designed to facilitate an 

FCM’s management of financial risk, 

such as automated pre-trade controls 

that enable member FCMs to implement 

appropriate financial risk limits. 

Accordingly, even if DCMs do not 

currently and voluntarily implement the 

specific controls addressing the risks of 

Algorithmic Trading proposed under 

§ 38.255(b), they should already have in 

place similar systems addressing FCMs’ 

management of financial risk pursuant 

to existing § 38.607. 

Estimate-Upgrade of Controls. With 

respect to a DCM that already has the 

controls required by § 38.255(b) in 

place, and only needs to update them to 

meet regulatory requirements (i.e., 

evaluate current systems, modify or 

create new code, and test systems), the 

Commission estimates that the cost to 

the DCM would be $155,520. This cost 

is broken down as follows: 1 Project 

Manager, working for 480 hours (480 × 

$70 per hour = $33,600); 1 Business 

Analyst, working for 480 hours (480 × 

$52 per hour = $24,960); 1 Tester, 

working for 480 hours (480 × $52 per 

hour = $24,960); and 2 Developers, 

working for a combined 960 hours (960 

× $75 per hour = $72,000). Commission 

staff estimates that if a DCM already has 

at least some of the controls required by 

§ 38.255(b), there will be no additional 

annual costs to maintain the 

modifications required to bring the 

systems into compliance with this 

regulation. 

Accordingly, the Commission 

estimates that the 15 DCMs that will be 

subject to § 38.255(b) would therefore 

incur a total one-time cost of $2,332,800 

(15 × $155,520) to update their controls. 

The Commission believes that the 

above estimates would change if a DCM 

must upgrade its systems in order to 

comply with § 40.20 (discussed below). 

Under such circumstances, where the 

DCM is already upgrading controls for 

its own implementation pursuant to 

§ 40.20, total cost to upgrade controls for 

use by FCMs pursuant to § 38.255 

should decrease. The controls required 

by § 40.20 should include interfaces to 

support external interactions and 

expanding them to support FCMs 

should not have additional costs. 

The Commission emphasizes that 

costs listed above are estimates, and it 

welcomes comment on their accuracy. 

The Commission further emphasizes 

that the costs for each DCM will vary. 

Finally, the Commission notes that, as 

indicated above, these estimates may 

overstate the actual costs to DCMs. 

Based on Concept Release comments, 

best practices issued by industry and 

regulatory organizations, as well as 

existing regulations, the Commission 

believes that DCMs have largely already 

established and are providing to FCMs 

the pre-trade and other risk controls 

required by § 38.255(b). 

xiv. § 38.255(b) and (c) Benefits—DCMs 

Must Provide Controls in DEA Context 

An additional benefit to Regulation 

AT is the reduction of system risk in the 

context of Direct Electronic Access. As 

noted above, the Commission believes 

that Algorithmic Trading creates risks 

regardless of the method of access. 

Because of this, the Commission seeks 

to ensure that all types of trading, 

including through DEA, is subject to 

pre-trade and other risk controls. The 

requirements of proposed § 38.255(b) 

specifically address the structure of 

DEA, in which orders submitted by an 

AT Person do not flow through the 

clearing member FCM’s infrastructure 

prior to submission to the DCM. 

Currently, credit risk in the DEA context 

is addressed through clearing member 

FCM-implemented controls provided by 

the DCM, as required pursuant to 

existing regulations §§ 38.607 and 1.73. 

Proposed § 38.255(b) and (c) follow a 

similar approach that would allow 

clearing members to have control over 

the trading flow of their DEA customers 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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660 In addition, four commenters stated generally 

that many exchanges have messaging rate limits in 

place. See TCL at 6; KCG at 4; MFA at 7; AIMA at 

8. 

661CME at 8–9, 13–17; CME Appendix A–1, 3– 

4, 6; CFE at 5–8. 

662CME at 23–24, Appendix A–4; CFE at 9–10. 

663CME at 23–24. 

664ESMA Guidelines, supra note 61 at 12–13. 

665CFTC TAC Recommendations, supra note 34 

at 4–5. 

for purposes of addressing the 

operational risks of Algorithmic 

Trading. Accordingly, § 38.255(b) would 

contribute to orderly markets by 

preventing orders that are outside of 

pre-determined parameters and 

ensuring a level-playing field among 

clearing members. 

As noted, the Commission believes 

that proposed regulations § 38.255(b) 

and (c) standardize existing industry 

practices in this area, and that many of 

the requirements are already followed 

by the majority of DCMs. Accordingly, 

the Commission notes that many of the 

benefits of § 38.255(b) and (c) are 

already being realized. The proposed 

rule would help ensure that the benefits 

of the required risk controls will be fully 

realized across all DEA active 

participants and sustained in the future. 

xv. § 40.20 Costs—Pre-Trade and 

Other Risk Controls (DCMs) 

Based on Concept Release comments, 

best practices documents issued by 

industry or regulatory organizations, as 

well as existing regulations, the 

Commission believes that most DCMs 

already implement the specificallyenumerated pre-trade and other risk 

controls required pursuant to proposed 

§ 40.20. In response to the Concept 

Release, CME and CFE indicated that 

they implement message rate limits,660

order size limits, and price collar 

mechanisms.661 In addition, they 

indicated that they provide an optional 

cancel-on-disconnect functionality 662

and kill switch tools.663 The 

Commission notes that these types of 

controls have been subject of industry 

best practices for years. For example, 

ESMA guidelines from 2012 

recommended that trading platforms 

implement, among other things, 

throttling limits and controls filtering 

order price and quantity.664 In addition, 

the CFTC TAC recommended in 2011 

that exchanges implement, among other 

things, message throttles, order quantity 

limits, price collars, and order 

cancellation policies that allow clearing 

firms and clients to opt for automatic 

cancellation of order upon disconnect 

and provide clearing firms with a tool 

that allows them to view and cancel 

orders.665

While the Commission believes that 

most DCMs already implement the 

controls required by § 40.20, it 

acknowledges that there may be DCMs 

that do not currently implement such 

controls, and those DCMs would incur 

some costs to comply with this 

regulation. An initial investment would 

be required to develop and implement 

processes necessary for compliance, and 

ongoing costs would be incurred to 

maintain such controls. The costs for 

each DCM will vary depending on the 

degree to which its current practices are 

or are not in compliance, as well as the 

procedures it selects and implements in 

order to comply. In addition, as noted 

above with respect to § 38.255(b) and 

(c), the Commission acknowledges that 

Regulation AT could have adverse 

effects on smaller DCMs. Any 

compliance costs that go beyond 

existing industry practice could 

potentially cause some DCMs to cease or 

scale back operation, and could 

potentially impact the entry of new 

DCMs. 

Estimate—Upgrade of Controls. With 

respect to a DCM that already has the 

controls required by proposed § 40.20 in 

place, and only needs to update them to 

meet regulatory requirements (i.e., 

evaluate current systems, modify or 

create new code, and test systems), the 

Commission estimates that the cost to 

the DCM would be $155,520. This cost 

is broken down as follows: 1 Project 

Manager, working for 480 hours (480 × 

$70 per hour = $33,600); 1 Business 

Analyst, working for 480 hours (480 × 

$52 per hour = $24,960); 1 Tester, 

working for 480 hours (480 × $52 per 

hour = $24,960); and 2 Developers, 

working for a combined 960 hours (960 

× $75 per hour = $72,000). The 

Commission estimates that if a DCM 

already has at least some of the controls 

required by § 40.20, there will be no 

additional annual costs to maintain the 

modifications required to bring the 

systems into compliance with this 

regulation. 

Accordingly, the Commission 

estimates that the 15 DCMs that will be 

subject to § 40.20 would therefore incur 

a total one-time cost of $2,332,800 (15 

× $155,520) to update their controls. 

The Commission notes that a DCM 

can choose not to develop these controls 

internally, but rather may purchase a 

solution from an outside vendor (or 

another DCM) in order to comply with 

§ 40.20. The Commission welcomes 

comments providing estimates 

concerning the cost for a DCM to use 

technology solution from an outside 

party to comply with this proposed 

regulation. In addition, as discussed 

above, the Commission believes that the 

above estimates for § 40.20 would 

change if a DCM is simultaneously 

upgrading its systems in order to 

comply with § 38.255. Where the DCM 

is already upgrading controls for FCM 

implementation pursuant to § 38.255, 

the cost of upgrading controls for its 

own implementation pursuant to § 40.20 

should decrease. 

The Commission emphasizes that 

costs listed above are estimates, and it 

welcomes comment on their accuracy. 

The Commission further emphasizes 

that the costs for each DCM will vary. 

Finally, the Commission notes that, as 

indicated above, these estimates may 

overstate the actual costs to DCMs. 

Based on Concept Release comments, 

best practices issued by industry and 

regulatory organizations, as well as 

existing regulations, the Commission 

believes that DCMs are largely already 

using the pre-trade and other risk 

controls required by § 40.20. 

xvi. § 40.20 Benefits—Pre-Trade and 

Other Risk Controls (DCMs) 

The Commission believes that the pretrade risk and order management 

control requirements that DCMs must 

implement pursuant to proposed 

§ 40.20, inasmuch as they are not 

currently implemented, will contribute 

to a system-wide reduction in 

operational risk, and will help 

standardize risk management practices 

across exchanges. These enhanced risk 

management practices should help 

reduce unintended market volatility and 

mitigate and prevent significant 

disruptive activity caused by 

algorithmic trading malfunctions. 

In addition, given that FCMs may 

have differing information about the 

trading activities of their customers/

users, a DCM may be better able to 

identify unintended market behavior. 

For example, with respect to a trading 

firm active in a single product and using 

multiple clearing firms, identifying total 

order frequencies or inventory levels 

may be more easily done at the market 

venue. To protect against the broadest 

set of errors, there are benefits to 

implementing risk controls at multiple 

points in the order chain, including the 

DCM. 

As noted, the Commission believes 

that proposed § 40.20 standardizes 

existing industry practices in this area, 

and that many of the requirements are 

already followed by the majority of 

DCMs. Accordingly, the Commission 

notes that many of the benefits of 

§ 40.20 are already being realized. The 

proposed rule would help ensure that 

the benefits of the required risk controls 

will be fully realized and sustained in 

the future. 


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666MFA at 13. 

667CME at 25–26. 

668FIA at 35. 

669See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

670See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

xvii. § 40.21 Costs—DCM Test 

Environments for AT Persons (DCMs) 

The Commission believes that the 

majority of DCMs have implemented 

test environments in which market 

participants may test their algorithmic 

systems. The Commission received 

comments in response to the Concept 

Release that ‘‘many, if not all, exchanges 

provide market participants a test 

facility to test trading software and 

algorithms, as well as offer test symbols 

to trade.’’ 666 The Commission believes 

that most if not all DCM’s already 

provide test environments that would 

comply with proposed § 40.21. As a 

result, subject to consideration of 

relevant comments, the Commission 

preliminarily believes that DCMs will 

not incur any material additional costs 

to comply with the proposed regulation. 

The Commission is therefore not 

estimating any costs for DCMs in 

connection with the proposed 

regulation in this discussion. 

xviii. § 40.21 Benefits—DCM Test 

Environments for AT Persons (DCMs) 

As noted, the Commission believes 

that proposed § 40.21 standardizes 

existing industry practices in this area, 

and that the requirements are already 

followed by the majority of DCMs. 

Accordingly, the Commission notes that 

many of the benefits of § 40.21 are 

already being realized. The proposed 

rule will help ensure that the benefits 

are being realized at all DCMs and 

sustained in the future. Proposed 

§ 40.21 requires DCMs to provide test 

environments in which market 

participants may test their algorithmic 

systems. This regulation is designed to 

promote testing of algorithmic systems 

using data and market conditions that 

approximate as closely as possible those 

of a live trading environment. Such 

testing should enable market 

participants to discover potential issues 

in the design of their algorithmic 

systems that were not discovered in 

their own test environment, thereby 

mitigating the risk that algorithmic 

systems cause market disruptions by 

failing to operate as intended in the 

production environment. Comments 

received in response to the Concept 

Release indicate that DCMs recognize 

the benefit of providing such test 

environments to their market 

participants. For example, CME 

indicated that market participants 

routinely test in their own testing 

environments using historical data to 

test trading strategies against a range of 

market conditions, and that exchanges 

commonly make their own historical 

data available for testing purposes. CME 

stated that it requires all systems 

interfacing with CME Globex to be 

certified on the order entry and/or 

market data interfaces prior to 

deployment.667 FIA also recommended 

the use of DCM test environments, 

noting in its comment letter, ‘‘We 

encourage DCMs to develop more robust 

test environments that more closely 

simulate trading in the production 

environment, and market participants to 

thoroughly test new and modified 

software in these DCM provided 

simulators when necessary.’’ 668

xix. § 40.22 Costs—DCM Review of 

Compliance Reports (DCMs) 

Proposed § 40.22 complements the 

requirement under § 1.83 for AT Persons 

and clearing member FCMs to submit 

compliance reports to DCMs. Proposed 

40.22(a) requires a DCM to implement 

rules that require each AT Person that 

trades on the DCM, and each FCM that 

is a clearing member of a DCO for such 

AT Person, to submit the reports 

described in § 1.83(a) and (b), 

respectively. Under proposed § 40.22(b), 

a DCM must require the submission of 

such reports by June 30th of each year. 

Proposed § 40.22(c) requires a DCM to 

establish a program for effective 

periodic review and evaluation of 

reports described in paragraph (a) of 

§ 40.22, and of the measures described 

therein. An effective program must 

include measures by the DCM 

reasonably designed to identify and 

remediate any insufficient mechanisms, 

policies and procedures described in 

such reports, including identification 

and remediation of any inadequate 

quantitative settings or calibrations of 

pre-trade risk controls required of AT 

Persons pursuant to § 1.80(a). 

In addition, as a complement to the 

compliance report review program 

described above, proposed § 40.22(d) 

requires each AT Person to keep and 

provide to the DCM books and records 

regarding their compliance with all 

requirements pursuant to § 1.80 and 

§ 1.81, and requires each clearing 

member FCM to keep and provide to the 

DCM market books and records 

regarding their compliance with all 

requirements pursuant to § 1.82. Finally, 

proposed § 40.22(e) requires DCMs to 

review and evaluate, as necessary, books 

and records required to be kept 

pursuant to § 40.22(d), and the measures 

described therein. An appropriate 

review pursuant to § 40.22(e) should 

include measures by the DCM 

reasonably designed to identify and 

remediate any insufficient mechanisms, 

policies, and procedures described in 

such books and records. 

DCM Establishment of Review 

Program. The Commission estimates 

that a DCM will incur a total one-time 

cost of $37,000 to establish the review 

program required by proposed § 40.22. 

This cost is broken down as follows: 1 

Tester, working for 200 hours (200 × $52 

per hour = $10,400); 1 Developer, 

working for 200 hours (200 × $75 per 

hour = $15,000); and 1 Senior 

Compliance Examiner, working for 200 

hours (200 × $58 per hour = $11,600).669

The 15 DCMs to which § 40.22 would 

apply would therefore incur a total onetime cost of $555,000 (15 × 37,000) to 

establish the review program required 

by § 40.22.670

DCM Review of Compliance Reports 

(§ 40.22(c)). Proposed § 40.22(a) and (b) 

would require DCMs to implement rules 

that require AT Persons, and FCMs that 

are clearing members for AT Persons, to 

submit the reports required of AT 

Persons and clearing member FCMs by 

proposed § 1.83. Proposed § 40.22(c) 

requires a DCM to establish a program 

for effective periodic review and 

evaluation of reports described in 

paragraph (a) of § 40.22, and of the 

measures described therein. As 

discussed in section V(D)(e) above, 

Commission staff estimates that each 

DCM will review 120 reports per year 

pursuant to § 40.22(c). The Commission 

estimates that a DCM will incur a total 

cost of $925 to review each report 

required by § 40.22. This cost is broken 

down as follows: 1 Tester, working for 

5 hours (5 × $52 per hour = $260); 1 

Developer, working for 5 hours (5 × $75 

per hour = $375); and 1 Senior 

Compliance Examiner, working for 5 

hours (5 × $58 per hour = $290), for a 

total review cost of $925 per report. If 

a DCM reviews an average of 120 reports 

per year, a DCM would require 1,800 

hours per year to review the 120 reports 

(15 hours × 120 reports), and would 

incur a cost of $111,000 per year. The 

15 DCMs to which § 40.22 would apply 

would incur a total annual cost of 

$1,665,000 (15 × $111,000) to conduct 

such a review. 

DCM Communication of Remediation 

Instructions (§ 40.22(c)). Proposed 

§ 40.22(c) states that an effective review 

program must include measures by the 

DCM reasonably designed to identify 

and remediate any insufficient 

mechanisms, policies and procedures 


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described in such reports, including 

identification and remediation of any 

inadequate quantitative settings or 

calibrations of pre-trade risk controls 

required of AT Persons pursuant to 

proposed § 1.80(a). The Commission 

estimates that a DCM will communicate 

remediation instructions in connection 

with approximately 20% of the reports 

reviewed on an annual basis (or 24 

reports, which is 20% of 120 reports). 

The Commission estimates that a DCM 

will incur a total cost of $925 to 

communicate remediation instructions 

for a report required by § 40.22. This 

cost is broken down as follows: 1 Tester, 

working for 5 hours (5 × $52 per hour 

= $260); 1 Developer, working for 5 

hours (5 × $75 per hour = $375); and 1 

Senior Compliance Examiner, working 

for 5 hours (5 × $58 per hour = $290), 

for a total review cost of $925 per report 

giving rise to remediation instructions. 

If a DCM provides remediation 

instructions in connection with 24 

reports per year, a DCM would require 

360 hours per year to review the 24 

reports (15 hours × 24 reports), and 

would incur a cost of $22,200 per year. 

The 15 DCMs to which § 40.22(c) would 

apply would incur a total annual cost of 

$333,000 (15 × $22,200) to conduct such 

a review. 

DCM Review of Books and Records 

(§ 40.22(e)). Proposed § 40.22(d) requires 

each AT Person to keep and provide to 

the DCM books and records regarding 

their compliance with all requirements 

pursuant to §§ 1.80 and 1.81, and 

requires each clearing member FCM to 

keep and provide to the DCM market 

books and records regarding their 

compliance with all requirements 

pursuant to § 1.82. The cost of these 

obligations to AT Persons and clearing 

member FCMs under § 40.22(d) is 

discussed above in this section. 

Proposed § 40.22(e) requires DCMs to 

review and evaluate, as necessary, books 

and records required to be kept 

pursuant to § 40.22(d), and the measures 

described therein. The Commission 

notes that § 40.22(e) does not prescribe 

how frequently DCMs should perform 

this review, or how many AT Persons 

and clearing member FCMs should be 

evaluated on an annual basis. For 

purposes of generating a cost estimate, 

the Commission anticipates that a DCM 

will find it necessary to review the 

books and records of approximately 

10% of AT Persons and clearing 

member FCMs on an annual basis. For 

example, a DCM may find it necessary 

to conduct such a review if: it becomes 

aware if an AT Person’s kill switch is 

frequently activated, or otherwise 

performs in an unusual manner; if a 

DCM becomes aware that an AT 

Person’s algorithm frequently performs 

in a manner inconsistent with its 

design, which may raise questions about 

the design or monitoring of the AT 

Person’s algorithms; if a DCM identifies 

frequent trade practice violations at an 

AT Person, which are related to an 

algorithm of the AT Person; or if an AT 

Person represents significant volume in 

a particular product, thereby requiring 

heightened scrutiny, among other 

reasons. DCMs may find it appropriate 

to review the books and records of AT 

Persons and clearing member FCMs on 

a more or less frequent basis, depending 

on other relevant considerations. 

The Commission estimates that AT 

Persons will generally be active on half 

of the 15 DCMs. If a DCM reviews the 

books and records of 10% of AT Persons 

and clearing member FCMs on an 

annual basis, a DCM will review 24 

entities on an annual basis (420 AT 

Persons + 57 clearing member FCMs = 

477. 477/2 = 239 entities. 239 × .1 = 24). 

The Commission estimates that a DCM 

will incur a total cost of $4,620 to 

review the books and records of an 

entity pursuant to § 40.22(e). This cost 

is broken down as follows: 1 Senior 

Compliance Examiner, working for 30 

hours (30 × $58 per hour = $1,740); and 

1 Compliance Attorney, working for 30 

hours (5 × $96 per hour = $2,880), for 

a total review cost of $4,620 per entity 

reviewed by a DCM. If a DCM reviews 

the books and records of 24 entities per 

year, a DCM would require 1,440 hours 

per year to review the 24 entities (60 

hours × 24 entities), and would incur a 

cost of $110,880 per year. The 15 DCMs 

to which § 40.22(e) would apply would 

incur a total annual cost of $1,663,200 

(15 × $110,880) to review such books 

and records. 

Total Cost to DCMs for Proposed 

§ 40.22 Requirements. A DCM will 

therefore incur $133,200 ($111,000 + 

$22,200) on an annual basis to review 

all reports received at least once every 

two years, communicate instructions to 

persons whose controls the DCM has 

determined are insufficient, and will 

incur $110,880 on an annual basis to 

review the books and records of 24 AT 

Persons and clearing member FCMs. 

The 15 DCMs to which § 40.22 would 

apply would therefore incur a total 

annual cost of $3,661,200 ($1,665,000 + 

$333,000 + $1,663,200) to maintain the 

review program required by § 40.22. 

The Commission also acknowledges 

that the compliance requirements on 

DCMs in Regulation AT could have 

adverse effects on smaller DCMs. Any 

compliance costs that go beyond 

existing industry practice could 

potentially cause some DCMs to cease or 

scale back operation, and impact the 

entry of new DCMs. 

xx. § 40.22 Benefits—DCM Review of 

Compliance Reports (DCMs) 

Proposed § 40.22 is a complement to 

proposed § 1.83, which would require 

AT Persons, and FCMs that are clearing 

members for AT Persons, to submit 

reports regarding compliance with 

§ 1.80(a) and pursuant to § 1.82(a)(1), 

respectively, to each DCM on which 

they operate, and to keep and provide 

upon request to DCMs books and 

records regarding their compliance with 

all §§ 1.80 and 1.81 (for AT Persons) and 

§ 1.82 (for clearing member FCMs) 

requirements. New § 40.22 would 

require each DCM that receives a report 

described in § 1.83 to establish a 

program for effective review and 

evaluation of the reports. By requiring 

DCMs to review the reports, identify 

outliers, and communicate instructions 

to outliers in order to remediate their 

pre-trade risk controls, proposed § 40.22 

will standardize market participants’ 

pre-trade risk controls required 

pursuant to proposed § 1.80(a). Further, 

DCM review of compliance reports is an 

important safeguard to prevent trading 

firms, the ‘‘outliers’’ described above, 

from operating without sufficient 

controls. Proposed § 40.22(e) will 

complement the review of compliance 

reports, by requiring DCMs to review 

and evaluate, as necessary, the books 

and records kept by AT Persons to 

demonstrate their compliance with 

§§ 1.80 and 1.81, and the books and 

records kept by clearing member FCMs 

to demonstrate their compliance with 

§ 1.82. A single Algorithmic Trading 

malfunction at a single market 

participant can significantly impact 

markets and market participants. 

Accordingly, all DCMs and market 

participants benefit from a review 

program that ensures that market 

participants conducting Algorithmic 

Trading have adequate pre-trade risk 

controls in place. 

c. Section 15(a) Factors 

This section discusses the CEA 

section 15(a) factors for the following 

proposed regulations: (i) The 

requirement that AT Persons implement 

pre-trade risk controls and other related 

measures (§ 1.80); (ii) standards for the 

development, testing, and monitoring of 

Algorithmic Trading systems by AT 

Persons (§ 1.81); (iii) RFA standards for 

automated trading and algorithmic 

trading systems of their members 

(§ 170.19); (iv) the requirement that AT 

Persons must become a member of a 

futures association (§ 170.18); (v) the 

requirement that clearing member FCMs 


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implement pre-trade risk controls and 

other related measures (§ 1.82); (vi) the 

requirement that AT Persons submit 

compliance reports to DCMs regarding 

their risk controls and Algorithmic 

Trading procedures and clearing 

member FCMs submit compliance 

reports to DCMs regarding their risk 

control program for AT Person 

customers, and that AT Persons and 

clearing member FCMs keep and 

provide upon request to DCMs certain 

related books and records (§ 1.83); (vii) 

the requirement that DCMs implement 

pre-trade risk controls and other related 

measures (§§ 38.255 and 40.20); (viii) 

the requirement that DCMs provide test 

environments where AT Persons may 

test their Algorithmic Trading systems 

(§ 40.21); and (ix) the requirements of 

§ 40.22, including that DCMs: 

implement rules requiring AT Persons 

and clearing member FCMs to submit 

compliance reports each year (§ 40.22(a) 

and (b)); establish a program for 

effective periodic review and evaluation 

of the reports (§ 40.22(c)); require each 

AT Person to keep and provide to the 

DCM books and records regarding their 

compliance with all requirements 

pursuant to §§ 1.80 and 1.81, and 

require each clearing member FCM to 

keep and provide to the DCM market 

books and records regarding their 

compliance with all requirements 

pursuant to § 1.82 (§ 40.22(d)); and 

require DCMs to review and evaluate, as 

necessary, books and records required to 

be kept pursuant to § 40.22(d), and the 

measures described therein (§ 40.22(e)). 

i. Protection of Market Participants and 

the Public 

The Commission preliminarily 

believes that Regulation AT would 

protect market participants and the 

public by limiting a ‘‘race to the 

bottom,’’ in which certain entities 

sacrifice effective risk controls in order 

to minimize costs or increase the speed 

of trading. The proposed rules, by 

standardizing the risk controls required 

to be used by firms, would help ensure 

that the benefits of these risk controls 

are more evenly distributed across a 

wide set of market participants, and 

reduce the likelihood that an outlier 

firm without sufficient risk controls 

causes significant market disruption. 

The requirements under proposed 

§§ 170.18 and 170.19 that all AT 

Persons be registered as a member of a 

futures association, and subject to an 

RFA program promulgating standards 

for automated trading and algorithmic 

trading systems, further promotes the 

standardization of risk controls. 

Moreover, the proposed rules, to the 

extent that they increase the usage of 

effective risk and order management 

controls, may reduce the likelihood that 

market participants execute trades at 

terms they do not intend. This is 

particularly important as to price, as 

market participants and members of the 

public rely on the prices of trades 

executed on DCMs, often for products 

not directly traded on the DCM. The 

requirements of proposed § 40.22, 

which requires DCMs to review the 

compliance reports and the books and 

records of AT Persons and clearing 

member FCMs, may promote protection 

of market participants and the public by 

helping to ensure that the risk control 

rules are followed in a consistent 

manner and may further reduce the 

likelihood of Algorithmic Trading 

Events and Algorithmic Trading 

Disruptions. Applying Regulation AT to 

all market levels—the trading firm, the 

clearing member, and the exchange— 

may further protect market participants 

and the public by providing multiple 

layers of protection against market 

disruptions. In addition, including 

automated order routers in the 

Algorithmic Trading definition may 

protect market participants and the 

public by providing these protections to 

a wider set of automated systems that 

may have the potential to disrupt the 

markets. 

Finally, the absence of pre-trade risk 

and order management controls at 

automated firms increases the chances 

for unintended trading behavior, 

including algorithms acting beyond 

their parameters or risk levels, resulting 

in unexpected market volatility or 

market disruptions (potentially across 

multiple market venues), distorted 

prices, and risks that could harm the 

economy and the public. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The Commission preliminarily 

believes that by addressing pre-trade 

risk controls, testing, and order 

management controls at all market 

levels—the trading firm, the clearing 

member, and the exchange—Regulation 

AT provides standards that can be 

interpreted and enforced in a uniform 

manner. Implementation of Regulation 

AT would help mitigate instabilities in 

the markets and ensure market 

efficiency and integrity. Regulation AT 

may serve to limit a ‘‘race to the 

bottom,’’ in which certain entities 

sacrifice effective risk controls in order 

to minimize costs or increase the speed 

of trading. The proposed rules, by 

standardizing the risk controls required 

to be used by firms, would help ensure 

that the benefits of these risk controls 

are more evenly distributed across a 

wide set of market participants, and 

reduce the likelihood that an outlier 

firm without sufficient risk controls 

causes significant market disruption. 

In particular, the implementation of 

such controls and systems would help 

prevent the occurrence of unintended 

and erroneous trades, and therefore 

contribute to market efficiency and 

integrity. For example, Regulation AT 

requires that trading firms, clearing 

members and exchanges implement 

maximum order size limits. That control 

is intended to prevent unintentionally 

large orders from entering the market 

and causing unintended executions. The 

Commission believes that a positive 

trading intention behind an execution is 

integral to the operations of an efficient 

market and to market integrity. By 

limiting the potential for erroneous 

executions, Regulation AT should 

enhance market efficiency and integrity 

by minimizing the number of trades that 

are subsequently broken and ensuring 

that publicly reported transaction prices 

are valid. Similarly, Regulation AT 

requires message and execution 

throttles, which mitigate the risks of 

executing large numbers of unintended 

orders, potentially harming market 

efficiency and integrity. Ensuring that 

only bona fide and intentional orders 

are entered into the market may also 

help promote market competitiveness 

by helping to ensure that a single entity 

does not inadvertently dominate the 

market due to unintended excessive 

orders. 

The Commission acknowledges that 

certain aspects of Regulation AT, such 

as the compliance reports, could have 

adverse effects on some trading firms 

due to the cost of creating and 

submitting the compliance reports, and 

to the extent that firms do not already 

do so, implementing and maintaining 

the proposed regulation’s required pretrade risk and order management 

controls. In order to mitigate costs to 

trading firms, the Commission is 

restricting the need for trading firm 

level risk controls and the associated 

compliance reports to those entities that 

are registered with the Commission in 

some capacity. For those who are not 

required to register, pre-trade risk 

controls will be executed by the entity’s 

clearing firm and the contract market 

the entity trades on and compliance 

reports will be submitted by the clearing 

FCM. 

According to a study by the 

Commission’s Division of Swap Dealer 

and Intermediary Oversight that was 

presented to the Commission’s 

Agricultural Advisory Committee on 


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78910 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

671The presentation is available at http://

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

documents/file/aac092215presentations_dsio.pdf. 

672See SEC Knight Capital Release, supra note 39. 

673As noted in the Flash Crash Report, ‘‘during 

the 20 minute period between 2:40 p.m. and 3:00 

p.m., over 20,000 trades (many based on retailcustomer orders) across more than 300 separate 

securities, including many ETFs, were executed at 

prices 60% or more away from their 2:40 p.m. 

prices. After the market closed, the exchanges and 

FINRA met and jointly agreed to cancel (or break) 

all such trades under their respective ‘clearly 

erroneous’ trade rules.’’ See the Flash Crash Report, 

supra note 121 at 6. 

674FIA at 63. 

675CFE at 1–2. 

676MFA at 5. 

September 22, 2015,671 the number of 

active FCMs has declined in recent 

years from 180 in 2005 to 76 in 

December 2014. The decline over this 

period in the number of FCMs holding 

customer assets was not as large as the 

overall decline in the number of FCMs: 

from 85 to 60. The decline in the 

number of FCMs can be attributed to a 

number of factors, including low 

interest rates (which can reduce FCM 

profitability by lowering the rate of 

return on the investment of customer 

funds) and the changing regulatory 

environment. The compliance and other 

costs on clearing FCMs that go beyond 

existing industry practice could, in 

conjunction with existing factors that 

are pressuring FCMs, potentially cause 

some additional FCMs to scale back 

operations, or make it less likely that 

new FCMs will enter the market. The 

Commission also notes the possibility 

that if clearing FCMs are required to 

establish and maintain pre-trade risk 

controls and order cancellation systems 

pursuant to § 1.82(c) with respect to AT 

Order Messages originating with AT 

Persons that do not use DEA and to 

submit compliance reports regarding 

their risk controls, they may refuse to 

serve such firms in light of the 

additional costs or may raise trading 

fees to cover these costs. Such potential 

increased costs may make it more 

difficult for new trading firms to enter 

the market and for certain existing 

trading firms to remain in the market. 

This could happen if FCMs determines 

to cease serving firms that, in light of 

the increased costs, are no longer 

profitable for the FCM. However, it is 

possible that the rule will create a 

market opportunity for certain FCMs to 

specialize in monitoring the operation 

of Algorithmic Trading systems used by 

trading firms that do not use DEA. This 

may mitigate the impact of other FCMs 

exiting the market or new FCMs 

choosing not to enter the market and 

may mitigate the impact on trading 

firms. 

The potential reduction in the number 

of clearing FCMs and market 

participants due to increased costs 

could reduce liquidity and increase 

transaction costs in futures markets. The 

proposed rules also impose costs on 

DCMs that, to the extent they go beyond 

existing industry practice (including the 

costs of reviewing submissions from AT 

Persons and FCMs pursuant to proposed 

§ 40.22), may significantly affect small 

or start-up DCMs. However, the 

Commission emphasizes the general 

benefits that Regulation AT provides to 

the market, such as the protection of 

market integrity and efficiency, which 

were impacted by previous disruptive 

market events. As noted in section III 

above, for example, the events at Knight 

Capital significantly impacted the 

equities market. Due to coding errors in 

Knight’s systems, the firm’s automated 

trading system inadvertently built up 

unintended positions in the equity 

market, eventually resulting in losses of 

more than $460 million for the firm.672

In addition, the Flash Crash in 2010 

impacted market efficiency in several 

respects; for example, due to the 

extreme price movement, the exchanges 

and FINRA made a determination to 

cancel a significant number of trades 

that were executed during the crash.673

The Commission has preliminarily 

determined that burdens placed on 

market participants, FCMs, and DCMs 

imposed by Regulation AT is justified 

by the benefits in ensuring that all 

orders submitted through Algorithmic 

Trading pass through effective controls 

and systems that mitigate the risks of 

malfunctioning automated trading 

systems. The Commission has 

endeavored to minimize the compliance 

burden in Regulation AT to the 

minimum level necessary to protect 

market participants and the public. 

The proposed rules may promote the 

financial integrity of futures markets by 

reducing the likelihood of flash crashes 

and other automated trading 

disruptions. Such disruptions can place 

financial strain on market participants, 

intermediaries, and DCOs. 

iii. Price Discovery 

Requiring trading firms, clearing 

members and exchanges to implement 

pre-trade risk controls, testing, and 

order management control requirements 

in order to mitigate the risk of a 

malfunctioning trading algorithm or 

automated trading disruption promotes 

the price discovery process by reducing 

the likelihood of transactions at prices 

that do not accurately reflect market 

forces. 

iv. Sound Risk Management Practices 

The Commission believes that the pretrade risk and order management 

control requirements contained in 

Regulation AT will contribute to a 

system-wide reduction in operational 

risk, and will help standardize risk 

management practices across similar 

entities within the marketplace. The 

reduction in operational risk may 

simplify the tasks associated with sound 

risk management practices. These 

enhanced risk management practices 

should help reduce unintended market 

volatility, which will aid in efficient 

market making, and reduce overall 

transaction costs as they relate to price 

movements, which should encourage 

market participants to trade in 

Commission-regulated markets. Market 

participants and those who rely on 

prices as determined within regulated 

markets should benefit from markets 

that behave in an orderly and expected 

fashion. 

v. Other Public Interest Considerations 

The Commission has not identified 

any effects that these proposed rules 

would have on other public interest 

considerations other than those 

addressed above. 

d. Consideration of Alternatives 

i. Pre-Trade and Other Risk Controls 

In proposing these regulations, the 

Commission considered alternatives 

suggested by comments to the Concept 

Release. The Commission notes that the 

Concept Release raised numerous 

potential measures and controls, not all 

of which are proposed in Regulation 

AT. Accordingly, comments supporting 

or opposing regulation in the area of 

automated trading were made without 

the benefit of knowing specifically what 

regulations would be proposed. Some 

commenters indicated that there was 

already sufficient regulation in the area 

of risk controls. For example, FIA 

suggested that ‘‘the best approach to 

achieve standardization is to reflect 

industry best practices through working 

groups of DCMs, FCMs and market 

participants.’’ 674 CFE stated that there is 

already sufficient regulation of DCMs in 

relation to risk controls and that 

exchange risk control practices should 

evolve as technology and markets 

evolve.675 MFA indicated that current 

CFTC regulations and existing best 

practices require entities to have 

sufficient and effective pre-trade risk 

controls.676 ICE commented that 

exchanges are better able to implement 

and update risk controls on a market-bymarket basis than through a 


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677 ICE at 1. 

678OneChicago at 4–5. 

679See, e.g., the discussion of Knight Capital in 

section III above. 680CFE at 2. 

Commission rulemaking.677 OneChicago 

indicated that ‘‘additional mandates’’ as 

to exchange risk controls will increase 

costs and complexity.678

As noted above, the Concept Release 

addresses a number of potential 

measures that are not proposed as part 

of Regulation AT. With respect to the 

pre-trade risk and other controls 

proposed in this NPRM, the 

Commission acknowledges that many 

best practices as to risk controls have 

been developed without a regulatory 

mandate, and that trading firms, 

clearing member FCMs, and DCMs are 

in the best position to determine the 

most effective design of their own 

particular risk controls and innovate 

new forms of controls. However, the 

Commission believes that regulation in 

this area will better foster 

standardization of controls across all 

entities, including smaller firms or 

exchanges that may, without regulation, 

implement some but not all of the 

controls required by Regulation AT. 

This rulemaking may serve to limit a 

‘‘race to the bottom’’ in which some 

entities sacrifice effective risk controls 

in order to minimize costs or increase 

the speed of trading. In the context of 

automated trading, a technological 

malfunction at a single firm can have a 

significant impact across markets and 

market participants.679 Given that 

reality, it is insufficient that some, but 

not all, industry participants have the 

appropriate risk controls. Requiring the 

implementation of certain risk controls 

through regulation will help ensure that 

all industry participants have the 

appropriate risk controls, thus fostering 

trade certainty and market integrity for 

all market participants. In determining 

which risk controls discussed in the 

Concept Release should be proposed in 

this NPRM, the Commission has 

attempted to propose those core risk 

controls that it believes are currently 

implemented by the majority of market 

participants, foregoing certain risk 

controls that are implemented by 

relatively few market participants and 

may be of less value in mitigating risk. 

In addition, some commenters to the 

Concept Release explained the 

appropriate implementation or design of 

particular pre-trade risk controls, which 

are discussed above as relevant to each 

control. Also as discussed above, the 

Commission determined that, while it 

believes that these comments are 

reasonable and merit further 

consideration by market participants as 

they implement risk controls, the 

specific design and operation of risk 

controls should not be mandated by 

regulation. Rather, given the wide 

variety of trading firms, technology, 

trading strategies, markets, and 

products, the relevant entities—trading 

firms, clearing firms, and DCMs— 

should have the discretion to determine 

the appropriate design of the specific 

controls required by Regulation AT. 

The remainder of this discussion 

focuses on various alternative measures 

that the Commission considered in 

proposing these regulations, some of 

which were discussed in the Concept 

Release, and some of which are 

contained in other regulatory systems. 

The Commission evaluated various 

regulatory definitions of algorithmic 

trading when considering how to draft 

a definition for purposes of this NPRM. 

The Commission has proposed that the 

definition of Algorithmic Trading will 

include systems that make 

determinations regarding any aspect of 

the routing of an order, i.e., systems that 

only make decisions as to the routing of 

orders to one or more trading venues. 

The Commission notes analogous 

definitions adopted by the European 

Commission under MiFID II and by 

FINRA do not include automated 

systems that only route orders as 

algorithmic trading. Excluding 

automated order routers would reduce 

the number of automated systems 

captured by Regulation AT relative to 

the Commission’s proposal and may 

reduce the number of AT Persons 

subject to the costs of the regulation. 

Nevertheless, the Commission believes 

that automated order routers have the 

potential to disrupt the market to a 

similar extent as other types of 

automated systems, and that there are 

significant benefits to including 

automated order routers in the proposed 

regulations. 

The Commission is also considering 

expanding the definition of Algorithmic 

Trading to encompass orders that are 

generated using algorithmic methods 

(e.g., an algorithm generates a buy or 

sell signal at a particular time), but are 

then manually entered into a front-end 

system by a natural person, who 

determines all aspects of the routing of 

the orders. Such an alternative would 

increase the number of automated 

systems captured by Regulation AT 

relative to the Commission’s proposal 

and may increase the number of AT 

Persons subject to the costs of the 

regulation. The Commission 

preliminarily believes that such 

manually entered orders present less 

risk than fully automated orders and 

that the benefits of including them in 

the definition of Algorithmic Trading 

would therefore be limited. 

In the event that a non-clearing FCM 

or other entity acts only as a conduit for 

orders, and does not make any 

determinations with respect to such 

orders, the conduit entity would not be 

engaged in Algorithmic Trading, as that 

definition is currently proposed. The 

Commission preliminarily believes that 

expanding the definition to include 

conduit entities would not sufficiently 

enhance the benefits associated with 

Regulation AT relative to the additional 

costs. 

The Commission determined not to 

extend Regulation AT to SEFs, a 

proposal that was supported by one 

Concept Release commenter. CFE stated 

that any risk control requirements 

should apply to SEFs, in addition to 

DCMs. CFE explained that there must be 

a level playing field between both DCMs 

and SEFs and that there be no regulatory 

disparities that would make it more 

advantageous to list a swap on a SEF as 

opposed to a DCM.680 The Commission 

believes in fostering a level playing field 

in its markets, and as a result any 

requirements on DCMs arising out of 

Regulation AT may ultimately be 

imposed on SEFs at a later date. 

However, as noted in section (C)(1) 

above, an important consideration for 

the Commission is that SEFs and SEF 

markets are much newer and less liquid 

than the more established and liquid 

DCMs and DCM markets. While SEFs 

and SEF markets are still in this nascent 

stage, the Commission does not want to 

impose additional requirements that 

may have the effect of decreasing the 

number of SEFs or decreasing liquidity. 

Moreover, the Commission, based on its 

present knowledge, believes that 

automated trading is not as prevalent in 

SEF markets as compared to DCM 

markets. Therefore, the policy 

considerations underlying Regulation 

AT are not as critical, at least at this 

time, in the SEF context. 

Proposed § 1.82 requires clearing 

FCMs to implement controls with 

respect to AT Order Messages 

originating with an AT Person. The 

Commission is considering modifying 

proposed § 1.82 to require clearing 

FCMs to implement controls with 

respect to all orders, including orders 

that are manually submitted. Such a 

requirement would correspond to the 

requirement under proposed § 40.20(d) 

that DCMs implement risk controls for 

orders that do not originate from 

Algorithmic Trading. The Commission 

is considering this modification because 

it recognizes that manually entered 


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orders also have the potential to cause 

significant market disruption. The 

Commission requests comment on this 

proposed alternative formulation of 

§ 1.82, which the Commission may 

implement in the final rulemaking for 

Regulation AT. The Commission 

acknowledges that this proposed 

alternative formulation would impose 

additional costs on clearing FCMs 

relative to the currently proposed § 1.82. 

The Commission requests comment on 

the potential benefits of this proposal 

relative to the increased costs to clearing 

FCMs, in addition to any other 

comments regarding the effectiveness of 

this proposal in terms of risk reduction. 

ii. Compliance Reports 

Proposed § 1.83 would require AT 

Persons and clearing FCMs to submit 

compliance reports to DCMs on an 

annual basis. Such reports would need 

to be submitted and certified annually 

by the chief executive officer or the 

chief compliance officer of the AT 

Person or FCM. Proposed § 40.22 would 

require DCMs to establish a program for 

effective periodic review and evaluation 

of the reports. The Commission has 

proposed these regulations, using the 

deadlines described above, because it 

believes they represent an appropriate 

balancing of the transparency and risk 

reduction provided by the reports 

against the burden placed on AT 

Persons, clearing FCMs, and DCMs of 

providing and reviewing the reports. 

The Commission is considering the 

alternatives of requiring AT Persons and 

clearing FCMs to submit such reports 

more or less frequently than annually. 

The Commission is also considering the 

alternatives of placing the responsibility 

for certifying the reports required by 

proposed § 1.83 only on the chief 

executive officer, only on the chief 

compliance officer, or permitting 

certification from other officers of the 

AT Person or FCM. While proposed 

§ 40.22 would require DCMs to establish 

a program for effective periodic review 

and evaluation of the reports, the 

Commission is considering the 

alternative of requiring DCMs to review 

the reports at more specific intervals. 

The Commission considered the 

alternative of requiring additional 

information in the reports by AT 

Persons to DCMs under proposed § 1.83, 

including (1) descriptions of order 

cancellation systems; (2) policies and 

procedures for the development, testing, 

and monitoring of Algorithmic Trading 

systems; and (3) policies and procedures 

for the training of Algorithmic Trading 

staff. The Commission determined not 

to propose these additional 

requirements in order to limit costs both 

to AT Persons and to the DCMs that will 

be required to review the reports under 

proposed § 40.22, while retaining the 

benefits of protecting market 

participants and the public from 

disruptions and other adverse events 

associated with automated trading. 

Requirements related to RFAs. The 

Commission is considering making 

adjustments to the scope of RFA 

responsibility under proposed § 170.19. 

For example, RFAs could be responsible 

for fewer or additional areas regarding 

AT Persons, ATSs, and algorithmic 

trading than specified in proposed 

§ 170.19 and could have more or less 

latitude to issue rules than under the 

proposal. 

e. Request for Comments 

Pre-Trade and Other Risk Controls 

112. How would an alternative 

definition of Algorithmic Trading that 

excludes automated order routers affect 

the costs and benefits of the pre-trade 

and other risk controls in comparison to 

the costs and benefits of the proposed 

definition that includes automated order 

routers? Would such an alternative 

definition reduce the number of AT 

Persons captured by Regulation AT? 

113. Would the benefits of Regulation 

AT be enhanced significantly if the 

definition of Algorithmic Trading were 

modified to capture a conduit entity 

such as a non-clearing FCM, thereby 

making the entity an AT Person subject 

to Regulation AT? How would such a 

modification affect costs? 

114. Would the benefits of Regulation 

AT be enhanced significantly if the 

definition of Algorithmic Trading were 

expanded to encompass orders that are 

generated using algorithmic methods 

(e.g., an algorithm generates a buy or 

sell signal at a particular time), but are 

then manually entered into a front-end 

system by a natural person? How would 

such a modification affect costs? Please 

comment on the costs and benefits of an 

alternative whereby the Commission 

would implement specific rules 

regarding the appropriate design of the 

specific controls required by Regulation 

AT and compare them to the costs and 

benefits of the Commission’s proposal 

whereby the relevant entities—trading 

firms, clearing firms, and DCMs—would 

have the discretion to determine the 

appropriate design of those controls. 

115. Does one particular segment of 

trading firms, clearing member FCMs or 

DCMs (e.g., smaller entities) currently 

implement fewer of the pre-trade and 

other risk controls required by 

Regulation AT than some other segment 

of trading firms, clearing member FCMs 

or DCMs? If so, please describe any 

unique or additional costs that will be 

imposed on such persons to develop the 

technology and systems necessary to 

implement the pre-trade and other risk 

controls required by Regulation AT. 

116. In question 14, the Commission 

asks whether there are any AT Persons 

who are natural persons. Would AT 

Persons who are natural persons (or sole 

proprietorships with no employees 

other than the sole proprietor) be 

required to hire staff to comply with the 

risk control, testing and monitoring, or 

compliance requirements of Regulation 

AT? 

117. Do you agree with the accuracy 

of cost estimates provided by the 

Commission as to how much it will cost 

a trading firm, clearing member FCM or 

DCM to internally develop the 

technology and systems necessary to 

implement the pre-trade and other risk 

controls required by Regulation AT? If 

you disagree with the Commission’s 

analysis, please provide your own 

quantitative estimates, as well as data or 

other information in support. Please 

specify in your answer the type of entity 

and which specific pre-trade risk or 

order management controls for which 

you are providing estimates. 

In addition, please differentiate 

between the situations where an entity 

(i) already has partially compliant 

controls in place, and only needs to 

upgrade such technology and systems to 

bring it into compliance with the 

regulations; and (ii) needs to build such 

technology and systems from scratch. 

Please include, as applicable, hardware 

and software costs as well as the hourly 

wage information of the employee(s) 

necessary to develop such risk controls 

(i.e., technology personnel such as 

programmer analysts, senior 

programmers and senior systems 

analysts). 

118. The Commission has assumed 

that the effort to adjust any one risk 

control (by ‘‘control,’’ in this context, 

the Commission means the pre-trade 

risk controls, order cancellation 

systems, and connectivity systems 

required by § 1.80) will require 

assessment and possible modifications 

to all controls. Is this assumption 

correct, and if not, why not? 

119. As indicated above, the 

Commission lacks sufficient information 

to provide full estimates of costs that a 

trading firm, clearing member FCM or 

DCM will incur if it chooses not to 

internally develop such controls, and 

instead purchases the solutions of an 

outside vendor in order to comply with 

Regulation AT’s pre-trade and other risk 

controls requirements. Please provide 

quantitative estimates of such costs, 

including supporting data or other 


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information. In addition, please specify 

in your answer the type of entity and 

which specific pre-trade risk or order 

management control for which you are 

providing estimates. 

In addition, please differentiate 

between the situations where an entity 

(i) already uses an outside vendor to at 

least some extent to implement the 

controls; and (ii) does not currently 

implement the controls and must obtain 

all applicable technology and systems 

from an outside vendor necessary to 

comply with Regulation AT. Please 

include, if applicable, hardware and 

software costs as well as the hourly 

wage information of the employee(s) 

necessary to effectuate the 

implementation of such controls from 

an outside vendor. 

120. Do you agree with the 

Commission’s estimates of how much it 

will cost a trading firm, clearing 

member FCM or DCM to annually 

maintain the technology and systems for 

the pre-trade and other risk controls 

required by Regulation AT, if it uses 

internally developed technology and 

systems? If not please provide 

quantitative estimates and supporting 

data or other information with respect to 

how much it will cost a trading firm, 

clearing member FCM or DCM to 

annually maintain the technology and 

systems for pre-trade and other risk 

controls required by Regulation AT, if it 

uses an outside vendor’s technology and 

systems. 

121. Is it correct to assume that many 

of the trading firms subject to § 1.80 are 

also subject to the SEC’s Market Access 

Rule, and, accordingly, already 

implement many of the systems 

required by Regulation AT for purposes 

of their securities trading? 

Please specify in your answer the type 

of entity and which specific pre-trade 

risk or order management control is 

already required pursuant to the Market 

Access Rule, and the extent of the 

overlap. 

122. Please comment on the costs and 

benefits (including quantitative 

estimates with supporting data or other 

information) to clearing FCMs of an 

alternative to proposed § 1.82 that 

would require clearing FCMs to 

implement controls with respect to all 

orders, including orders that are 

manually submitted or are entered 

through algorithmic methods that 

nonetheless do not meet the definition 

of Algorithmic Trading and compare 

those costs and benefits to those costs 

and benefits of proposed § 1.82. 

123. Please comment on the 

additional costs (including quantitative 

estimates with supporting data or other 

information) to AT Persons of 

complying with each of the following 

specific requirements of § 1.80: 

a. § 1.80(a)(2) (pre-trade risk control 

threshold requirements); 

b. § 1.80(a)(3) (natural person 

monitors must be alerted when 

thresholds are breached) 

c. § 1.80(d) (notification to DCM and 

clearing member FCM that AT Person 

will use Algorithmic Trading); 

d. § 1.80(e) (self-trade prevention 

tools); and 

e. § 1.80(f) (periodic review of pretrade risk controls and other measures 

for sufficiency and effectiveness). 

124. The Commission welcomes 

comment on the estimated costs of the 

pre-trade risk controls proposed in 

§ 1.80 as compared to the annual 

industry expenditure on technology, 

risk mitigation and/or technology 

compliance systems. 

125. Please comment on the costs to 

AT Persons and clearing member FCMs 

of complying with DCM rules requiring 

retention and production of records 

relating to §§ 1.80, 1.81, and 1.82 

compliance, pursuant to § 40.22(d), 

including without limitation on the 

extent to which AT Persons and clearing 

member FCMs already have policies, 

procedures, staffing and technological 

infrastructure in place to retain such 

records and produce them upon DCM 

request. 

126. The Commission anticipates that 

Regulation AT may promote confidence 

among market participants and reduce 

market risk, consequently reducing 

transaction costs, but has not estimated 

this reduction in transaction costs. The 

Commission welcomes comment on the 

extent to which Regulation AT may 

impact transaction costs and effects on 

liquidity provision more generally. 

AT Person Membership in RFA; RFA 

Standards for Automated Trading and 

Algorithmic Trading Systems 

127. The Commission estimates that 

the costs of membership in an RFA 

associated with proposed § 170.18 will 

encompass certain costs, such as those 

associated with NFA membership dues. 

Has the Commission correctly identified 

the costs associated with membership in 

an RFA? 

128. The Commission expects that 

entities that will be required to become 

members of an RFA would not incur 

any additional compliance costs as a 

result of their membership in an RFA. 

The Commission requests comment on 

the accuracy of this expectation. What 

additional compliance costs, if any, 

would a registrant face as a result of 

being required to become a member of 

an RFA pursuant to proposed § 170.18? 

129. Has the Commission accurately 

estimated that approximately 100 

entities will be affected by the 

membership requirements of § 170.18? 

130. The Commission invites 

estimates on the cost to an RFA to 

establish and maintain the program 

required by § 170.19, and the amount of 

that cost that will be passed along to 

individual categories of AT Person 

members in the RFA. 

Development, Testing, and Supervision 

of Algorithmic Systems 

131. Proposed § 1.81(a) establishes 

principles-based standards for the 

development and testing of Algorithmic 

Trading systems and procedures, 

including requirements for AT Persons 

to test all Algorithmic Trading code and 

related systems and any changes to such 

code and systems prior to their 

implementation. AT Persons would also 

be required to maintain a source code 

repository to manage source code 

access, persistence, copies of all code 

used in the production environment, 

and changes to such code, among other 

requirements. Are any of the 

requirements of § 1.81(a) not already 

followed by the majority of market 

participants that would be subject to 

§ 1.81(a) (or some particular segment of 

market participants), and if so, how 

much will it cost for a market 

participant to comply with such 

requirement(s)? 

132. Proposed § 1.81(b) requires that 

an AT Person’s Algorithmic Trading is 

subject to continuous real-time 

monitoring and supervision by 

knowledgeable and qualified staff at all 

times while Algorithmic Trading is 

occurring. Proposed § 1.81(b) also 

requires automated alerts when an 

Algorithmic Trading system’s AT Order 

Message behavior breaches design 

parameters, upon loss of network 

connectivity or data feeds, or when 

market conditions approach the 

boundaries within which the ATS is 

intended to operate, to the extent 

applicable, among other monitoring 

requirements. Are any of the 

requirements of § 1.81(b) not already 

followed by the majority of market 

participants that would be subject to 

§ 1.81(b), and if so, how much will it 

cost for a market participant to comply 

with such requirement(s)? 

133. Proposed § 1.81(c) requires that 

AT Persons implement policies 

designed to ensure that Algorithmic 

Trading operates in a manner that 

complies with the CEA and the rules 

and regulations thereunder. Among 

other controls, the policies should 

include a plan of internal coordination 

and communication between 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78914 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

681As noted previously, the Commission has 

delegated its registration functions to NFA. Nonnatural person floor trader entities register with the 

Commission and apply for membership in NFA via 

CFTC Form 7–R. Principals of non-natural person 

floor trader entities register via Form 8–R. The 

Commission estimates that each non-natural person 

floor trader entity will have approximately 10 

principals and therefore need to file approximately 

10 Forms 8–R. In the event that a natural person 

meets the definition of Floor Trader in proposed 

§ 1.3(x)(3), and is therefore required to register with 

the Commission and become a member of NFA, 

such person would only be required to complete 

Form 8–R and would face substantially lower costs 

than those estimated here. The Form 7–R and 8– 

R fees estimated here are based on NFA’s current 

fees. 

682See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

683See Section V(E)(7)(b) above for a discussion 

of costs associated with Proposed §§ 1.80, 1.81, and 

1.83. 

compliance staff of the AT Person and 

staff of the AT Person responsible for 

Algorithmic Trading regarding 

Algorithmic Trading design, changes, 

testing, and controls. Are any of the 

requirements of § 1.81(c) not already 

followed by the majority of market 

participants that would be subject to 

§ 1.81(c), and if so, how much will it 

cost for a market participant to comply 

with such requirement(s)? 

134. Proposed § 1.81(d) requires that 

AT Persons implement policies to 

designate and train their staff 

responsible for Algorithmic Trading, 

which policies should include 

procedures for designating and training 

all staff involved in designing, testing 

and monitoring Algorithmic Trading. 

Are any of the requirements of § 1.81(d) 

not already followed by the majority of 

market participants that would be 

subject to § 1.81(d), and if so, how much 

will it cost for a market participant to 

comply with such requirement(s)? 

AT Person and FCM Compliance 

Reports 

135. Please comment on whether any 

of the alternatives discussed above 

regarding compliance reports would 

provide a superior cost-benefit profile 

relative to the Commission’s proposal. 

DCM Test Environments 

136. Do any DCMs not currently offer 

a test environment that simulates 

production trading to their market 

participants, as would be required by 

proposed § 40.21? If so, how much 

would it cost a DCM to implement a test 

environment that would comply with 

the requirements of § 40.21? 

DCM Review of Compliance Reports 

137. Please comment on the cost 

estimates provided above with respect 

to DCMs’ review of compliance reports 

provided under § 40.22 and related 

review requirements, including the 

estimated cost for DCMs to: Establish 

the review program required by § 40.22; 

review the reports provided by AT 

Persons and clearing member FCMs; 

communicate remediation instructions 

to a subset of AT Persons and clearing 

member FCMs; and review and 

evaluate, as necessary, books and 

records of AT Persons and clearing 

member FCMs as contemplated by 

proposed § 40.22(e). 

Section 15(a) Considerations 

138. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in § 15(a) of the CEA. 

139. Are the compliance costs 

associated with the proposed rules of 

sufficient magnitude to potentially 

cause smaller market participants, 

FCMs, or DCMs to cease or scale back 

operations? Do these costs create 

significant barriers to entry? 

8. Requirements for Certain Entities To 

Register as Floor Traders 

a. Background 

The Commission proposes to require 

registration for certain market 

participants with Direct Electronic 

Access. To achieve registration, the 

Commission proposes amending the 

definition of ‘‘Floor trader’’ in 

Commission regulation 1.3(x). The 

amended definition would include any 

person who purchases or sells futures or 

swaps solely for such person’s own 

account in any other place provided by 

a contract market for the meeting of 

persons similarly engaged where such 

place is accessed for Algorithmic 

Trading by such person in whole or in 

part through Direct Electronic Access 

(as defined in proposed § 1.3(yyyy)). 

b. Costs 

Registration and Membership Fees. 

The new registration requirements 

imposed on certain entities with Direct 

Electronic Access would require these 

entities to pay certain one-time 

registration charges. NFA currently 

charges non-natural persons applying 

for registration as floor traders $200 per 

application (on Form 7–R), and charges 

individuals $85 per application (on 

Form 8–R). The Commission estimates 

that there will be approximately 100 

entities with Direct Electronic Access 

that will register as Floor Traders under 

the new registration requirements. The 

Commission further estimates that each 

entity will be required to file 10 Forms 

8–R in relation to its principals. 

Accordingly, the Commission estimates 

that new registrants will incur one-time 

registration costs of $105,500 for Form 

7–R and 8–R fees combined (Form 7–Rs 

submitted by 100 new registrants, at 

$200 per Form 7–R plus 10 Forms 8–R 

submitted by each of 100 new 

registrants, at $85 per Form 8–R).681

Costs for Submitting Applications. In 

addition, the Commission estimates that 

new registrants will incur a total onetime cost of $105,600 to prepare and 

submit Forms 7–R and 8–R. This cost 

represents the work of 1 Compliance 

Attorney per registrant, working for 11 

hours (11 × $96 = $1,056 per 

registrant).682 The 100 new registrants 

will therefore incur a total one-time cost 

of $105,600. 

Other Indirect Costs. The Commission 

preliminarily believes that there are 

additional indirect costs, beyond the 

cost of registration, to new registrants 

resulting from the new registration 

requirement. New floor traders required 

to register under proposed § 1.3(x)(3) 

will be included in the definition of 

‘‘AT Person.’’ These proposed rules 

establish various requirements for AT 

Persons, including the implementation 

of risk controls for algorithmic systems 

(proposed § 1.80), the implementation of 

standards for development, testing, and 

supervision of algorithmic systems 

(proposed § 1.81), and the submission to 

DCMs of compliance reports regarding 

risk controls and, upon request, certain 

related books and records (proposed 

§ 1.83). Because these provisions apply 

to AT Persons, new floor traders under 

Proposed § 1.3(x)(3) will only be 

required to follow these provisions as a 

result of their status as a floor trader. 

Thus, any costs associated with these 

rules are also indirect costs of 

registration itself.683

c. Benefits 

The Commission preliminarily 

believes that registration of certain 

entities with Direct Electronic Access 

would enhance the pre-trade controls 

and risk management tools discussed 

elsewhere in this NPRM. For example, 

the pre-trade risk controls listed in 

proposed § 1.80(a)—maximum AT 

Order Message frequencies per unit 

time, maximum execution frequencies 

per unit time, order price parameters 

and maximum order size limits—must 

be established and used by all AT 

Persons. If the Commission were to only 

require those trading firms or clearing 

member FCMs that are already 

registered with the Commission to 

implement such controls, it would be 

ignoring a significant number of market 

participants that actively trade on 

Commission-regulated markets, each of 

which has algorithmic trading systems 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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684Better Markets 13; AFR 8–9; TCL 17. 

685AFR 8–9. 

686AIMA 24; VFL 3. 

687 VFL 3. 

that could malfunction and create 

systemic risk to all market participants. 

The Commission estimates that there are 

approximately one hundred proprietary 

trading firms engaged in Algorithmic 

Trading in Commission-regulated 

markets. However, a technological 

malfunction in a single trading firm’s 

systems can significantly impact other 

markets and market participants. 

Accordingly, the proposed registration 

requirement accomplished through 

revised § 1.3(x) is critical to ensuring 

that all such firms are registered and 

subject to appropriate risk control, 

testing, and other requirements of 

Regulation AT. 

A number of commenters to the 

Concept Release pointed out benefits of 

additional registration.684 AFR stated 

that ‘‘[t]he enhancement of investigative 

authority is extraordinarily important 

given that the Commission would often 

need to involve itself in the workings of 

the ATSs to anticipate problems and to 

detect and investigate problems that 

have occurred. HFT firms should have 

the highest priority.’’ 685

AIMA and VFL specifically 

emphasized benefits of registration for 

participants with direct market 

access.686 VFL commented that if an 

exchange provides a participant the 

ability to connect directly, then that 

participant enjoys all of the rights of a 

member and should be regulated at the 

federal and exchange level.687

d. Section 15(a) Factors 

This section discusses the section 

15(a) factors for the proposed 

amendment of the definition of ‘‘Floor 

trader’’ in Commission Regulation 

1.3(x), for purposes of registering 

participants with Direct Electronic 

Access. 

i. Protection of Market Participants and 

the Public 

The Commission preliminarily 

believes that requiring market 

participants with Direct Electronic 

Access to register with the Commission 

will further the protection of market 

participants and the public by 

enhancing the Commission’s ability to 

seek information from such firms and 

allow for wider implementation of many 

of the pre-trade risk controls and other 

tools discussed in this release. Broader 

use of these tools will reduce the 

likelihood of market disruptions that 

adversely impact market participants 

and the public. Regulation AT may 

serve to limit a ‘‘race to the bottom,’’ in 

which certain entities sacrifice effective 

risk controls in order to minimize costs 

or increase the speed of trading. The 

proposed rules, by standardizing the 

risk controls required to be used by 

firms, would help ensure that the 

benefits of these risk controls are more 

evenly distributed across a wide set of 

market participants, and reduce the 

likelihood that an outlier firm without 

sufficient risk controls causes 

significant market disruption. Thus, the 

proposed registration requirement may 

help ensure the protections of market 

participants and the public that these 

tools provide as discussed above. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The Commission preliminarily 

believes that requiring market 

participants with Direct Electronic 

Access to register with the Commission 

will further the efficiency, 

competitiveness, and financial integrity 

of futures markets by enhancing the 

Commission’s ability to seek 

information from such firms and allow 

for wider implementation of many of 

the pre-trade risk controls and other 

tools discussed in this release. Broader 

use of these tools will reduce the 

likelihood of market disruptions that 

may adversely impact the efficiency and 

integrity of the futures markets. 

Consistent use of these tools may also 

even the playing field within groups of 

automated firms, such as marketmakers, or across firms with differing 

strategies. This consistency can improve 

firm competitiveness and reduce 

disadvantages experienced by those 

firms who would employ more 

comprehensive risk control and order 

management programs even absent a 

rule requiring use of such tools. Thus, 

the proposed registration requirement 

may help ensure the furtherance of 

efficiency, competitiveness, and 

financial integrity that these tools 

provide as discussed above. 

iii. Price Discovery 

The Commission preliminarily 

believes that requiring market 

participants with direct market access to 

register with the Commission will also 

further price discovery by enhancing the 

Commission’s ability to seek 

information from such firms and allow 

for wider implementation of many of 

the pre-trade controls and risk 

management tools discussed in this 

release. Broader use of these tools will 

reduce the likelihood of market 

disruptions that may interfere with the 

price discovery process. Thus, the 

proposed registration requirement may 

help ensure the furtherance of price 

discovery protections that these tools 

provide as discussed above. 

iv. Sound Risk Management Practices 

The Commission preliminarily 

believes that requiring market 

participants with direct market access to 

register with the Commission will also 

further sound risk management 

practices by enhancing the 

Commission’s ability to seek 

information from such firms and allow 

for wider implementation of many of 

the pre-trade controls and risk 

management tools discussed in this 

release. Broader use of these tools will 

reduce the likelihood of market 

disruptions that may interfere with 

sound risk management practices. Thus, 

the proposed registration requirement 

may help ensure the furtherance of 

sound risk management practices that 

these tools provide as discussed above. 

v. Other Public Interest Considerations 

The Commission has not identified 

any effects that these proposed rules 

would have on other public interest 

considerations other than those 

addressed above. 

e. Consideration of Alternatives 

The Commission considered a 

number of alternatives to the proposed 

approach of requiring registration for 

entities with Direct Electronic Access. 

In the Concept Release, the Commission 

sought comments regarding broader 

registration of proprietary traders 

generally. Based upon the comments 

received, many of which did not 

support registration, the Commission is 

not proposing broad registration of 

proprietary traders at this time. 

As an alternative to requiring the 

registration of entities engaged in 

proprietary Algorithmic Trading 

through DEA, the Commission 

considered reaching such entities 

indirectly through the DCMs on which 

they trade. This approach would have 

necessitated that DCMs implement rules 

requiring relevant entities to meet the 

substantive standards of Regulation AT. 

These DCM rules would have needed to 

require, for example, that relevant 

entities implement pre-trade risk 

controls, establish policies and 

procedures for testing and monitoring of 

ATSs, and provide compliance reports 

regarding their algorithmic trading to 

DCMs (which are currently proposed as 

direct obligations upon AT Persons 

under §§ 1.80, 1.81, and 1.83, 

respectively). This alternative would 

have reduced the costs for such entities, 

since they would not be required to 

register with the Commission. However, 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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688FIA at 44. 

689FIA 43–46; CME at 32–34; Gelber at 22–24; 

KCG at 18; MFA at 3; AIMA at 2, 24; Chicago Fed 

at 3. 

such costs would instead have been 

borne by DCMs, and potentially passed 

back on to relevant entities. The 

Commission did not pursue this 

approach for a number of other reasons 

as well. In particular, the Commission 

wanted to ensure that such entities are 

directly subject to Commission 

regulations, rather than impose 

obligations indirectly through DCMs. In 

addition, the Commission wanted to 

ensure a uniform baseline of regulatory 

expectations which might not arise 

where numerous DCMs are 

independently producing their own selfregulatory standards in lieu of the 

Commission’s standards. Furthermore, 

the Commission also wanted to combine 

the requirement to register with the 

Commission with the requirement 

under § 170.18 that all AT Persons must 

become a member of a registered futures 

association, so that the RFA can 

consider adopting standards for 

automated trading and ATSs applicable 

to AT Persons. These standards are 

described under § 170.19. As discussed 

above, the Commission believes that 

§§ 170.18 and 170.19 would allow RFAs 

to supplement elements of Regulation 

AT as markets and trading technologies 

evolve over time, and do so in a uniform 

manner that would not be available 

through separate initiatives by 

individual DCMs. 

The Commission also considered not 

requiring currently unregistered entities 

to register with the Commission as floor 

traders. A number of commenters 

supported such an approach, including 

FIA, which suggested ‘‘[r]ather than 

creating a new registration framework, 

expanding the information required in 

[the DCM’s] audit trail may be a more 

direct and efficient way to address the 

Commission’s concerns.’’ 688 Other 

commenters also focused on whether 

the Commission already had access to 

the information that registration would 

ostensibly enable it to acquire. 

Commenters pointed out that: DCMs 

already use Operator IDs; the DCM audit 

trail already satisfies the goals of 

registration; implementing the 

Commission’s final rule on ownership 

and control reporting (OCR) will 

provide additional information on 

trading identities; and the Commission 

already has access to trade data (i.e., 

Regulation 1.40 and part 38’s mandate 

that DCMs require market participants 

to submit to jurisdiction).689 The 

Commission notes that obtaining 

information from proprietary traders is 

not the primary purpose of the proposed 

registration requirement, and therefore 

believes that the goals of Regulation AT 

can only be realized by requiring 

currently unregistered entities to 

register with the Commission as floor 

traders. 

As discussed more fully in section 

IV(E)(3) above, the ‘‘floor trader’’ 

definition is not being expanded to 

capture all proprietary traders engaged 

in Algorithmic Trading; rather, the 

revised floor trader definition is limited 

to firms using DEA to engage in 

Algorithmic Trading. Registration of 

entities with DEA as floor traders would 

enhance the pre-trade controls and risk 

management tools discussed elsewhere 

in this NPRM by making such entities 

subject to the various regulations 

governing AT Persons under the NPRM. 

For example, the pre-trade risk controls 

listed in proposed § 1.80—maximum AT 

Order Message frequencies per unit 

time, maximum execution frequencies 

per unit time, order price parameters 

and maximum order size limits—must 

be established and used by all AT 

Persons. The Commission is also 

considering whether it is appropriate to 

further limit the registration 

requirement by adding a de minimis 

exception, whereby only those persons 

with DEA who also meet certain trading 

volume or message volume thresholds 

would be required to register. 

f. Request for Comments 

140. The Commission estimates that 

the costs of registration will encompass 

direct costs (those associated with NFA 

membership, and reporting and 

recordkeeping with the Commission), 

and indirect costs (e.g. those associated 

to risk control requirements placed on 

all registered entities). Has the 

Commission correctly identified the 

costs associated with the new 

registration category? What firm 

characteristics would change the level 

of direct and indirect costs associated 

with the registration? 

141. Has the Commission accurately 

estimated that approximately 100 

currently unregistered entities will be 

captured by the new registration 

requirement in proposed § 1.3(x)(3). 

142. Has the Commission accurately 

estimated that each currently 

unregistered entity captured by the new 

registration requirement in proposed 

§ 1.3(x)(3) will have approximately 10 

persons required to file Form 8–R? 

143. As defined, the new floor trader 

category restricts the registration 

requirement to those who make use of 

Direct Electronic Access. Is this 

requirement overly restrictive or unduly 

broad from a cost-benefit perspective? 

Are there alternate, or additional, 

characteristics of trading activity to 

determine registration status that would 

be preferable from a cost-benefit 

standpoint? For example, should 

persons with trading volume or message 

volume below a specified threshold be 

exempted from registration? 

144. Will any currently unregistered 

entities change their business model or 

exit the market in order to avoid the 

proposed registration requirement? 

145. The Commission believes that 

the risk control protocols required of 

registered entities, specifically those 

under the new registration category, will 

provide a general benefit to the safety 

and soundness of market activity and 

price formation. Has the Commission 

correctly identified the type and level of 

benefits which arise from placing these 

requirements on a new set of significant 

market participants? 

146. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

9. Transparency in Exchange Trade 

Matching Systems 

a. Background 

The proposed regulations concerning 

additional disclosure by DCMs 

regarding their trade matching systems 

(amendments to §§ 38.401(a) and 

40.1(i)) provide that DCMs publicly 

disclose certain information 

prominently and clearly. These 

proposed regulations would require 

DCMs to provide a description of 

attributes of trade matching systems that 

materially affect the entry and execution 

of orders and requests for quotes, 

including any changes to trade matching 

systems that would cause such effects. 

b. Costs 

The Commission notes that DCMs are 

currently obligated under DCM core 

principles and existing regulations to 

make available certain types of 

information concerning the operation of 

their electronic matching platforms 

through publication of rulebooks and 

through the required posting of 

specifications of platforms on their Web 

site. DCMs are also obligated under 

DCM core principles and existing 

regulations to establish and maintain a 

program of risk analysis and oversight to 

identify and minimize sources of 

operation risk, which should identify 

and remediate aspects of an electronic 

matching platform that could negatively 

affect market participants’ orders. 

Therefore, to a large extent, the 

Commission believes that the disclosure 


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690See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

691See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

requirements under proposed 

§ 38.401(a) would not materially impact 

a DCM’s operations costs. 

The Commission anticipates that 

additional costs under proposed 

§ 38.401(a) would be staff hours 

associated with drafting descriptions of 

such attributes that the DCMs should 

already be determining as part of their 

systems testing and disclosure of 

platform specifications. Such drafting 

may also require additional 

determinations as to the materiality of 

attributes and, where applicable, 

additional testing of systems to ensure 

an accurate description of those 

attributes in public documents. This 

may also involve attorneys’ fees 

associated with reviewing any 

disclosures. 

The proposed amendments to 

§ 38.401(a) and (c) require DCMs to 

publicly post information regarding 

certain aspects of their electronic 

matching platforms. The Commission 

anticipates that DCMs are likely to be 

aware of these aspects of their platforms 

based on their daily work in operating 

their matching engines, monitoring 

performance, and receiving customer 

feedback, among other internal 

monitoring activities. As a result, the 

added burden under the proposed 

amendments would be limited to 

drafting the description of such 

attributes and making the description 

available on the DCM’s Web site. 

The Commission estimates that a 

DCM would incur an annual cost of 

$19,200 to comply with amended 

§ 38.401(a)–(c), assuming the DCM is 

already compliant with the 

requirements to post the specifications 

of its electronic matching platform 

under current § 38.401(a). This cost 

represents the work of 1 Compliance 

Attorney, working for 200 hours (200 × 

$96 per hour = $19,200).690 The 15 

DCMs that would be subject to amended 

§ 38.401(a)–(c) would therefore incur a 

total annual cost of $288,000 (15 × 

$19,200).691 The Commission 

anticipates that this figure would 

decrease in subsequent years as the 

descriptions provided would only need 

to be amended to reflect changes to the 

electronic matching platform or the 

discovery of previously unknown 

attributes. 

The proposed amendment to 

Regulation 40.1(i) that adds the 

language ‘‘(including but not limited to 

any operation of an electronic matching 

platform that materially affects the time, 

priority, price, or quantity of execution 

of market participant orders, the ability 

to cancel, modify, or limit display of 

market participant orders, or the 

dissemination of real-time market data 

to market participants)’’ would not 

result in any additional costs for DCMs. 

The Commission notes that the 

proposed change to Regulation 40.1(i) 

clarifies and codifies the Commission’s 

existing interpretation of the term 

‘‘rule.’’ Moreover, the proposal is 

consistent with industry practice, 

whereby DCMs have submitted as rule 

changes information regarding proposed 

changes to electronic trade matching 

platform that affect the entry and 

execution of market participant orders 

and quotes. Therefore, the Commission 

does not anticipate that DCMs will be 

required to file submissions relating to 

any changes to the platform that should 

not already be filed under current 

Commission interpretation and industry 

practice. 

c. Benefits 

The Commission believes that the 

additional disclosure by DCMs 

regarding their trade matching systems, 

pursuant to the proposed amendments 

to §§ 38.401(a) and 40.1(i), would have 

substantial benefits for market 

participants. With a better 

understanding of how their order 

messages interact with an electronic 

matching platform, market participants 

can more efficiently use the electronic 

markets to hedge risks. Moreover, the 

disclosure required by the proposed rule 

would foster greater transparency in the 

operation of electronic markets. This 

enhanced transparency would foster 

confidence in the markets and ensure 

the availability of efficient markets to 

hedge risks. Finally, this increased 

transparency would encourage 

competition among DCMs to provide the 

best platforms for market participants, 

as market participants would be able to 

evaluate better the relative benefits of 

trading on individual exchanges. The 

Commission believes that, to the extent 

that DCMs are currently in compliance 

with the proposed amendments to 

§§ 38.401(a) and 40.1(i), many of the 

benefits of the proposed amendments 

are already being realized. The proposed 

rule will ensure that the benefits are 

being realized by market participants at 

all DCMs. 

d. Section 15(a) Factors 

This section discusses the Section 

15(a) factors for the proposed 

regulations requiring additional 

disclosure by DCMs regarding their 

trade matching systems (amendments to 

§§ 38.401(a) and 40.1(i)). 

i. Protection of Market Participants and 

the Public 

The Commission preliminarily 

believes that the proposed disclosure 

requirement and the enhanced 

transparency that it would foster will 

protect market participants by providing 

them with a better understanding of 

how their order messages interact with 

an electronic matching platform, thus 

facilitating their ability to tailor their 

orders to their understanding of the 

matching engine and reducing the 

likelihood of unpleasant surprises 

regarding order fills. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

Requiring submissions for changes to 

available order types and platform 

functionalities also ensures 

transparency on the operation of such 

platforms, further encouraging 

competition among DCMs and 

enhancing market integrity. The 

increased transparency may increase 

investor confidence and expand 

participation in the futures markets. 

iii. Price Discovery 

The proposed rule may protect and 

enhance the price discovery process by 

providing market participants and the 

public with a better understanding of 

how buy and sell orders interact on the 

trading platform, thus making the price 

discovery process more transparent. 

iv. Sound Risk Management Practices 

The proposal may promote sound risk 

management practices by providing 

market participants with more detailed 

information regarding how their order 

messages will be processed once they 

reach the trading platform, and how 

their messages will interact with 

messages from other market 

participants, including the priority with 

which they will be executed. This 

information will enable market 

participants to calibrate their risk 

controls more effectively. 

v. Other Public Interest Considerations 

The Commission has not identified 

any effects that these proposed rules 

would have on other public interest 

considerations other than those 

addressed above. 

vi. Consideration of Alternatives 

The Commission is considering the 

alternative of applying the transparency 

requirement only with respect to 

latencies within a platform and how a 

self-trade prevention tool determines 

whether to cancel an order. The 

Commission preliminarily believes that 

the broader language that it is proposing 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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692FIA at 25–27. 

693FIA at 25–27; MFA at 8; Gelber 7–9; AIMA at 

10; IATP at 5. 

694See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

695See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

696See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

would better ensure that DCMs disclose 

any additional attributes of an electronic 

matching platform that may materially 

impact market participant orders and 

any material attributes that may arise in 

the future as the structures of matching 

engines continue to evolve. This 

additional information may enable 

market participants to make better and 

more informed decisions about their 

trading decisions. 

e. Request for Comments 

147. The Commission anticipates that 

costs associated with the transparency 

requirement would come from some 

additional testing of platform systems 

and from drafting and publishing 

descriptions of any relevant attributes of 

the platform. What new costs would be 

associated with providing descriptions 

of attributes of electronic matching 

platforms that affect market participant 

orders and quotes? 

148. Please compare the costs and 

benefits of the alternative of applying 

the transparency requirement only with 

respect to latencies within a platform 

and how a self-trade prevention tool 

determines whether to cancel an order 

with the costs and benefits of the 

proposed rule. 

149. What benefits might market 

participants receive through increased 

transparency into the operation of 

electronic matching platforms, 

particularly for those market 

participants without direct electronic 

access who may not be able to 

accurately measure latencies or other 

metrics of market efficiency? 

150. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

10. Self-Trade Prevention 

a. Background 

Regulation AT proposes a new 

requirement (§ 40.23) that a DCM shall 

implement rules reasonably designed to 

prevent self-trading by market 

participants, except as specified in 

paragraph (b) of § 40.23. ‘‘Self-trading’’ 

is defined for purposes of § 40.23 as the 

matching of orders between accounts 

that have common beneficial ownership 

or are under common control. A DCM 

must either apply, or provide and 

require the use of, self-trade prevention 

tools that are reasonably designed to 

prevent self-trading and are applicable 

to all orders on its electronic trade 

matching platform. This requirement is 

subject to the proviso in proposed 

§ 40.23(b) that a DCM may, in its 

discretion, implement rules that permit 

the matching of orders for accounts with 

common beneficial ownership where 

such orders are initiated by independent 

decision makers. Under § 40.23(b), a 

DCM could also permit the matching of 

orders for accounts under common 

control where such orders comply with 

the DCM’s cross-trade, minimum 

exposure requirements or similar rules, 

and are for accounts that are not under 

common beneficial ownership. 

Proposed § 40.23(c) states that a DCM 

may only permit the self-trading 

described in § 40.23(b) if the DCM 

complies with certain requirements, 

including the requirement under 

§ 40.23(c) that the DCM requires market 

participants to request approval from 

the DCM that self-trade prevention tools 

not be applied with respect to specific 

accounts under common beneficial 

ownership or control, on the basis that 

they meet the criteria of § 40.23(b). 

Finally, proposed § 40.23(d) would 

require DCMs to publish statistics on 

their Web site with respect to selftrading activity on their platform. For 

example, each DCM would be required 

to describe the amount of trading on its 

platform that represents permitted selftrading approved pursuant to § 40.23(b). 

b. Costs 

The Commission assumes that most, if 

not all, DCMs currently offer self-trade 

prevention controls or plan to 

implement them and provide them for 

use by market participants in the near 

future. FIA recommends that DCMs 

offer such controls,692 and several DCMs 

provide the controls, a capability which 

was introduced, and refined, in recent 

years.693 As a result, subject to 

consideration of relevant comments, the 

Commission preliminarily believes that 

DCMs would not incur additional costs 

to develop and offer self-trade 

prevention controls as required by 

§ 40.23(a). The Commission has, 

nonetheless, estimated the cost to a 

DCM that does not currently offer selftrade prevention tools to develop and 

implement such tools for purposes of 

complying with § 40.23(a). 

Cost to DCMs to Implement SelfTrade Prevention Tools. The 

Commission estimates that a DCM 

would incur a total one-time cost of 

$155,520 to implement these § 40.23(a) 

requirements, in the absence of any 

existing controls. This cost is broken 

down as follows: 1 Project Manager, 

working for 480 hours (480 × $70 = 

$33,600); 1 Business Analyst, working 

for 480 hours (480 × $52 = $24,960); 1 

Tester, working for 480 hours (480 × $52 

= $24,960); and 2 Developers, working 

for a combined 960 hours (960 × $75 = 

$72,000).694 Notwithstanding these 

estimates, the Commission believes that 

the requirement under proposed 

§ 40.23(a) that DCMs either apply selftrade prevention tools, or provide such 

tools to market participants, 

standardizes existing industry practice. 

As a result, subject to consideration of 

relevant comments, the Commission 

preliminarily believes that this 

requirement under § 40.23(a) will not 

impose additional costs on DCMs. 

DCM Review of Approval Requests. 

DCMs will, however, incur additional 

costs in connection with proposed 

§ 40.23(c). This provision requires 

market participants to request approval 

from the DCM that self-trade prevention 

tools not be applied with respect to 

specific accounts under common 

beneficial ownership or control, on the 

basis that they meet the criteria of 

§ 40.23(b). DCMs will incur costs to 

review these § 40.23(c) approval 

requests. These costs may vary 

significantly depending on the number 

of approval requests a DCM receives. 

The Commission has therefore 

estimated the average annual costs that 

a DCM will incur, while acknowledging 

that DCMs may incur lower or higher 

costs depending on the number of 

requests received. On average, the 

Commission estimates that, on an 

annual basis, a DCM will incur a cost of 

$22,000 to review these approval 

requests. This cost is broken down as 

follows: 1 Senior Compliance Examiner, 

working for 200 hours (200 × $58 per 

hour = $11,600); and 1 Business 

Analyst, working for 200 hours (200 × 

$52 per hour = $10,400).695 The 15 

DCMs that will be subject to § 40.23(c) 

would therefore incur a total annual 

cost of $330,000 (15 × 22,000).696

DCM Publication of Statistics 

Regarding Self-Trade Prevention. In 

addition, DCMs will incur costs to 

generate and publish the self-trade 

statistics on their Web site required by 

§ 40.23(d). The Commission estimates 

that, on an annual basis, a DCM will 

incur a cost of $6,650 to generate and 

publish these statistics. This cost is 

broken down as follows: 1 Developer, 

working for 50 hours (50 × $75 per hour 

= $3,750); and 1 Senior Compliance 

Examiner, working for 50 hours (50 × 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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697See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

698See section V(A) above for the calculation of 

the number of persons subject to Regulation AT. 

699FIA at 26; Gelber at 7–9. 

700FIA at 26, 59–60. 

701See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

702See section V(A) above for the calculation of 

the number of person subject to Regulation AT. 

$58 per hour = $2,900).697 The 15 DCMs 

that will be subject to § 40.23(c) and (d) 

would therefore incur a total annual 

cost of $99,750 (15 × 6,650).698 These 

costs may vary significantly depending 

on the size of a DCM and the number 

of products it lists for trading. 

As noted above, proposed § 40.23 

requires DCMs to apply, or provide and 

require the use of, self-trade prevention 

tools that are reasonably designed to 

prevent self-trading and are applicable 

to all orders on its electronic trade 

matching platform. To the extent that a 

DCM offers self-trade prevention tools to 

market participants, in lieu of the DCM 

internalizing and directly applying 

these tools, then market participants 

will be required to use these tools. 

Commenters indicated that exchangeprovided self-trading controls are 

widely used by market participants.699

The FIA PTG Survey indicated that 25 

of 26 responding firms use such 

controls.700 In the event that a market 

participant is required to use self-trade 

prevention tools in the scenario 

described above, and was not previously 

using such tools, the Commission 

estimates that the market participant 

will not incur any additional costs 

beyond those costs already incurred to 

implement the pre-trade risk controls 

required by Regulation AT. 

Market Participant Approval 

Requests. Market participants will, 

however, incur additional costs in the 

event that they prepare and submit the 

approval requests contemplated by 

§ 40.23(c). This provision requires 

market participants to request approval 

from DCMs on which they are active 

that self-trade prevention tools not be 

applied with respect to specific 

accounts under common beneficial 

ownership or control. The Commission 

estimates that, on an annual basis, a 

market participant will incur a total cost 

of $3,810 to prepare and submit these 

approval requests to the DCMs on which 

the market participant is active. This 

cost is broken down as follows: 1 

Business Analyst, working for 30 hours 

(30 × $52 per hour = $1,560); and 1 

Developer, working for 30 hours (30 × 

$75 per hour = $2,250).701

The Commission cannot predict how 

many market participants would likely 

submit the approval requests 

contemplated by § 40.23(c) on an annual 

basis. The Commission believes that not 

all market participants trading on a 

DCM would submit such requests. In 

the view of the Commission, for 

example, a limited subset of market 

participants will own two or more 

accounts, but operate them through 

‘‘independent decision makers’’ that 

initiate orders for ‘‘separate business 

purposes,’’ as contemplated by 

§ 40.23(b). Similarly, a limited subset of 

market participants will find it 

advantageous to incur the costs 

associated with the self-trading 

described by § 40.23(b), such as trading 

costs and clearing fees. In addition, the 

Commission believes that market 

participants submitting orders through 

Algorithmic Trading are more likely 

than traders submitting orders manually 

to inadvertently self-trade through 

independent decision-makers. The 

Commission estimates that, 

notwithstanding the fact that the DCM 

rules described in § 40.23(c) are directed 

to all market participants, the number of 

market participants that will submit the 

approval requests described therein are 

equivalent to the number of AT Persons 

calculated above (420).702 On this basis, 

the Commission estimates that market 

participants will incur a total annual 

cost of $1,600,200 to submit the 

approval requests contemplated by 

§ 40.23(c) ($3,810 per market participant 

× 420 market participants). 

c. Benefits 

The Commission notes that, to the 

extent that DCMs are offering self-trade 

prevention tools and market 

participants are using them, many of the 

benefits of the proposed rules are 

already being realized. Nonetheless, the 

Commission has determined to propose 

rules in the area of self-trading that 

address both intentional and 

unintentional matching of orders for 

accounts that have common beneficial 

ownership or are under common 

control, with the goal of benefiting 

markets and market participants. In 

particular, the proposed rules would 

codify a regulatory baseline for selftrade prevention across DCMs, and 

provide all market participants with 

enhanced transparency regarding the 

products in which they trade. 

Regulation AT addresses certain selftrading as provided in § 40.23(a) and (b) 

(trades between accounts that have 

common beneficial ownership or are 

under common control, with certain 

exceptions). At their extreme, 

intentional self-trades, or wash sales, 

may indicate an intent to manipulate a 

market by creating a false impression of 

supply or demand or distortions in 

prices. While Section 4c of the CEA 

prohibits wash sales, unintentional selftrades are not specifically prohibited 

under the statute. While existing 

Commission rules address market 

manipulation, including wash sales, the 

use of self-trade tools (as compared to 

an electronic market without such 

controls) can improve market 

functioning, aid firm and market 

efficiency, and minimize unintentional, 

and often unnecessary, trading by firms 

that may be difficult for firms to track 

on their own. Absent self-trade controls, 

it has become even more difficult for 

firms to avoid unintentional selfmatches due to their use of automated 

strategies, which make trading decisions 

in isolation from the rest of the firm at 

very high speeds. The Commission 

preliminarily believes that the proposed 

rule, by standardizing the use of selftrade controls, will ensure that these 

benefits of self-trade controls will be 

available to all market participants. The 

Commission believes that DCMs are best 

situated to promulgate rules designed to 

limit the frequency of self-trading on 

their platforms, and to provide 

disclosure to the marketplace regarding 

the frequency of self-trade activity on 

their platform. 

Proposed § 40.23(c) requires market 

participants to request approval from 

DCMs on which they are active that selftrade prevention tools not be applied 

with respect to specific accounts under 

common beneficial ownership or 

control. The Commission preliminarily 

believes that this rule will benefit the 

market by providing, to the DCMs, 

additional transparency on the 

relationships between accounts and 

trading strategies within a firm. In 

addition, the rule will better ensure that 

firms will apply self-trade prevention 

tools in a consistent manner. 

The Commission preliminarily 

believes that publication of self-trade 

statistics by DCMs (proposed § 40.23(d)) 

will benefit market participants by 

providing transparency about the 

frequency of certain categories of selftrades on each DCM, which can aid in 

a better understanding of the sources, 

and characteristics, of liquidity demand 

and supply across futures products. 

d. Section 15(a) Factors 

This section discusses the Section 

15(a) factors for the new proposed 

requirement (§ 40.23) that a DCM shall 

implement rules reasonably designed to 

prevent self-trading by market 

participants, except as specified in 

paragraph (b) of § 40.23. 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78920 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

i. Protection of Market Participants and 

the Public 

The Commission preliminarily 

believes that the proposed rule would 

protect market participants and the 

public by codifying the use of self-trade 

controls and increasing transparency 

around self-trading as required by 

proposed § 40.23(d). It may also 

incentivize practices that help to reduce 

the likelihood of wash trades and selftrades. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The Commission preliminarily 

believes that the proposed rule 

standardizing the use of self-trade 

controls and increasing transparency 

around self-trading would promote the 

efficiency of the markets. The use of 

self-trade controls may promote 

financial integrity by helping to limit 

self-trades (including intentional and 

potentially manipulative self-trades). 

Moreover, requiring that DCMs provide 

self-trade controls and that market 

participants use them may enhance 

competitiveness by preventing a race to 

the bottom; that is, eliminating the 

possibility that a DCM or market 

participant could elect not to require or 

implement self-trade prevention in 

order to gain competitive advantage. 

iii. Price Discovery 

The proposed rule may protect and 

enhance the price discovery process by 

standardizing the use of self-trade 

controls and increasing transparency 

around self-trading. 

iv. Sound Risk Management Practices 

The proposed rule may promote 

sound risk management practices since 

self-trade controls (which the rule 

codifies) give market participants 

greater ability to avoid unintentional 

self-trading that could expose them to 

various financial risks. 

v. Other Public Interest Considerations 

The Commission has not identified 

any effects that these proposed rules 

would have on other public interest 

considerations other than those 

addressed above. 

e. Consideration of Alternatives 

Proposed § 40.23 provides that DCMs 

may comply with the requirement to 

apply, or provide and require the use of, 

self-trade prevention tools by requiring 

market participants to identify to the 

DCM which accounts should be 

prohibited from trading with each other. 

With respect to this account 

identification process, the Commission’s 

principal goal is to address 

unintentional self-trading; the 

Commission does not have a specific 

interest in regulating the manner by 

which market participants identify to 

DCMs the accounts that should not 

trade with each other, so long as this 

goal is met. The Commission has 

requested comment on whether other 

identification methods should be 

permitted in § 40.23. For example, the 

Commission has requested comment on 

whether the opposite approach is 

preferable: market participants would 

identify to DCMs the accounts that 

should be permitted to trade with each 

other (as opposed to those accounts that 

should be prevented from trading with 

each other). The Commission has also 

asked for comment on whether other 

identification methods would reduce 

costs for market participants or be easier 

for both market participants and DCMs 

to administer. Upon consideration of 

comments, the Commission may choose 

to adopt these other methods in lieu of 

what is now proposed. 

f. Request for Comments 

151. Please comment on the cost 

estimates described above for DCMs and 

market participants to comply with the 

requirements of § 40.23. The 

Commission is interested in commenter 

opinion on all aspects of its analysis, 

including its estimate of the number of 

entities impacted by the proposed 

regulation and the amount of costs such 

entities may incur to comply with the 

regulation. 

152. Please comment on the benefits 

described above. Do you agree with the 

Commission’s position that self-trade 

prevention requirements will result in 

more accurate indications of the level of 

market interest on both sides of the 

market and help ensure arms-length 

transactions that promote effective price 

discovery? Are there additional benefits 

to regulatory self-trade prevention 

requirements not articulated above? 

153. Are there any DCMs that neither 

internalize and apply self-trade 

prevention tools, nor provide self-trade 

prevention tools to their market 

participants? If so, please provide an 

estimate of the cost to such a DCM to 

comply with the requirement under 

§ 40.23(a) to apply, or provide and 

require the use of, self-trade prevention 

tools. 

154. Would any DCMs that currently 

offer self-trade prevention tools need to 

update their tools to meet the 

requirements of § 40.23? If so, please 

provide an estimate of the cost to such 

a DCM to comply with the requirements 

of § 40.23. 

155. What percentage of market 

participants do not currently make use 

of exchange-provided self-trade 

prevention tools, when active on a DCM 

that provides, but does not require such 

tools? Please provide an estimate of the 

cost to such a market participant to 

initially calibrate and use exchangeprovided self-trade prevention tools, in 

accordance with § 40.23. Please also 

comment on any other direct or indirect 

costs to a market participant that does 

not currently use self-trade prevention 

tools arising from the proposed 

requirement to implement such tools. 

156. The Commission estimates above 

that the number of market participants 

that will submit the approval requests 

described by § 40.23(c) is approximately 

equivalent to the number of AT Persons. 

Please comment on whether the 

estimate of the number of market 

participants submitting such approval 

requests should be higher or lower. For 

example, should the estimate be raised 

to account for proprietary algorithmic 

traders that will not be AT Persons, 

because they do not use Direct 

Electronic Access and therefore will not 

be required to register as floor traders? 

157. Proposed § 40.23 provides that 

DCMs may comply with the 

requirement to apply, or provide and 

require the use of, self-trade prevention 

tools by requiring market participants to 

identify to the DCM which accounts 

should be prohibited from trading with 

each other. With respect to this account 

identification process, the Commission’s 

principal goal is to prevent 

unintentional self-trading; the 

Commission does not have a specific 

interest in regulating the manner by 

which market participants identify to 

DCMs the account that should be 

prohibited from trading from each other, 

so long as this goal is met. Should any 

other identification methods be 

permitted in § 40.23? For example, 

please comment on whether the 

opposite approach is preferable: market 

participants would identify to DCMs the 

accounts that should be permitted to 

trade with each other (as opposed to 

those accounts that should be prevented 

from trading with each other). In 

particular, please comment on whether 

this approach or other identification 

methods would reduce costs for market 

participants or be easier for both market 

participants and DCMs to administer. 

158. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 


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703See Final Rule, Provisions Common to 

Registered Entities, 76 FR 44776, 44778 (July 27, 

2011), where the Commission stated, specifically 

with respect to DCMs, that ‘‘[a] DCM’s rules 

implementing market maker and trading incentive 

programs fall within the Commission’s oversight 

authority.’’ 

704See id. 

11. Market-Maker and Trading Incentive 

Programs 

a. Summary of Proposed Rules 

The Commission is proposing new 

regulations in part 40 to increase 

transparency around DCM marketmaker and trading incentive programs, 

underline existing regulatory 

expectations, and introduce basic 

safeguards in the conduct of such 

programs. The proposed regulations 

would amend existing § 40.1(i), which 

applies to all registered entities, to make 

clear that market-maker and trading 

incentive programs are ‘‘rules’’ for 

purposes of part 40, and therefore 

subject to part 40’s rule filing 

requirements. They would also establish 

information requirements when DCMs 

file rules for Commission approval 

pursuant to existing § 40.5 or self-certify 

rules pursuant to existing § 40.6. 

Information requirements would be 

codified in proposed § 40.25, including 

§ 40.25(a) for information to be provided 

to the Commission and § 40.25(b) 

specifying information that must be 

available on a DCM’s public Web site. 

Relatedly, proposed § 40.26 would 

permit the Commission or the director 

of DMO to require certain information 

from DCMs regarding their marketmaker or trading incentive programs, 

including but not limited to copies of 

program agreements, names of program 

participants, and payments or other 

benefits conferred pursuant to a 

program. 

The most substantive provisions of 

the Commission’s proposed rules for 

market-maker and trading incentive 

programs are in new § 40.27(a). 

Proposed § 40.27(a) would codify 

DMO’s long-standing guidance to DCMs 

that market-maker and trading incentive 

programs should not provide payments 

or incentives for trades between 

accounts under common ownership. 

Finally, the proposed regulations would 

also make clear in § 40.28 that DCMs’ 

existing trade practice and market 

surveillance responsibilities in subparts 

C and E of part 38 apply equally to 

market-maker and trading incentive 

programs. 

b. Costs 

i. Rule 40.1(i)—Definition of ‘‘Rule’’; 

and Rule 40.26—Information Requests 

From the Commission or the Director of 

the Division of Market Oversight 

Proposed amendments to § 40.1 and 

new § 40.26 serve in large part to 

emphasize existing regulatory 

requirements and Commission or staff 

authorities. As such, they are not 

expected to impose meaningful costs on 

DCMs. While they may in some cases 

impose minor incremental costs, they 

should not require entirely new 

programs, systems, or categories of 

employees for DCMs that are already 

compliant with parts 38 and 40 of the 

Commission’s regulations. 

The Commission proposes to amend 

§ 40.1(i) to make clear that marketmaker and trading incentive programs 

are ‘‘rules’’ for purposes of part 40. This 

codification of a previously articulated 

Commission standard with broad 

industry-wide acceptance should not 

give rise to new costs for market 

participants. The Commission has 

previously stated its view, in a Final 

Rule regarding Provisions Common to 

Registered Entities, that a market-maker 

or trading incentive program is an 

‘‘agreement’’ corresponding to ‘‘trading 

protocol’’ as such terms are used within 

§ 40.1(i)’s existing definition of 

‘‘rule.’’ 703 In the same Final Rule, the 

Commission stated that ‘‘all market 

maker and trading incentive programs 

must be submitted to the Commission in 

accordance with the procedures 

established in part 40.’’ 704 DCMs, for 

example, certify numerous marketmaker and trading incentive programs to 

the Commission annually, including 

341 such self-certifications in 2013. For 

these and other rule filings, DCMs 

already employ corresponding staff and 

other resources to comply with their 

part 40 obligations. The proposed 

amendments to § 40.1(i) do not create a 

new category of rule filings, nor do they 

require more frequent filings. 

Furthermore, the proposed amendments 

would require no additional staff or 

other resources beyond those already in 

place to meet existing rule filing 

requirements in part 40. Accordingly, 

the Commission believes that the 

proposed amendments to § 40.1(i) will 

impose no additional costs on the 

registered entities to which it applies. 

Proposed § 40.26 is a new regulatory 

provision that would permit the 

Commission or the director of DMO to 

require certain information from DCMs 

regarding their market-maker or trading 

incentive programs. As with § 40.1(i), 

the Commission believes that proposed 

§ 40.26 will impose no additional costs 

on DCMs. The proposed regulation is a 

more targeted iteration of existing 

§ 38.5, which requires a DCM to file 

with the Commission such ‘‘information 

related to its business as a designated 

contract market’’ as the Commission 

may require. Section 38.5 also requires 

a DCM upon request by the Commission 

or the director of DMO to file ‘‘a written 

demonstration’’ that the DCM ‘‘is in 

compliance with one or more core 

principles as specified in the request’’ or 

‘‘satisfies its obligations under the Act,’’ 

including ‘‘supporting data, information 

and documents.’’ 

Proposed § 40.26 does not alter a 

DCM’s existing obligations under § 38.5, 

but rather makes clear that Commission 

and DMO information requests may 

pertain specifically to market-maker and 

trading incentive programs. It also 

provides a non-exhaustive list of the 

types of ‘‘supporting data, information 

and documents’’ that the Commission or 

the director of DMO may request that is 

particularly appropriate to marketmaker and trading incentive programs. 

Proposed § 40.26 imposes no new 

obligation to provide information, and 

does not increase the frequency which 

information must be provided. The 

Commission is aware that DCMs already 

employ legal, business, technology, and 

other staff and resources necessary to 

respond to § 38.5 information requests. 

The Commission believes that the same 

staff will be appropriate for any § 40.26 

information request that it may issue to 

focus specifically on market-maker or 

trading incentive programs. 

Accordingly, the Commission believes 

that proposed § 40.26 will impose no 

additional costs on DCMs. 

ii. Rule 40.25—Additional Public 

Information Required for Market Maker 

and Trading Incentive Programs; and 

Rule 40.28—Surveillance of Market 

Maker and Trading Incentive Programs 

Proposed § 40.25(a) would require 

DCMs to provide the Commission with 

certain information regarding their 

market-maker and trading incentive 

programs when submitting such 

programs as rules pursuant to part 40. 

Specifically, when requesting approval 

of a new program pursuant to § 40.5, or 

self-certifying a program pursuant to 

§ 40.6, DCMs would be required to 

provide the name of the program, the 

date on which it begins, and the date on 

which it terminates (if applicable). 

DCMs would also be required to provide 

a description of any categories of market 

participants or eligibility criteria 

limiting who may participate in the 

program. For any market-maker or 

trading incentive program open to only 

some market participants, proposed 

§ 40.25(a) would require DCMs to 

explain why the program was limited to 

the chosen participants or criteria. 

Proposed § 40.25(a) would also require 

DCMs to include in their rule filings an 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78922 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

705The Commission estimates that a Compliance 

Attorney will be required to spend an additional 

three hours per week over the course of a 52 week 

year to comply with proposed § 40.25. Such hours 

are additional because DCMs are already required 

to provide substantial information regarding 

market-maker and trading incentive program rule 

filings pursuant to existing requirements in §§ 40.5 

and 40.6 as discussed above. Three additional hours 

per week across a 52 week year yields 

approximately 156 additional hours per year per 

DCM to comply with proposed § 40.25. 

706See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

explanation of how persons eligible for 

a market-maker or trading incentive 

program would apply to participate, and 

how eligibility would be evaluated by 

the DCM. 

Separately, proposed § 40.25(a) would 

require DCMs to provide an explanation 

of the specific purpose for a marketmaker or trading incentive program, and 

a list of all products or services to which 

the program applies. It would also 

require a description of any payments, 

incentives, discounts, considerations, 

inducements or other benefits that 

program participants may receive, 

including any non-financial incentives. 

Finally, proposed § 40.25(a) would 

require a description of the obligations, 

benchmarks, or other measures that 

participants in a market-maker or 

trading incentive program must meet to 

receive benefits. 

To ensure public transparency in 

market-maker and trading incentive 

programs, proposed § 40.25(b) would 

enlarge upon DCMs’ existing obligations 

in part 40 to provide public notice and 

other information regarding their rule 

filings. Specifically, proposed § 40.25(b) 

would require DCMs to ensure that the 

information described above in 

§ 40.25(a) is easily located on their 

public Web sites. Lastly, proposed 

§ 40.25(c) would require DCMs to notify 

the Commission upon the termination of 

a market maker or trading incentive 

program. 

While proposed § 40.25 would require 

information from DCMs regarding their 

market-maker or trading incentive 

programs, the Commission believes it 

largely incorporates existing rule filing 

requirements in part 40. For example, 

existing §§ 40.5 and 40.6 each require a 

DCM requesting approval or selfcertifying rules to provide the 

Commission with the rule text; the 

proposed effective date or date of 

intended implementation; and an 

‘‘explanation and analysis of the 

operation, purpose, and effect’’ of the 

proposed rule. Existing §§ 40.5 and 40.6 

also require each DCM to provide the 

Commission with an assessment of the 

rule’s ‘‘compliance with applicable 

provisions of the Act, including core 

principles, and the Commission’s 

regulations thereunder;’’ and ‘‘a brief 

explanation of any substantive opposing 

views expressed to [the DCM] by 

governing board or committee members, 

members of the entity or market 

participants that were not incorporated 

into the rule. . . . ’’ Furthermore, these 

existing provisions each require a DCM 

to certify that the DCM posted on its 

public Web site a notice of pending rule 

or certification and to also post a copy 

of the DCM’s submission to the 

Commission on the DCM’s Web site. 

The Commission believes proposed 

§ 40.25 adds important clarity to 

existing rule filing requirements in part 

40 when such filings pertain to marketmaker or trading incentive programs. 

However, it also recognizes important 

overlaps between proposed § 40.25 and 

existing regulations in §§ 40.5 and 40.6. 

Furthermore, proposed § 40.25 does not 

create a new category of rule filings, nor 

does it or require more frequent filings. 

For these reasons, the Commission 

believes that additional costs to DCMs 

attributable to § 40.25 will not be 

significant. As an example of such costs, 

DCMs will need to evaluate § 40.25 and 

assess whether and what filings must be 

made to comply with the regulation. In 

addition, the more explicit requirements 

of proposed § 40.25, as compared to 

existing regulations, may prompt DCMs 

to make filings that they otherwise may 

not have made. The Commission 

estimates the costs of proposed § 40.25 

per DCM as described below. 

The Commission believes that the 

work of proposed § 40.25 will fall 

primarily upon DCM Compliance 

Attorneys already employed in 

completing part 40 rule filings. The 

Commission estimates that a DCM 

(through its Compliance Attorneys) will 

incur a total annual cost of $14,976 to 

comply with proposed § 40.25. This cost 

is broken down as follows: 1 

Compliance Attorney, working for 156 

hours 705 (156 × $96 per hour = 

$14,976).706 On average, the 15 DCMs to 

which proposed § 40.25 would apply 

would therefore incur a total annual 

cost of $224,640 (15 × $14,976) to 

comply with proposed § 40.25. The 

Commission notes, however, that actual 

costs per DCM may vary depending on 

the number of market-maker and trading 

incentive program rule filings submitted 

by an individual DCM on an annual 

basis. 

Finally, proposed § 40.28 requires that 

a DCM, ‘‘consistent with its obligations 

pursuant to subparts C and E of part 38 

. . . review all benefits accorded to 

participants in market maker and 

trading incentive programs . . . to 

ensure that such benefits are not earned 

through abusive practices.’’ Notably, the 

proposed regulation points to 

preexisting requirements in the 

Commission’s rules—and to costs that 

DCMs must already assume 

independently of proposed § 40.28. 

Subpart C of part 38, entitled 

‘‘Compliance with Rules,’’ requires 

DCMs to prohibit abusive trading 

practices on its markets by all members 

and market participants, including but 

not limited to a series of enumerated 

trade practice violations. It also requires 

DCMs to have the capacity to detect and 

investigate rule violations, including 

sufficient compliance staff and 

resources, automated trade surveillance 

systems, and real-time market 

monitoring. Subpart E, ‘‘Prevention of 

Market Disruptions,’’ requires DCMs to 

‘‘collect and evaluate data on individual 

traders’ market activity on an ongoing 

basis in order to detect and prevent 

manipulation, [and] price distortions.’’ 

In addition, subpart E requires a DCM 

to have the ability to ‘‘comprehensively 

and accurately’’ reconstruct trading on 

its markets, obtain information from its 

market participants, and implement 

additional requirements for cash-settled 

and physically-settled contracts. 

Proposed § 40.28 does not add to the 

oversight responsibilities outlined 

above, but rather makes clear that a 

DCM’s existing obligations in subparts C 

and E of part 38 apply equally in the 

context of market-maker and trading 

incentive programs. The Commission 

believes that proposed § 40.28 will 

impose no significant new costs on 

DCMs, but acknowledges that it may 

result in minor administrative costs. 

Specifically, a DCM not already doing 

so will be required to ensure 

appropriate communication between its 

compliance staff tasked with detecting 

abusive practices and its business staff 

that may administer the DCM’s marketmaker or trading incentive programs. 

For example, in the case of an incentive 

program based on a market participant’s 

gross trading volume, compliance staff 

would be required to inform business 

staff of trades that should not be 

credited towards the incentive program 

because they were conducted in 

violation of an exchange rule. The 

Commission believes that the costs 

associated with proposed § 40.28 are not 

significant due in part to DCMs’ existing 

surveillance capabilities, which are 

typically highly automated. 

The Commission estimated the costs 

of complying with proposed § 40.28. In 

making its estimates, the Commission 

determined that the primary costs 

associated with the regulation will be 

communication between a DCM’s 


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Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78923 

707See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

708The Commission estimates that each such staff 

person will be required to dedicate approximately 

1 hour per week over the course of a 52 week year, 

yielding approximately 52 hours per year. The 

Commission is increasing these estimates by an 

additional 20 percent to account for more 

complicated circumstances that may arise. This 

yields a total of approximately 62 hours per year 

for each relevant staff role. 

709See Final Rule, Provisions Common to 

Registered Entities, 76 FR 44776, 44778. 

710See section V(B) above for the calculation of 

hourly wage rates used in this analysis. 

711The Commission estimates that a Compliance 

Attorney will require 1 hour per week, a Senior 

Compliance Specialist will require 3 hours per 

week, and a Business Analyst will require 6 hours 

per week, in each case over the course of a 52 week 

year. 

compliance and business staffs. The 

Commission estimates that a DCM will 

incur a total annual cost of $12,710 to 

comply with proposed § 40.28. This cost 

is broken down as follows: 1 

Compliance Attorney, working for 62 

hours (62 × $96 per hour = $5,952); 1 

Senior Compliance Specialist, working 

for 62 hours (62 × $57 per hour = 

$3,534); and 1 Business Analyst, 

working for 62 hours (62 × $52 per hour 

= $3,224).707 In the event that no DCM 

is currently in compliance with 

proposed § 40.28, the 15 DCMs to which 

proposed § 40.28 would apply would 

therefore incur a total annual cost of 

$190,650 (15 × $12,710) to comply with 

proposed § 40.28.708

iii. Rule § 40.27—Payment for Trades 

With No Change in Ownership 

Prohibited 

The Commission is also proposing 

new § 40.27(a) to require that DCMs 

implement policies and procedures 

reasonably designed to prevent the 

payment of market-maker or trading 

incentive payments for trades between 

accounts identified to the DCM as under 

common beneficial common ownership 

or known to the DCM as under common 

ownership. Proposed § 40.27(a) is 

consistent with guidance provided to 

DCMs by the Commission that incentive 

payments should not be made for ‘‘selftrades.’’ In this regard, the proposed 

regulation ratifies staff’s previous 

guidance 709 and further develops the 

Commission’s expectations regarding 

appropriate uses of market-maker and 

trading incentive programs. However, 

because the subject matter of proposed 

§ 40.27(a) is not explicitly addressed in 

existing regulations, the Commission is 

analyzing it as an entirely new cost to 

DCMs for this purpose. 

The Commission believes that the 

costs associated with proposed 

§ 40.27(a) will be administrative in 

nature. DCMs will be required to 

implement policies and procedures 

reasonably designed to ensure that selftrades permitted pursuant to § 40.23 

nonetheless do not receive marketmaker or trading incentives payments, 

discounts or other considerations. DCMs 

will also be required to implement 

policies and procedures reasonably 

designed to ensure that any other selftrades known to the DCM do not receive 

market-maker or trading incentive 

payments, discounts or other 

considerations. 

The Commission believes a DCM 

could efficiently implement proposed 

§ 40.27(a) by requiring the DCM’s 

compliance staff (Senior Compliance 

Specialist) to periodically provide its 

business staff (Business Analyst) with 

summary statistics regarding self-trades 

by market participants. Business 

Analysts responsible for administering a 

market-maker or trading incentive 

program could then discount such 

trades from any payments, benefits, or 

other considerations made pursuant to a 

program. Reports regarding self-trades 

could be automated at the DCM’s 

discretion. When necessary, Senior 

Compliance Specialists could 

collaborate with the DCM’s legal staff 

(Compliance Attorney) to address 

instances in which the existence of a 

self-trade is unclear. Similarly, Business 

Analysts could collaborate with legal or 

compliance counterparts where a 

market participant challenges the DCM’s 

determinations or payments. The 

Commission believes that a similar 

process of information flow to Business 

Analysts administering payments, 

benefits, or other considerations 

pursuant to a market-maker or trading 

incentive program would also be 

appropriate to implement proposed 

§ 40.27(a). The Commission estimates 

the costs of compliance as described 

below. 

The Commission estimates that a 

DCM will incur a total annual cost of 

$30,108 to comply with proposed 

§ 40.27(a). This cost is broken down as 

follows: 1 Compliance Attorney, 

working for 52 hours (52 × $96 per hour 

= $4,992); 1 Senior Compliance 

Specialist, working for 156 hours (156 × 

$57 per hour = $8,892); and 1 Business 

Analyst, working for 312 hours (312 × 

$52 per hour = $16,224).710 The 15 

DCMs to which proposed § 40.27(a) 

would apply would therefore incur a 

total annual cost of $451,620 (15 × 

$16,224) to comply with proposed 

§ 40.27(a).711

c. Benefits 

The Commission anticipates that the 

proposed amendments to § 40.1(i) and 

new §§ 40.25–40.28 will facilitate 

Commission oversight; increase public 

transparency; and help ensure marketmaker and trading incentive programs 

that are compliant with the Act and 

Commission regulations. The proposed 

rules are consistent with existing 

regulatory expectations. To the extent 

that they impose requirements beyond 

those of existing Commission 

regulations and to the extent that DCMs 

are currently not in compliance with the 

proposed rules, the Commission expects 

the rules to increase transparency 

around DCM market-maker and trading 

incentive programs, and introduce basic 

safeguards in the conduct of such 

programs. Building on the Dodd-Frank 

Act, the Commission adopted in June 

2012 core principles and final rules 

modernizing the regulatory regime 

applicable to all DCMs (‘‘DCM Final 

Rules’’). Among other areas, the DCM 

Final Rules emphasized DCMs’ 

obligations as the front-line regulators of 

their markets. These include extensive 

trade practice responsibilities pursuant 

to subpart C of part 38, and market 

surveillance responsibilities pursuant to 

subpart E. In addition, the Commission 

codified new requirements that a DCM 

offer its ‘‘members [and] persons with 

trading privileges . . . with impartial 

access to its markets and services,’’ 

including: (1) ‘‘Access criteria that are 

impartial, transparent and applied in a 

non-discriminatory manner’’ and (2) 

‘‘comparable fee structures . . . for 

equal access to, or services from’’ the 

DCM. 

Substantively, the Commission 

believes that the proposed regulations 

for market-maker and trading incentive 

programs will help facilitate 

Commission oversight by eliminating 

any potential ambiguity that may exist 

regarding its authority over such 

programs. Proposed amendments to the 

definition of ‘‘rule’’ in § 40.1(i), in 

particular, will codify previous 

statements by the Commission regarding 

the treatment of market-maker and 

trading incentive programs as ‘‘rules’’ 

pursuant to part 40, which statements 

however were not explicitly reflected in 

existing § 40.1(i). Proposed § 40.25 will 

enhance the types of information that 

DCMs should expect to provide the 

Commission when requesting approval 

or self-certifying market-maker or 

trading incentive programs. Such 

information will include a description 

of any eligibility criteria for 

participation in a market-maker or 

trading incentive program, and an 

explanation for programs with limited 

eligibility. Proposed § 40.25 will also 

require that information regarding 


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78924 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

712See Section 4c(a) of the CEA, 7 U.S.C. 

6c(a)(2)(A), and Commission regulation 1.38(a). 

market-maker and trading incentive 

programs be easily located on a DCM’s 

Web site. Taken together, these 

measures will for example facilitate the 

Commission’s oversight of DCMs’ 

compliance with impartial access and 

comparable fee structure requirements 

in § 38.151(b) adopted by the 

Commission in 2012. 

Proposed § 40.27(a) is designed to 

promote market integrity and to 

discourage abusive trading practices. 

The Commission believes it is 

imperative that market participants are 

not incentivized to trade solely for the 

purpose of collecting market-maker or 

trading incentive program benefits. 

Trading for the sake of collecting such 

benefits may, for example, inaccurately 

signal the level of liquidity in the 

market and may result in a non-bona 

fide price. Key public statistics 

published by DCMs regarding trades, 

orders, and other measures of liquidity 

on their markets must not be inflated 

through trading strategies that may be 

violative of DCM or Commission rules 

and that are designed solely to collect 

incentives or to meet market-maker 

program requirements. For example, the 

Commission seeks to eliminate 

incentives that may encourage market 

participants to engage in illegal behavior 

such as wash trading, which is 

prohibited under the CEA and 

Commission regulations.712

d. Section 15(a) Factors 

This section discusses the Section 

15(a) factors for the proposed new 

regulations in part 40 to increase 

transparency around DCM marketmaker and trading incentive programs, 

underline existing regulatory 

expectations, and introduce basic 

safeguards in the conduct of such 

programs. The proposed regulations 

would amend existing § 40.1(i) and 

create new §§ 40.25- 40.28. 

i. Protection of Market Participants and 

the Public 

The Commission preliminarily 

believes that the proposed rule would 

protect market participants and the 

public by eliminating potential 

ambiguity that may exist regarding the 

Commission’s expectations and 

requirements with respect to marketmaker and trading incentive programs 

and by guarding against such programs 

incentivizing self-trading. By so doing, 

the proposed rules would help ensure 

that volume reports accurately reflect 

levels of bona fide risk shifting 

transactions activity rather than selftrades. It may also reduce the frequency 

of self-trades, and eliminate incentives 

that may encourage market participants 

to engage in illegal behavior such as 

wash trading, by prohibiting marketmaker or trading incentive program 

payments for transactions involving 

accounts under common ownership. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

The Commission preliminarily 

believes that the proposed rule would 

promote the efficiency, competitiveness 

and financial integrity of futures 

markets by clarifying Commission 

requirements and expectations 

regarding market-maker and trading 

incentive programs. The proposed rule 

regarding payments to accounts with 

common ownership may reduce 

incentives to self-trade and thus may 

also help further ensure (beyond the 

rules related to self-trades also being 

proposed in this release) that market 

volumes reflect only trades that shift 

risk between different counterparties 

and thus accurately reflect supply and 

demand in the market and true market 

liquidity. The proposed rule regarding 

payments to accounts with common 

ownership may promote financial 

integrity by helping to prevent 

intentional self-trades (wash trades) that 

could lead to price distortions. 

iii. Price Discovery 

The Commission expects that the 

proposed rule regarding payments to 

accounts with common ownership to 

protect and enhance the price discovery 

process by helping to prevent 

intentional self-trades (wash trades) that 

could lead to price distortions. The 

proposed rules also would make clear 

Commission requirements designed to 

prevent market-maker and trading 

incentive programs from interfering 

with or doing harm to the price 

discovery process. 

iv. Sound Risk Management Practices 

The proposed rule regarding 

payments to accounts with common 

ownership may promote sound risk 

management practices by helping to 

ensure that market-maker and trading 

incentive programs do not incentivize 

self-trades or wash trades. The proposed 

rules also would make clear 

Commission requirements designed to 

prevent market-maker and trading 

incentive programs from deterring 

sound risk management considerations. 

v. Other Public Interest Considerations 

The Commission has not identified 

any effects that these proposed rules 

would have on other public interest 

considerations other than those 

addressed above. 

e. Consideration of Alternatives 

As discussed, the proposed rules 

regarding market-maker and trading 

incentive programs largely refer to and 

clarify the Commission’s existing rules 

and guidance and make Commission 

expectations more clear to new and 

existing DCMs. The Commission 

considered not proposing these rules. 

Absent these rules, the Commission 

could still realize many of the benefits 

by enforcing the existing regulations, 

but it would be more difficult to ensure 

that DCMs provide information 

regarding market-maker and trading 

incentive programs prominently on 

their Web sites. Moreover, absent the 

proposed rule, there would only be 

guidance rather than a rule regarding 

payments for self-trades. The 

Commission has determined to propose 

these rules to provide increased 

regulatory certainty to DCMs and market 

participants regarding market-maker 

and trading incentive programs and to 

ensure that such programs do not permit 

self-trade payments. 

f. Request for Comments 

159. The Commission requests 

comment on the accuracy of its cost 

estimates. 

160. To what extent are the costs 

imposed on the DCMs by the proposed 

rule already incurred pursuant to 

existing rules? 

161. To what extent are the benefits 

of the proposed rule currently being 

realized? 

162. Do DCM Web sites currently 

provide adequate information regarding 

market-maker and trading incentive 

programs, and is such information 

easily located? 

163. To what extent do DCMs 

currently make payments for self-trades 

pursuant to market-maker and trading 

incentive programs? 

164. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

VI. Aggregate Estimated Cost of 

Regulation AT 

Summarizing the cost estimates 

presented above, the Commission 

estimates that Regulation AT will 

impose the following costs on persons 

subject to its rules. These costs are 

broken into one-time costs for initial 

compliance, and annual costs following 

thereafter. As discussed in section V 

above, the Commission calculated costs 

for certain risk mitigation procedures, 


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713See, e.g., the calculation of costs for 

procedures related to the testing, monitoring and 

supervision of Algorithmic Trading systems, which 

are discussed in section V(E)(7) above. These costs 

are not included in the charts in this section VI. 

714See supra note 597. 

but determined that they generally will 

not be imposed upon market 

participants because, among other 

reasons, they relate to procedures or 

controls that are already widely used in 

the industry.713 The two charts below 

do not include such costs. 

In addition, as noted above, the 

Commission believes that the risk 

controls and other measures required by 

§§ 1.80 and 1.82 are already widely used 

by market participants. Upgrading such 

systems to come into full compliance 

with the proposed regulations will 

impose initial one-time costs, which are 

included in the one-time costs chart 

below. However, the Commission 

believes that because market 

participants already have these systems 

in place, the proposed regulations will 

generally not result in increased annual 

costs to maintain suchsystems. 

One-time costs: 

Regulation Description Cost per entity Cost for all 

entities 

New Floor Traders (100 Entities) 

1.3(x)/170.18 714 ............................... Registration of new floor traders with CFTC and as members of RFA— 

Form 7–R Fee.

$200 $20,000 

1.3(x)/170.18 .................................... Registration of new floor traders with CFTC and as members of RFA— 

preparation of Form 7–R.

96 9,600 

1.3(x)/170.18 .................................... Registration of new floor traders with CFTC and as members of RFA— 

Form 8–R Fee for 10 principals.

850 85,000 

1.3(x)/170.18 .................................... Registration of new floor traders with CFTC and as members of RFA— 

preparation of Form 8–R for 10 principals.

960 96,000 

Total New Floor Traders .......... .................................................................................................................... 2,106 210,600 

AT Persons (420 Entities) 

1.80 .................................................. Risk controls .............................................................................................. 79,680 33,465,600 

1.83(c) .............................................. Recordkeeping .......................................................................................... 5,130 2,154,600 

Total AT Persons ...................... .................................................................................................................... 84,810 35,620,200 

Clearing Member FCMs (57 Entities) 

1.82 .................................................. Risk controls—DEA orders ....................................................................... 49,800 2,838,600 

1.82 .................................................. Risk controls—non-DEA orders ................................................................ 159,360 9,083,520 

1.83(d) .............................................. Recordkeeping .......................................................................................... 5,130 292,410 

Total Clearing Member FCMs .. .................................................................................................................... 214,290 12,214,530 

DCMs (15 Entities) 

38.255(b) .......................................... Provide controls to FCMs .......................................................................... 155,520 2,332,800 

40.20 ................................................ Risk controls .............................................................................................. 155,520 2,332,800 

40.22(c) ............................................ Establish compliance report review program ............................................ 37,000 555,000 

Total DCMs ............................... .................................................................................................................... 348,040 5,220,600 

Total All Entities ........................ .................................................................................................................... ........................ 53,265,930 

Annual costs: 

Regulation Description Cost per entity Cost for all 

entities 

New Floor Traders (100 Entities) 

170.18 .............................................. RFA annual membership dues (payable first year of membership and 

each year after).

$5,625 $562,500 

Total New Floor Traders .......... .................................................................................................................... 5,625 562,500 

AT Persons (420 Entities) 

1.83(a) .............................................. Submit compliance reports/written policies ............................................... 4,240 1,780,800 

1.83(c) .............................................. Recordkeeping .......................................................................................... 2,670 1,121,400 

40.23 ................................................ Submit approval requests to DCMs to forego self-trade controls ............ 3,810 1,600,200 

Total AT Persons ...................... .................................................................................................................... 10,720 4,502,400 


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78926 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

Regulation Description Cost per entity Cost for all 

entities 

Clearing Member FCMs (57 Entities) 

1.83(b) .............................................. Submit compliance reports ........................................................................ 7,090 404,130 

1.83(d) .............................................. Recordkeeping .......................................................................................... 2,670 152,190 

Total Clearing Member FCMs .. .................................................................................................................... 9,760 556,320 

DCMs (15 Entities) 

38.401 .............................................. Disclosure of trade matching programs .................................................... 19,200 288,000 

40.22(c) ............................................ Review of compliance reports ................................................................... 111,000 1,665,000 

40.22(c) ............................................ Remediation of compliance reports .......................................................... 22,200 333,000 

40.22(e) ............................................ Review books and records ........................................................................ 110,880 1,663,200 

40.23(c) ............................................ Review approval requests from market participants re self-trading ......... 22,000 330,000 

40.23(d) ............................................ Publish statistics on self-trading ................................................................ 6,650 99,750 

40.25 ................................................ Provide information on market maker programs in rule filings ................. 14,976 224,640 

40.27 ................................................ Restrictions on payments under marker maker programs ....................... 30,108 451,620 

40.28 ................................................ Surveillance of market maker programs for abusive practices ................ 12,710 190,650 

Total DCMs ............................... .................................................................................................................... 349,724 5,245,860 

Total All Entities ........................ .................................................................................................................... ........................ 10,867,080 

The Commission is also presenting 

the following costs applicable to an RFA 

pursuant to proposed § 170.19. The 

Commission anticipates that an RFA 

will incur these costs on an episodic 

basis in connection with § 170.19. 

Episodic costs: 

Regulation Description Cost per entity Cost for all 

entities 

RFAs (1 Entity) 

170.19 .............................................. RFA Standards .......................................................................................... $34,200 $34,200 

Total RFAs ................................ .................................................................................................................... 34,200 34,200 

VII. List of All Questions in the NPRM 

Listed below are all questions raised 

in the preceding sections of this NPRM, 

organized according to the section of the 

NPRM in which the question appears. 

The Commission welcomes any and all 

comments on any aspect of Regulation 

AT regardless of whether it is addressed 

by a particular question. If responding 

to a specific question enumerated in this 

NPRM, the Commission requests that 

commenters in their comment letters 

refer to that question being answered. 

IV(D) Codification of Defined Terms 

‘‘Algorithmic Trading’’—§ 1.3(zzzz) 

1. Is the Commission’s definition of 

‘‘Algorithmic Trading’’ generally 

consistent with what algorithmic 

trading is understood to mean in the 

industry? If not, please explain how it 

is inconsistent and how the definition 

should be modified. In your answer, 

please explain whether the definition 

inappropriately includes or excludes a 

particular type or aspect of trading. 

2. Should the Commission adopt a 

definition of ‘‘Algorithmic Trading’’ that 

is more closely aligned with any 

definition used by another regulatory 

organization? 

3. For purposes of the Commission’s 

definition of Algorithmic Trading, is it 

necessary for the Commission to define 

‘‘computer algorithms or systems’’? If 

so, please explain what should be 

included in such a definition. 

4. Should the Commission’s 

definition of ‘‘Algorithmic Trading’’ 

include systems that only make 

determinations as to the routing of 

orders to different venues (which is 

contemplated in the proposed 

definition)? With respect to the 

definition of ‘‘Algorithmic Trading,’’ 

should the Commission differentiate 

between different types of algorithms, 

such as alpha-generating algorithms and 

order routing algorithms? 

5. Is the Commission’s understanding 

correct that most entities using 

automated order routers will be using 

similar or related automated technology 

to determine other parameters of an 

order? 

6. The Commission posits a scenario 

in which an AT Person submits orders 

through Algorithmic Trading, and a 

non-clearing FCM or other entity acts 

only as a conduit for these AT Person 

orders. If the non-clearing FCM or other 

entity does not make any 

determinations with respect to such 

orders, the conduit entity would not be 

engaged in Algorithmic Trading, as that 

definition is currently proposed. Should 

the definition of Algorithmic Trading be 

modified to capture a conduit entity 

such as a non-clearing FCM in this 

scenario, thereby making the entity an 

AT Person subject to Regulation AT? In 

other words, should non-clearing FCMs 

be required to manage the risks of AT 

Person customers? How would nonclearing FCMs do so if the non-clearing 

FCMs do not have risk controls 

comparable to the risk controls specified 

in proposed § 1.82? 

7. The Commission, recognizing that 

natural person traders who manually 

enter orders also have the potential to 

cause market disruptions, is considering 

expanding the definition of Algorithmic 

Trading to encompass orders that are 

generated using algorithmic methods 

(e.g., an algorithm generates a buy or 

sell signal at a particular time), but are 

then manually entered into a front-end 

system by a natural person, who 


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715The Commission notes that CPOs are separate 

legal entities from the underlying commodity pools 

which they operate. 

determines all aspects of the routing of 

the orders. Such order entry would not 

represent Algorithmic Trading under 

the currently proposed definition. The 

Commission requests comment on this 

proposed expansion of the definition of 

Algorithmic Trading, which the 

Commission may implement in the final 

rulemaking for Regulation AT. The 

Commission requests comment on the 

costs and benefits of this proposal, in 

addition to any other comments 

regarding the effectiveness of this 

proposal in terms of risk reduction. 

‘‘Algorithmic Trading Compliance 

Issue’’—§ 1.3(tttt) 

8. Should the definition of 

Algorithmic Trading Compliance Issue 

be modified to include other potential 

compliance failures involving an AT 

Person that may have a significant 

detrimental impact on such AT Person, 

the relevant DCM, or other market 

participants? 

‘‘Algorithmic Trading Disruption’’— 

§ 1.3(uuuu) 

9. Should the definition of 

Algorithmic Trading Disruption be 

modified to include other types of 

disruptive events that may originate 

with an AT Person? 

10. Should the definition be expanded 

to include other types of disruptive 

downstream consequences that may 

result from an Algorithmic Trading 

Disruption originating with an AT 

Person, and which may negatively 

impact the relevant designated contract 

market, other market participants, or 

other persons? Alternatively, should the 

scope of the definition be reduced, and 

if so, why? 

11. In addition, should the reference 

to ‘‘materially degrades’’ in the 

definition of Algorithmic Trading 

Disruption be expanded or otherwise 

modified to encompass other types of 

disruptions that may impact the 

relevant designated contract market, 

other market participants, or other 

persons? Please provide examples of 

real-world events originating with AT 

Persons (as defined under Regulation 

AT) that resulted in disruptions that 

may not be captured by the reference to 

‘‘materially degrades’’ in the definition. 

‘‘AT Order Message’’—§ 1.3(wwww) 

12. Please comment on the proposed 

scope of the Commission’s definition of 

AT Order Message. Is the proposed 

definition too expansive, in that it 

would limit the submission of messages 

that do not have the potential to disrupt 

the market? Alternatively, is the scope 

of the AT Order Message too limited, in 

that it could allow messages not related 

to orders (i.e., heartbeat messages or 

requests for mass quotes) to 

intentionally or unintentionally flood 

the DCM’s systems and slow down the 

matching engine? Please explain how 

this definition would be more 

appropriately limited or expanded. 

‘‘AT Person’’—§ 1.3(xxxx) 

13. The Commission notes that the 

FIA Guide recommends certain pretrade risk controls and contemplates 

three levels at which these controls can 

be placed: Automated trader, broker, 

and exchange. FIA defines ‘‘automated 

trader’’ as any trading entity that uses an 

automated system, including hedge 

funds, buy-side firms, trading firms, and 

brokers who deploy automated 

algorithms, and defines ‘‘broker’’ as 

FCMs, other clearing firms, executing 

brokers and other financial 

intermediaries that provide access to an 

exchange. 

a. Should the Commission’s definition 

of ‘‘AT Person’’ explicitly include or 

exclude any of the classes of parties 

included in FIA’s term ‘‘automated 

trader’’? Please explain. Are there any 

types of entities not present in this list 

that should be included in the ‘‘AT 

Person’’ definition? 

b. Should Regulation AT use the term 

‘‘broker,’’ as understood by FIA? If so, 

please explain. Is there another term 

that would be more appropriate in 

defining the scope of AT Persons? 

14. Algorithmic Trading carries 

technological and personnel costs, and 

the Commission expects that such 

trading will be performed by entities, 

not natural persons. Is this a reasonable 

assumption? For purposes of 

quantifying the number of AT Persons 

that will be subject to the regulations, 

do you believe that any AT Person (a 

definition that encompasses the 

following persons if engaged in 

Algorithmic Trading: FCMs, floor 

brokers, swap dealers, major swap 

participants, commodity pool operators, 

commodity trading advisors, 

introducing brokers, and newly 

registered floor traders using Direct 

Electronic Access) will be a natural 

person or a sole proprietorship with no 

employees other than the sole 

proprietor? 

15. The Commission recognizes that a 

CPO could use Algorithmic Trading to 

enter orders on behalf of a commodity 

pool which it operates. In these 

circumstances, should the Commission 

consider the CPO that operates the 

commodity pool or the underlying 

commodity pool itself as ‘‘engaged in 

Algorithmic Trading’’ pursuant to the 

definition of AT Person? 715

16. The Commission notes that 

pursuant to § 1.57(b) of the 

Commission’s regulations IBs may not 

carry proprietary accounts. However, 

certain customer relationships may 

cause an IB to fall under the definition 

of AT Person. The Commission requests 

comment on the types of IB customer 

relationships that could cause IBs to fall 

under the definition of AT Persons. 

What activities are currently being 

conducted by IBs that could cause an IB 

to be considered engaging in 

Algorithmic Trading on or subject to the 

rules of a DCM and would therefore 

cause the IB to be considered an AT 

Person? 

17. Should the definition of AT 

Person be limited to persons using DEA? 

In other words, should the definition 

capture persons registered or required to 

be registered as FCMs, floor brokers, 

SDs, MSPs, CPOs, CTAs, or IBs that 

engage in Algorithmic Trading on or 

subject to the rules of a DCM, or persons 

registered or required to be registered as 

floor traders as defined in § 1.3(x)(3), in 

each case if such persons are using 

DEA? The Commission requests 

comment on the costs and benefits of 

this approach, including comments on 

whether this more limited definition of 

AT Persons would adequately mitigate 

the risks associated with algorithmic 

trading. 

‘‘Direct Electronic Access’’—§ 1.3(yyyy) 

18. Please explain whether the 

Commission’s proposed definition of 

DEA will encompass all types of access 

commonly understood in Commissionregulated markets as ‘‘direct market 

access.’’ In light of the proposed 

regulations concerning pre-trade and 

other risk controls and standards for the 

development, testing and supervision of 

algorithmic trading systems, do you 

believe that the proposed definition of 

Direct Electronic Access is too limited 

(or, alternatively, too expansive)? If so, 

please explain why and how the 

definition should be revised. 

19. Should the Commission define 

‘‘routed’’ in its definition of DEA? If so, 

how? Are there specific examples of 

trading or routing arrangements where it 

would be unclear whether trading was 

performed through DEA? 

20. Should the Commission use the 

term ‘‘direct market access’’ instead of 

DEA, and if so why? 


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21. Should the Commission define 

sub-categories of DEA, such as 

sponsored market access? 

22. The Commission’s proposed 

definition of DEA in § 1.3(yyyy) differs 

from definitions of direct electronic 

access in § 38.607 and direct access for 

FBOTs in § 48.2(c). The Commission 

believes that the more technical 

definition in proposed 1.3(yyyy) is 

appropriate for Regulation AT. The 

Commission solicits comment regarding 

proposed 1.3(yyyy), whether all 

definitions of ‘‘direct’’ access should be 

harmonized across the Commission’s 

rules, and if so how. Do you believe that 

two definitions would create confusion 

with respect to Commission 

requirements as to direct electronic 

access? With respect to §§ 1.80, 1.82, 

and 38.255(b) and (c) provisions 

imposing risk control requirements on 

AT Persons, FCM and DCMs, should the 

Commission use the existing definition 

of direct electronic access provided in 

§ 38.607? 

IV(E) Registration of Certain Persons 

Not Otherwise Registered With 

Commission—§ 1.3(x) 

23. Should firms operating 

Algorithmic Trading systems in CFTCregulated markets, but not otherwise 

registered with the Commission, be 

required to register with the CFTC? If 

not, what alternatives are available to 

fully effectuate the purpose and design 

of Regulation AT? 

24. Should all firms deploying 

Algorithmic Trading systems be 

required to register with the 

Commission? Are there additional 

characteristics of AT Persons that 

should be taken into consideration for 

registration purposes? For example, 

should the Commission limit 

registration to trading firms meeting 

certain trading volume, order or 

message levels? In other words, should 

there be a minimum volume, order or 

message test in order to meet the 

definition of ‘‘floor trader,’’ or otherwise 

to meet the definition of AT Person? If 

so, what should be measured and what 

specific thresholds should be used? 

25. In the alternative, should the 

Commission broaden the registration 

requirements in proposed § 1.3(x)(3)(ii) 

so that all persons trading on a contract 

market through DEA are required to 

register, instead of only those who are 

engaged in Algorithmic Trading? 

26. 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 

Section 1a(23) of the Act. 

27. Do you believe that the 

registration of such firms as ‘‘floor 

traders’’ would help effectuate the 

purposes of the CEA to deter and detect 

price manipulation or any other 

disruptions to market integrity? If you 

believe that registration of such firms 

will not help effectuate the purposes of 

the CEA, or that the same purposes can 

be achieved by other means, please 

explain. 

IV(F) RFA Standards for Automated 

Trading and Algorithmic Trading 

Systems—§ 170.19 

28. The Commission requests 

comment on the scope of 

responsibilities assigned to RFAs under 

proposed § 170.19. Should RFAs be 

responsible for fewer or additional areas 

regarding AT Persons, ATSs, and 

algorithmic trading than specified in 

proposed § 170.19, prongs (1), (2), (3), 

and (4) (§ 170.19(a)(1)–(a)(4))? 

Regulation 170.19 requires RFAs to 

consider the need for rules in the areas 

listed in prongs (1)–(4) (§ 170.19(a)(1)– 

(a)(4)). Should RFAs be responsible for 

considering whether to adopt rules in 

fewer or additional areas? 

29. The Commission requests 

comment on the latitude afforded to 

RFAs in proposed § 170.19. Should 

RFAs have more or less latitude to issue 

rules than specified in proposed 

§ 170.19? 

30. The Commission requests 

comment on RFAs’ obligation in 

proposed § 170.19 to establish and 

maintain a program for the prevention 

of fraud and manipulation, protection of 

the public interest, and perfecting the 

mechanisms of trading, including 

through rules it may determine to adopt 

pursuant to § 170.19. The proposed 

rules anticipate that an RFA’s program 

will include examination and 

enforcement components. Is this the 

appropriate approach? 

31. The Commission requests 

comment on whether proposed § 170.19 

may result in duplicative obligations on 

AT Persons or any other market 

participant. In particular, please 

comment on potential duplication, if 

any, between algorithmic trading 

requirements that an RFA may impose 

upon its members pursuant to § 170.19, 

and similar requirements that may be 

imposed by a DCM in its role as a selfregulatory organization. What 

amendments would be appropriate in 

any final rules arising from this NPRM 

to clarify that unintended overlap 

between the role of an RFA and a DCM 

in this context? 

IV(G) AT Persons Must Become 

Members of an RFA—§ 170.18 

32. The Commission requests 

comment on whether the regulatory 

framework established by Regulation 

AT would require all AT Persons to be 

members of an RFA in order to be 

effective. Alternatively, could the goals 

of Regulation AT be realized without 

requiring all AT Persons to be members 

of an RFA? 

IV(H) Pre-Trade and Other Risk Controls 

for AT Persons—§ 1.80 

33. Are any pre-trade and other risk 

controls required by § 1.80 ineffective, 

not already widely used by AT Persons, 

or likely to become obsolete? 

34. Are there additional pre-trade or 

other risk controls that should be 

specifically enumerated in proposed 

§ 1.80? 

35. Do you believe that the pre-trade 

and other risk controls required in 

§ 1.80 sufficiently address the 

possibility of technological advances in 

trading, and the development of new, 

more effective controls that should be 

implemented by AT Persons? 

36. The Commission welcomes 

comment on whether the regulation’s 

requirements relating to the design of 

controls and the levels at which the 

controls should be set are appropriate 

and sufficiently granular. 

37. The Commission notes that 

§ 1.80(d) requires that prior to initial use 

of Algorithmic Trading, an AT Person 

must notify its clearing member FCM 

and the DCM that it will engage in 

Algorithmic Trading. The Commission 

welcomes comment on whether the 

content of that notification requirement 

is sufficient, or whether clearing 

member FCMs and DCMs should also be 

notified of additional information. For 

example, should AT Persons be required 

to notify their clearing member FCMs of 

particular changes to their Algorithmic 

Trading systems that would affect the 

risk controls applied by the clearing 

member FCM? 

38. Is § 1.80(f)’s requirement that each 

AT Person periodically review its 

compliance with § 1.80 appropriate? 

Should there be more prescriptive and 

granular requirements to ensure that 

each AT Person periodically reviews its 

pre-trade and other risk controls and 

takes appropriate steps to update or 

recalibrate them in order to prevent an 

Algorithmic Trading Event? 

Alternatively, is § 1.80(f) necessary? 

Does the Commission need to explicitly 

require AT Persons to conduct a 

periodic review of their compliance 

with § 1.80? 

39. AT Persons that are registered 

FCMs are required by existing 

Commission regulation 1.11 to have 

formal ‘‘Risk Management Programs,’’ 

including, pursuant to § 1.11(e)(3)(ii), 

‘‘automated financial risk management 


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controls reasonably designed to prevent 

the placing of erroneous orders’’ and 

‘‘policies and procedures governing the 

use, supervision, maintenance, testing, 

and inspection of automated trading 

programs.’’ As described in § 1.11, an 

FCM’s Risk Management Program must 

include a risk management unit 

independent of the business unit; 

quarterly risk exposure reports to senior 

management and the governing body of 

the FCM, with copies to the 

Commission; and other substantive 

requirements. The Commission requests 

public comment regarding whether one 

or more of the proposed requirements 

applicable to FCMs in §§ 1.80, 1.81, 

1.83(a), and 1.83(c) should be 

incorporated within an FCM’s Risk 

Management Program and be subject to 

the requirements of such program as 

described in § 1.11. In this regard, any 

final rules arising from this NPRM could 

place all requirements applicable to 

FCMs in §§ 1.80, 1.81, 1.83(a), and 

1.83(c) within the operational risk 

measures required in § 1.11(e)(3)(ii). 

Such incorporation could help improve 

the interaction between an FCM’s 

operational risk efforts and its pre-trade 

risk controls; development, monitoring, 

and compliance efforts; and reporting 

and recordkeeping requirements, 

pursuant to §§ 1.80, 1.81, 1.83(a), and 

1.83(c). It could also help ensure that an 

FCM’s §§ 1.80, 1.81, 1.83(a), and 1.83(c) 

processes benefit from the same internal 

rigor and independence required by the 

Risk Management Program in § 1.11. 

40. The Commission proposes to 

adopt a multi-layered approach to 

regulations intended to mitigate the 

risks of automated trading, including 

pre-trade risk controls and other 

procedures applicable to AT Persons, 

clearing member FCMs and DCMs. 

Please comment on whether an 

alternative approach, for example one 

which does not impose requirements at 

each of these three levels, would more 

effectively mitigate the risks of 

automated trading and promote the 

other regulatory goals of Regulation AT. 

IV(I) Standards for Development, 

Testing, Monitoring, and Compliance of 

Algorithmic Trading Systems—§ 1.81 

41. The Commission understands that 

the requirements for developing, testing, 

and supervising algorithmic systems 

proposed in § 1.81(a)–(d) are already 

widely used throughout the industry. 

Are any specific requirements proposed 

in this section not widely used by 

persons that would be designated as AT 

Persons under Regulation AT, and if 

not, why not? If any requirements 

described in § 1.81(a)–(d) are not widely 

used, please provide an estimate of the 

cost that would be incurred by an AT 

Person to implement such requirements. 

42. Are there any aspects of § 1.81(a)– 

(d) that are unnecessary for purposes of 

reducing the risks from Algorithmic 

Trading, and should not be mandated by 

regulation? If so, please explain. 

43. Are the procedures described 

above for the development and testing 

of Algorithmic Trading sufficient to 

ensure that algorithmic systems are 

thoroughly tested before being used in 

production, and will operate in the 

manner intended in the production 

environment? 

44. Are there any additional 

procedures for the development and 

testing of Algorithmic Trading that 

should be required under Regulation 

AT? 

45. Are any of the required 

procedures for the development and 

testing of Algorithmic Trading likely to 

become obsolete in the near future as 

development and testing standards 

evolve? 

46. Are the procedures for designating 

and training Algorithmic Trading staff 

of AT Persons sufficient to ensure that 

such staff will be knowledgeable in the 

strategy and operation of Algorithmic 

Trading, and capable of identifying 

Algorithmic Trading Events and 

promptly escalating them to appropriate 

staff members? 

47. Is it typical that persons 

responsible for monitoring algorithmic 

trading do not simultaneously engage in 

trading activity? 

48. Proposed §§ 1.80, 1.81, and 1.83 

would impose certain requirements on 

all AT Persons regardless of the size, 

sophistication, or other attributes of 

their business. The Commission 

requests public comment regarding 

whether these requirements should vary 

in some manner depending on the AT 

Person. If commenters believe proposed 

§§ 1.80, 1.81, and 1.83 should vary, 

please describe how and according to 

what criteria. 

IV(J) Risk Management by Clearing 

Member FCMs—§ 1.82 

49. Are any pre-trade or other risk 

controls required by § 1.82 ineffective, 

not already widely used by clearing 

member FCMs, or likely to become 

obsolete? 

50. Are there any aspects of proposed 

§ 1.82 that pose an undue burden for 

clearing member FCMs and are 

unnecessary for purposes of reducing 

the risks associated with Algorithmic 

Trading? If so, please explain (1) the 

burden; (2) why it is not necessary to 

reduce the risks associated with 

Algorithmic Trading, particularly in the 

case of DEA. What alternatives are 

available consistent with the purposes 

of Regulation AT? 

51. Please describe the technological 

development that would be required by 

clearing member FCMs to comply with 

the requirement to implement and 

calibrate the pre-trade and other risk 

controls required by § 1.82(c) for nonDEA orders. To what extent have 

clearing member FCMs already 

developed the technology required by 

this provision, for example in 

connection with existing requirements 

under § 1.11, and §§ 1.73 and 38.607 for 

clearing FCMs to manage financial 

risks? 

52. Are there additional pre-trade or 

other risk controls that should be 

specifically required pursuant to 

proposed § 1.82? 

53. Do you believe that the pre-trade 

and other risk controls required in 

§ 1.82 sufficiently address the 

possibility of technological advances in 

trading and development of new, more 

effective controls that should be 

implemented by FCMs? 

54. The Commission welcomes 

comment on whether the requirements 

of § 1.82 relating to the design of 

controls and the levels at which the 

controls should be set are appropriate 

and sufficiently granular. 

55. Proposed § 1.82 does not require 

FCMs to have connectivity monitoring 

such as ‘‘system heartbeats’’ or 

automatic cancel-on-disconnect 

functions. Do you believe that § 1.82 

should require FCMs to have such 

functionality? 

56. Proposed § 1.82 requires clearing 

FCMs to implement controls with 

respect to AT Order Messages 

originating with an AT Person. The 

Commission is considering modifying 

proposed § 1.82 to require clearing 

FCMs to implement controls with 

respect to all orders, including orders 

that are manually submitted or are 

entered through algorithmic methods 

that nonetheless do not meet the 

definition of Algorithmic Trading. Such 

a requirement would correspond to the 

requirement under proposed § 40.20(d) 

that DCMs implement risk controls for 

orders that do not originate from 

Algorithmic Trading. If the Commission 

were to incorporate such amendments 

in any final rules arising from this 

NPRM, its intent would be to further 

reduce risk by ensuring that all orders, 

regardless of source, are screened for 

risk at both the clearing member FCM 

and the DCM level. Risk controls at the 

point of order origination would 

continue to be limited to AT Persons. 

The Commission requests comment on 

this proposed amendment to § 1.82, 

which the Commission may implement 


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78930 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

in the final rulemaking for Regulation 

AT. The Commission requests comment 

on the costs and benefits to clearing 

FCMs of this proposal, in addition to 

any other comments regarding the 

effectiveness of this proposal in terms of 

risk reduction. 

IV(K) Compliance Reports Submitted by 

AT Persons and Clearing FCMs to 

DCMs; Related Recordkeeping 

Requirements—§ 1.83 

57. The Commission welcomes 

comment on the type of information that 

should be included in the reports 

required by proposed § 1.83. Should 

different or additional descriptions be 

included in the reports, which will be 

evaluated by DCMs under proposed 

§ 40.22? 

58. How often should the reports 

required by proposed § 1.83 be 

submitted to the relevant DCMs? Should 

the report be submitted more or less 

frequently than annually? 

59. When should the reports required 

by proposed § 1.83 be submitted to the 

relevant DCMs? Should the reports be 

submitted on a date other than June 30 

of each year? 

60. Should a representative of the AT 

Person or clearing member FCM other 

than the chief executive officer or the 

chief compliance officer be responsible 

for certifying the reports required by 

proposed § 1.83? Should only the chief 

executive officer be permitted to certify 

the report? Alternatively, should only 

the chief compliance officer be 

permitted to certify the report? 

61. Are there any aspects of proposed 

§ 1.83(b) that pose an undue burden for 

clearing member FCMs and are 

unnecessary for purposes of reducing 

the risks associated with Algorithmic 

Trading? If so, please explain (1) the 

burden; (2) why it is not necessary to 

reduce the risks associated with 

Algorithmic Trading, particularly in the 

case of DEA. What alternatives are 

available consistent with the purposes 

of Regulation AT, including in 

particular Regulation AT’s intent that 

§ 1.83 reports benefit from the thirdparty SRO review performed by DCMs 

with respect to such reports? 

62. Should the reports required by 

proposed § 1.83 be sent to any entity 

other than each DCM on which the AT 

Person operates, such as the 

Commission or an RFA? For example, 

should the Commission require that AT 

Persons that are members of a RFA send 

compliance reports to RFA upon NFA’s 

request? 

63. Proposed § 1.83(c) includes 

recordkeeping requirements imposed on 

AT Persons, and proposed § 1.83(d) 

includes recordkeeping requirements 

imposed on clearing member FCMs. 

Should the recordkeeping requirements 

of § 1.83(c) be distributed throughout 

the sections of the Commission’s 

regulations that contain recordkeeping 

requirements for various categories of 

Commission registrants that will be 

classified as AT Persons? Should 

§ 1.83(d) be transferred to § 1.35 of the 

Commission’s regulations, which 

contains recordkeeping requirements for 

clearing member FCMs? 

IV(L) Direct Electronic Access Provided 

by DCMs—§ 38.255(b) and (c) 

64. Are there any pre-trade and other 

risk controls required by § 38.255(b) and 

(c) that will be ineffective, not already 

widely provided by DCMs for use by 

FCMs, or likely to become obsolete? 

65. Are there additional pre-trade or 

other risk controls that DCMs should be 

specifically required to provide to FCMs 

pursuant to proposed § 38.255(b) and 

(c)? 

66. Do you believe that the pre-trade 

and other risk controls required 

pursuant to § 38.255(b) sufficiently 

address the possibility of technological 

advances in trading? For example, do 

they appropriately address the potential 

for the future development of additional 

effective controls that should be 

provided by DCMs and implemented by 

FCMs? 

67. The Commission welcomes 

comment on whether § 38.255(b)’s 

requirements relating to the design of 

controls and the levels at which the 

controls should be set are appropriate 

and sufficiently granular. 

68. Proposed § 38.255(b) and (c) do 

not require DCMs to provide to FCMs 

connectivity monitoring systems such as 

‘‘system heartbeats’’ or automatic 

cancel-on-disconnect functions. Should 

§ 38.255 require such functionality? 

IV(M) Disclosure and Transparency in 

DCM Trade Matching Systems— 

§ 38.401(a) 

69. The Commission has proposed 

that certain components of an 

exchange’s market architecture should 

be considered part of the ‘‘electronic 

matching platform’’ for purposes of the 

DCM transparency provision. Are there 

any additional systems that should fall 

within the meaning of ‘‘electronic 

matching platforms’’ for purposes of 

proposed § 38.401(a)? 

70. The Commission has specifically 

identified, as ‘‘attributes’’ that must be 

disclosed, latencies within a platform 

and how a self-trade prevention tool 

determines whether to cancel an order. 

Are there any other attributes that 

would materially affect the execution of 

market participant orders and therefore 

should be made known to all market 

participants? Should the Commission 

revise the final rule so that it only 

applies to latencies within a platform 

and how a self-trade prevention tool 

determines whether to cancel an order? 

71. What information should be 

disclosed as part of the description of 

relevant attributes of the platform? For 

instance, with latencies within a 

platform, should statistics on latencies 

be required? If so, what statistics would 

help market participants assess any 

impact on their orders? Would a 

narrative description of attributes be 

preferable, including a description of 

how the attributes might affect market 

participant orders under different 

market conditions, such as during times 

of increased messaging activity? 

72. The Commission notes that 

proposed § 38.401(a)(1)(iii) and (iv) are 

not intended to require the disclosure of 

a DCM’s trade secrets. The Commission 

requests comments on whether the 

proposed rules might inadvertently 

require such disclosure, and if so, how 

they might be amended to address this 

concern. Furthermore, the Commission 

anticipates that the mechanisms and 

standards for requesting confidential 

treatment already codified in existing 

§ 40.8 could be used by DCMs to 

identify and request confidential 

treatment for information otherwise 

required to be disclosed pursuant to 

proposed § 38.401(a)(1)(iii) and (iv), for 

example by incorporating § 40.8’s 

mechanisms and standards into any 

final rules arising from this NPRM. If 

commenters believe that the 

mechanisms and standards in § 40.8 are 

inappropriate for this purpose, please 

describe any other mechanism that 

should be included in any final rules to 

facilitate DCM requests for confidential 

treatment of information otherwise 

required to be disclosed pursuant to 

proposed § 38.401(a)(1)(iii) and (iv). 

73. The Commission notes that DCMs 

are required, as part of voluntary 

submissions of new rules or rule 

amendments under § 40.5(a) and selfcertification of rules and rule 

amendment under § 40.6(a), to provide 

inter alia an explanation and analysis of 

the operation, purpose and effect of the 

proposed rule or rule amendment. 

Would the information required under 

§§ 40.5(a) or 40.6(a) provide market 

participants and the public with 

sufficient information regarding 

material attributes of an electronic 

matching platform? 

74. The Commission recognizes that 

DCMs are required to have system 

safeguards to ensure information 

security, business continuity and 

disaster recovery under DCM Core 


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Principle 20. The Commission 

understands that some attributes of an 

electronic matching platform designed 

to implement those safeguards should 

be maintained as confidential to prevent 

cybersecurity or other threats. Does 

existing § 40.8, 17 CFR 40.8 (2014) 

provide sufficient basis for DCMs to 

publicly disclose the relevant attributes 

of their platforms while maintaining as 

confidential information concerning 

system safeguards? 

75. With respect to material attributes 

affecting market participant orders 

caused by temporary or emergency 

situations, such as network outages or 

the temporary suspension of certain 

market functionality, what is the best 

way for DCMs to alert market 

participants? How are DCMs currently 

handling these situations? 

76. The Commission proposes that 

DCMs provide a description of the 

relevant material attributes in a single 

document ‘‘disclosed prominently and 

clearly’’ on the exchange’s Web site. The 

Commission also proposes that this 

document be written in ‘‘plain English’’ 

to allow market participants, even those 

not technically proficient, to understand 

the attributes described. Would these 

requirements be practical and help 

market participants locate and 

understand the information provided? 

77. The Commission proposes 

requiring DCMs to disclose information 

on the relevant attributes: (a) When 

filing a rule change submission with the 

Commission for changes to the 

electronic matching platform; or (b) 

within a ‘‘reasonable time, but no later 

than ten days’’ following the 

identification of such attribute. Do the 

proposed timeframes provide sufficient 

time for DCMs to disclose the relevant 

information? Do the proposed 

timeframes offer sufficient notice of 

changes or discovered attributes to 

market participants to allow them to 

adjust any systems or strategies, 

including any algorithmic trading 

systems? 

78. The Commission proposes 

requiring disclosure of newly identified 

attributes within 10 days of discovery. 

Does this provide DCMs sufficient time 

to analyze the attribute and provide a 

description? Should DCMs be required 

to provide notice of the existence of the 

attribute and supplement as further 

analysis is performed? 

IV(N) Pre-Trade and Other Risk Controls 

at DCMs—§ 40.20 

79. The Commission proposes to 

require DCMs to set pre-trade risk 

controls at the level of the AT Person, 

and allows discretion to set controls at 

a more granular level. Should the 

Commission eliminate this discretion, 

and require that the controls be set at a 

specific, more granular, level? If so, 

please explain the more appropriate 

level at which pre-trade risk controls 

should be set by a DCM. 

80. The Commission requests public 

comment on the pre-trade and other risk 

controls required of DCMs in proposed 

§ 40.20. Are any of the risk controls 

required in the proposed rules 

unhelpful to operational or other risk 

mitigation, or to market stability, when 

implemented at the DCM level? 

81. Are there additional pre-trade or 

other risk controls that should be 

specifically enumerated in proposed 

§ 40.20? 

82. The Commission proposes, with 

respect to its kill switch requirements, 

to allow DCMs the discretion to design 

a kill switch that allows a market 

participant to submit risk-reducing 

orders. The Commission also does not 

mandate particular procedures for alerts 

or notifications concerning kill switch 

triggers. Does the proposed rule allow 

for sufficient flexibility in the design of 

kill switch mechanisms and the policies 

and procedures concerning their 

implementation? Should the 

Commission consider more prescriptive 

rules in this area? 

83. Does existing § 38.1051 provide 

the Commission with adequate 

authority to require DCMs to adequately 

test planned changes to their matching 

engines and other automated systems? 

IV(O) DCM Test Environments for AT 

Persons—§ 40.21 

84. Should the test environment 

provided by DCMs under proposed 

§ 40.21 offer any other functionality or 

data inputs that will promote the 

effective design and testing of 

Algorithmic Trading by AT Persons? 

IV(P) DCM Review of Compliance 

Reports by AT Persons and Clearing 

FCMs—§ 40.22 

85. In lieu of a DCM’s affirmative 

obligation in proposed § 40.22 to review 

AT Person and clearing member FCM 

compliance reports, should DCMs 

instead be permitted to rely on the CEO 

or CCO representations required by 

proposed § 1.83(a)(2)? If so, what events 

in the Algorithmic Trading of an AT 

Person should trigger review obligations 

by the DCM? 

86. Should § 40.22(c) provide more 

specific requirements regarding a DCM’s 

establishment of a program for effective 

periodic review and evaluation of AT 

Person and clearing member FCM 

reports? For example, § 40.22(c) could 

require review at specific intervals (e.g., 

once every two years). Alternatively, 

§ 40.22(c) could provide greater 

discretion to DCMs in establishing their 

programs for the review of reports. 

Please comment on the appropriateness 

of these alternative approaches. 

87. Should § 40.22(e) provide more 

specific requirements regarding the 

triggers for a DCM to review and 

evaluate the books and records of AT 

Persons and clearing member FCMs 

required to be kept pursuant to 

§ 40.22(d)? For example, § 40.22(e) 

could require review at specific 

intervals (e.g., once every two years), or 

it could require review in response to 

specific events related to the 

Algorithmic Trading of AT Persons. 

Please comment on the appropriateness 

of these alternative approaches. 

88. Does § 40.22 leave enough 

discretion to the DCM in determining 

how to design and implement an 

effective compliance review program 

regarding Algorithmic Trading? 

Alternatively, is there any aspect of this 

regulation that should be more specific 

or prescriptive? 

89. Should § 40.22 specifically 

authorize a DCM to establish further 

standards for the organization, method 

of submission, or other attributes of the 

reports described in § 40.22(a)? 

IV(Q) Self-Trade Prevention Tools— 

§ 40.23 

90. The Commission seeks to require 

self-trade prevention tools that screen 

out unintentional self-trading, while 

permitting bona-fide self-matched trades 

that are undertaken for legitimate 

business purposes. Under the 

regulations proposed above, DCMs shall 

implement rules reasonably designed to 

prevent self-trading (‘‘the matching of 

orders for accounts that have common 

beneficial ownership or are under 

common control’’), but DCMs may in 

their discretion implement rules that 

permit ‘‘the matching of orders for 

accounts with common beneficial 

ownership where such orders are 

initiated by independent decision 

makers.’’ 

a. Do these standards accomplish the 

goal of preventing only unintentional 

self-trading, or would other standards be 

more effective in accomplishing this 

goal? For example, should the 

Commission consider adopting in any 

final rules arising from this NPRM an 

alternative requirement modeled on 

FINRA Rule 5210 and require market 

participants to implement policies and 

procedures to review their trading 

activity for, and a prevent a pattern of, 

self-trades? 

b. While the regulations contain 

exceptions for bona fide self-match 

trades (described in § 40.23(b)), the 


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716See FIA Guide, supra note 95 at 13 (discussing 

balance between flexibility and complexity with 

respect to self-trade prevention tools). 

regulations are intended to prevent all 

unintentional self-trading, and do not 

include a de minimis exception for a 

certain percentage of unintentional selftrading. Should the regulations permit a 

certain de minimis amount of 

unintentional self-trading, and if so, 

what amount should be permitted (e.g., 

as a percentage of monthly trading 

volume)? 

c. The following terms are used in 

proposed § 40.23(a) and (b): (1) Selftrading, (2) common beneficial 

ownership, (3) independent decision 

makers, and (4) common control. Do any 

of these terms require further definition? 

If so, how should they be defined? 

Should any alternatives be used and, if 

so, how should such substitute terms be 

defined? 

d. With respect to ‘‘common 

beneficial ownership,’’ the Commission 

requests comment on the minimum 

degree of ownership in an account that 

should trigger a determination that such 

account is under common beneficial 

ownership. For example, should an 

account be deemed to be under common 

beneficial ownership between two 

unrelated persons if each person 

directly or indirectly has a 10% or more 

ownership or equity interest in such 

account? The Commission refers 

commenters to the aggregation rules in 

part 150 of its regulations, including 

specifically § 150.4, and requests 

comment on a potential Commission 

definition of common beneficial 

ownership that is modeled on § 150.4. 

e. The Commission also requests 

comment on whether ‘‘common 

beneficial ownership’’ should be 

defined in any final rules arising from 

this NPRM, or whether such definition 

should be left to each DCM with respect 

to its program for implementing 

proposed § 40.23. 

91. Are there any other types of selftrading that should be permitted in 

addition to the exceptions permitted in 

§ 40.23(b)(1) and (2)? If so, please 

describe such other types of acceptable 

self-trading and explain why they 

should be permitted. 

92. Proposed § 40.23 provides that 

DCMs may comply with the 

requirement to apply, or provide and 

require the use of, self-trade prevention 

tools by requiring market participants to 

identify to the DCM which accounts 

should be prohibited from trading with 

each other. With respect to this account 

identification process, the Commission’s 

principal goal is to prevent 

unintentional self-trading; the 

Commission does not have a specific 

interest in regulating the manner by 

which market participants identify to 

DCMs the account that should be 

prohibited from trading from each other, 

so long as this goal is met. Should any 

other identification methods be 

permitted in § 40.23? For example, 

please comment on whether the 

opposite approach is preferable: market 

participants would identify to DCMs the 

accounts that should be permitted to 

trade with each other (as opposed to 

those accounts that should be prevented 

from trading with each other). 

93. The Commission believes that its 

requirements concerning self-trade 

prevention tools must strike the 

appropriate balance between flexibility 

(allowing market participants with 

diverse trading operations and strategies 

the discretion in implementation so as 

effectively prevent only unintentional 

self-trades) and simplicity (a variety of 

design and implementation options may 

render this control too complex to be 

effective).716 Does the Commission 

allow sufficient discretion to exchanges 

and market participants in the design 

and implementation of self-trade 

prevention tools? Is there any area 

where the Commission should be more 

prescriptive? The Commission is 

particularly interested in whether there 

is a particular level at which it should 

require implementation of self-trade 

prevention tools, i.e., if the tools must 

prevent matching of orders from the 

same trading firm, the same trader, the 

same trading algorithm, or some other 

level. 

94. Proposed § 40.23(a) would require 

DCMs to either apply, or provide and 

require the use of, self-trade prevention 

tools. Please comment whether 

§ 40.23(a) should, in addition, permit 

market participants to use their own 

self-trade prevention tools to meet the 

requirements of proposed § 40.23(a), 

and if so, what additional regulations 

would ensure that DCMs are able to: 

ensure that such tools are comparable to 

DCM-provided tools; monitor the 

performance of such tools; and 

otherwise review such tools and ensure 

that they are sufficiently rigorous to 

meet the requirements of § 40.23. 

95. Is it appropriate to require 

implementation of self-trade prevention 

tools with respect to all orders? Should 

such controls be mandatory for only a 

particular subset of orders, i.e., orders 

from AT Persons or orders submitted 

through DEA? 

96. Please comment on the 

requirement that DCMs disclose selftrade statistics. Is the data required to be 

disclosed appropriate? Is there any other 

category of self-trade data that DCMs 

should be required to disclose? 

97. Should DCMs be required to 

disclose the amount of unintentional 

self-trading that occurs each month, 

alongside the self-trade statistics 

required to be published under 

proposed § 40.23(d)? 

98. As noted above, the Commission 

understands that there is some potential 

for self-trade prevention tools to be used 

for wrongful activity that may include 

disruptive trading or other violations of 

the Act or Commission regulations on 

DCMs. Are there ways to design selftrade prevention tools so that they do 

not facilitate disruptive trading (such as 

spoofing) or other violations of the Act 

or Commission regulations on DCMs? 

Are additional regulations warranted to 

ensure that such tools are not used to 

facilitate such activities? 

IV(R) DCM Market Maker and Trading 

Incentive Programs—§§ 40.25–40.28 

99. To what extent do market 

participants currently trade in ways 

designed primarily to collect market 

maker or trading incentive program 

benefits, rather than for risk 

management purposes? 

100. To what extent do that market 

maker and trading incentive programs 

currently provide benefits for selftrades? To what extent do market 

participants collect such benefits for 

self-trades? 

101. The Commission requests 

comment regarding whether the 

information proposed to be collected in 

§ 40.25 would be sufficient for it to 

determine whether a DCM’s marketmaker or trading incentive program 

complies with the impartial access 

requirements of § 38.151(b). If 

additional or different information 

would be helpful, please identify such 

information. 

102. The Commission requests 

comment regarding whether DCMs 

should be required to maintain on their 

public Web sites the information 

required by proposed § 40.25(a) and (b) 

for an additional period beyond the end 

of the market maker or trading incentive 

program. The Commission may 

determine to include in any final rules 

arising from this NPRM a requirement 

that such information remain publicly 

available pursuant to proposed 

§ 40.25(b) for an additional period up to 

six months following the end of a 

market maker or trading incentive 

program. 

103. The Commission requests 

comment regarding whether the text of 

proposed § 40.27(a) identifies with 

sufficient particularity the types of 

trades that are not eligible for payments 


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or benefits pursuant to a DCM marketmaker or trading incentive program. 

What amendments, if any, are necessary 

to clearly identify trades that are not 

eligible? 

104. Section 40.27(a) provides that 

DCMs shall implement policies and 

procedures that are reasonably designed 

to prevent the payment of market-maker 

or trading incentive program benefits for 

trades between accounts under common 

ownership. Are there any other types of 

trades or circumstances under which 

the Commission should also prohibit or 

limit DCM market-maker or trading 

incentive program benefits? 

105. The Commission is proposing in 

§ 40.27(a) certain requirements 

regarding DCM payments associated 

with market maker and trading 

incentive programs. Please address 

whether the proposed rules will 

diminish DCMs’ ability to compete or 

build liquidity by using market maker or 

trading incentive programs. Does any 

DCM consider it appropriate to provide 

market maker or trading incentive 

program benefits for trades between 

accounts known to be under common 

beneficial ownership? 

106. In any final rules arising from 

this NPRM, should the Commission also 

prohibit DCMs from providing trading 

incentive program benefits where such 

benefits on a per-trade basis are greater 

than the fees charged per trade by such 

DCMs and its affiliated DCO (if 

applicable)? The Commission also 

specifically requests comment on the 

extent, if any, to which one or more 

DCMs engage in this practice. 

107. Proposed § 40.25(b) imposes 

certain transparency requirements with 

respect to both market maker and 

trading incentive programs. The 

Commission requests public comment 

regarding: 

a. The most appropriate place or 

manner for a DCM to disclose the 

information required by proposed 

§ 40.25(b); 

b. The benefits or any harm that may 

result from such transparency, 

including any anti-competitive effect or 

pro-competitive effect among DCMs or 

market participants; 

c. Whether transparency as proposed 

in § 40.25(b) is equally appropriate for 

both market maker programs and 

trading incentive programs, or are the 

proposed requirements more or less 

appropriate for one type of program over 

the other? 

d. Whether any of the enumerated 

items required to be posted on a DCM’s 

public Web site pursuant to proposed 

§ 40.25(b) could reasonably be 

considered confidential information that 

should not be available to the public, 

and if so, what process should be 

available for a DCM to request from the 

Commission an exemption from the 

requirements of proposed § 40.25(b) for 

that specific enumerated item? 

Related Matters—A. Calculation of 

Number of Persons Subject to 

Regulations 

108. The Commission requests 

comment on its calculation of the 

number of AT Persons, newly registered 

floor traders, clearing member FCMs, 

and DCMs that will be subject to 

Regulation AT. 

Related Matters—C. Regulatory 

Flexibility Act Analysis 

109. The Commission requests 

comment on each element of its RFA 

analysis. In particular, the Commission 

specifically invites comment on the 

accuracy of its estimates of potential 

firms that could be considered ‘‘small 

entities’’ for RFA purposes. 

110. The Commission also requests 

comment on whether any natural 

persons will be designated as AT 

Persons under the proposed definition 

of that term. 

Related Matters—E. Cost Benefit 

Considerations 

111. Beyond specific questions 

interspersed throughout its discussion, 

the Commission generally requests 

comment on all aspects of its 

consideration of costs and benefits, 

including: (a) Identification, 

quantification, and assessment of any 

costs and benefits not discussed therein; 

(b) whether any of the proposed 

regulations may cause FCMs or DCMs to 

raise their fees for their customers, or 

otherwise result in increased costs for 

market participants and, if so, to what 

extent; (c) whether any category of 

Commission registrants will be 

disproportionately impacted by the 

proposed regulations, and if so whether 

the burden of any regulations should be 

appropriately shifted to other 

Commission registrants; (d) what, if any, 

costs would likely arise from market 

participants engaging in regulatory 

arbitrage by restructuring their trading 

activities to trade on platforms not 

subject to the proposed regulations, or 

taking other steps to avoid costs 

associated with the proposed 

regulations; (e) quantitative estimates of 

the impact on transaction costs and 

liquidity of the proposals contained 

herein; (f) the potential costs and 

benefits of the alternatives that the 

Commission discussed in this release, 

and any other alternatives appropriate 

under the CEA that commenters believe 

would provide superior benefits relative 

to costs; (g) data and any other 

information to assist or otherwise 

inform the Commission’s ability to 

quantify or qualitatively describe the 

benefits and costs of the proposed rules; 

and (h) substantiating data, statistics, 

and any other information to support 

positions posited by commenters with 

respect to the Commission’s 

consideration of costs and benefits. 

§ 1.80 Pre-Trade and Other Risk 

Controls 

112. How would an alternative 

definition of Algorithmic Trading that 

excludes automated order routers affect 

the costs and benefits of the pre-trade 

and other risk controls in comparison to 

the costs and benefits of the proposed 

definition that includes automated order 

routers? Would such an alternative 

definition reduce the number of AT 

Persons captured by Regulation AT? 

113. Would the benefits of Regulation 

AT be enhanced significantly if the 

definition of Algorithmic Trading were 

modified to capture a conduit entity 

such as a non-clearing FCM, thereby 

making the entity an AT Person subject 

to Regulation AT? How would such a 

modification affect costs? 

114. Would the benefits of Regulation 

AT be enhanced significantly if the 

definition of Algorithmic Trading were 

expanded to encompass orders that are 

generated using algorithmic methods 

(e.g., an algorithm generates a buy or 

sell signal at a particular time), but are 

then manually entered into a front-end 

system by a natural person? How would 

such a modification affect costs? Please 

comment on the costs and benefits of an 

alternative whereby the Commission 

would implement specific rules 

regarding the appropriate design of the 

specific controls required by Regulation 

AT and compare them to the costs and 

benefits of the Commission’s proposal 

whereby the relevant entities—trading 

firms, clearing firms, and DCMs—would 

have the discretion to determine the 

appropriate design of those controls. 

115. Does one particular segment of 

trading firms, clearing member FCMs or 

DCMs (e.g., smaller entities) currently 

implement fewer of the pre-trade and 

other risk controls required by 

Regulation AT than some other segment 

of trading firms, clearing member FCMs 

or DCMs? If so, please describe any 

unique or additional costs that will be 

imposed on such persons to develop the 

technology and systems necessary to 

implement the pre-trade and other risk 

controls required by Regulation AT. 

116. In question 14, the Commission 

asks whether there are any AT Persons 

who are natural persons. Would AT 

Persons who are natural persons (or sole 


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proprietorships with no employees 

other than the sole proprietor) be 

required to hire staff to comply with the 

risk control, testing and monitoring, or 

compliance requirements of Regulation 

AT? 

117. Do you agree with the accuracy 

of cost estimates provided by the 

Commission as to how much it will cost 

a trading firm, clearing member FCM or 

DCM to internally develop the 

technology and systems necessary to 

implement the pre-trade and other risk 

controls required by Regulation AT? If 

you disagree with the Commission’s 

analysis, please provide your own 

quantitative estimates, as well as data or 

other information in support. Please 

specify in your answer the type of entity 

and which specific pre-trade risk or 

order management controls for which 

you are providing estimates. 

In addition, please differentiate 

between the situations where an entity 

(i) already has partially compliant 

controls in place, and only needs to 

upgrade such technology and systems to 

bring it into compliance with the 

regulations; and (ii) needs to build such 

technology and systems from scratch. 

Please include, as applicable, hardware 

and software costs as well as the hourly 

wage information of the employee(s) 

necessary to develop such risk controls 

(i.e., technology personnel such as 

programmer analysts, senior 

programmers and senior systems 

analysts). 

118. The Commission has assumed 

that the effort to adjust any one risk 

control (by ‘‘control,’’ in this context, 

the Commission means the pre-trade 

risk controls, order cancellation 

systems, and connectivity systems 

required by § 1.80) will require 

assessment and possible modifications 

to all controls. Is this assumption 

correct, and if not, why not? 

119. As indicated above, the 

Commission lacks sufficient information 

to provide full estimates of costs that a 

trading firm, clearing member FCM or 

DCM will incur if it chooses not to 

internally develop such controls, and 

instead purchases the solutions of an 

outside vendor in order to comply with 

Regulation AT’s pre-trade and other risk 

controls requirements. Please provide 

quantitative estimates of such costs, 

including supporting data or other 

information. In addition, please specify 

in your answer the type of entity and 

which specific pre-trade risk or order 

management control for which you are 

providing estimates. In addition, please 

differentiate between the situations 

where an entity (i) already uses an 

outside vendor to at least some extent to 

implement the controls; and (ii) does 

not currently implement the controls 

and must obtain all applicable 

technology and systems from an outside 

vendor necessary to comply with 

Regulation AT. Please include, if 

applicable, hardware and software costs 

as well as the hourly wage information 

of the employee(s) necessary to 

effectuate the implementation of such 

controls from an outside vendor. 

120. Do you agree with the 

Commission’s estimates of how much it 

will cost a trading firm, clearing 

member FCM or DCM to annually 

maintain the technology and systems for 

the pre-trade and other risk controls 

required by Regulation AT, if it uses 

internally developed technology and 

systems? If not please provide 

quantitative estimates and supporting 

data or other information with respect to 

how much it will cost a trading firm, 

clearing member FCM or DCM to 

annually maintain the technology and 

systems for pre-trade and other risk 

controls required by Regulation AT, if it 

uses an outside vendor’s technology and 

systems. 

121. Is it correct to assume that many 

of the trading firms subject to § 1.80 are 

also subject to the SEC’s Market Access 

Rule, and, accordingly, already 

implement many of the systems 

required by Regulation AT for purposes 

of their securities trading? Please 

specify in your answer the type of entity 

and which specific pre-trade risk or 

order management control is already 

required pursuant to the Market Access 

Rule, and the extent of the overlap. 

122. Please comment on the costs and 

benefits (including quantitative 

estimates with supporting data or other 

information) to clearing FCMs of an 

alternative to proposed § 1.82 that 

would require clearing FCMs to 

implement controls with respect to all 

orders, including orders that are 

manually submitted or are entered 

through algorithmic methods that 

nonetheless do not meet the definition 

of Algorithmic Trading and compare 

those costs and benefits to those costs 

and benefits of proposed § 1.82. 

123. Please comment on the 

additional costs (including quantitative 

estimates with supporting data or other 

information) to AT Persons of 

complying with each of the following 

specific requirements of § 1.80: 

a. § 1.80(a)(2) (pre-trade risk control 

threshold requirements); 

b. § 1.80(a)(3) (natural person 

monitors must be alerted when 

thresholds are breached); 

c. § 1.80(d) (notification to DCM and 

clearing member FCM that AT Person 

will use Algorithmic Trading); 

d. § 1.80(e) (self-trade prevention 

tools); and 

e. § 1.80(f) (periodic review of pretrade risk controls and other measures 

for sufficiency and effectiveness). 

124. The Commission welcomes 

comment on the estimated costs of the 

pre-trade risk controls proposed in 

§ 1.80 as compared to the annual 

industry expenditure on technology, 

risk mitigation and/or technology 

compliance systems. 

125. Please comment on the costs to 

AT Persons and clearing member FCMs 

of complying with DCM rules requiring 

retention and production of records 

relating to §§ 1.80, 1.81, and 1.82 

compliance, pursuant to § 40.22(d), 

including without limitation on the 

extent to which AT Persons and clearing 

member FCMs already have policies, 

procedures, staffing and technological 

infrastructure in place to retain such 

records and produce them upon DCM 

request. 

126. The Commission anticipates that 

Regulation AT may promote confidence 

among market participants and reduce 

market risk, consequently reducing 

transaction costs, but has not estimated 

this reduction in transaction costs. The 

Commission welcomes comment on the 

extent to which Regulation AT may 

impact transaction costs and effects on 

liquidity provision more generally. 

AT Person Membership in RFA; RFA 

Standards for Automated Trading and 

Algorithmic Trading Systems 

127. The Commission estimates that 

the costs of membership in an RFA 

associated with proposed § 170.18 will 

encompass certain costs, such as those 

associated with NFA membership dues. 

Has the Commission correctly identified 

the costs associated with membership in 

an RFA? 

128. The Commission expects that 

entities that will be required to become 

members of an RFA would not incur 

any additional compliance costs as a 

result of their membership in an RFA. 

The Commission requests comment on 

the accuracy of this expectation. What 

additional compliance costs, if any, 

would a registrant face as a result of 

being required to become a member of 

an RFA pursuant to proposed § 170.18? 

129. Has the Commission accurately 

estimated that approximately 100 

entities will be affected by the 

membership requirements of § 170.18? 

130. The Commission invites 

estimates on the cost to an RFA to 

establish and maintain the program 

required by § 170.19, and the amount of 

that cost that will be passed along to 

individual categories of AT Person 

members in the RFA. 


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Development, Testing, and Supervision 

of Algorithmic Systems 

131. Proposed § 1.81(a) establishes 

principles-based standards for the 

development and testing of Algorithmic 

Trading systems and procedures, 

including requirements for AT Persons 

to test all Algorithmic Trading code and 

related systems and any changes to such 

code and systems prior to their 

implementation. AT Persons would also 

be required to maintain a source code 

repository to manage source code 

access, persistence, copies of all code 

used in the production environment, 

and changes to such code, among other 

requirements. Are any of the 

requirements of § 1.81(a) not already 

followed by the majority of market 

participants that would be subject to 

§ 1.81(a) (or some particular segment of 

market participants), and if so, how 

much will it cost for a market 

participant to comply with such 

requirement(s)? 

132. Proposed § 1.81(b) requires that 

an AT Person’s Algorithmic Trading is 

subject to continuous real-time 

monitoring and supervision by 

knowledgeable and qualified staff at all 

times while Algorithmic Trading is 

occurring. Proposed § 1.81(b) also 

requires automated alerts when an 

Algorithmic Trading system’s AT Order 

Message behavior breaches design 

parameters, upon loss of network 

connectivity or data feeds, or when 

market conditions approach the 

boundaries within which the ATS is 

intended to operate, to the extent 

applicable, among other monitoring 

requirements. Are any of the 

requirements of § 1.81(b) not already 

followed by the majority of market 

participants that would be subject to 

§ 1.81(b), and if so, how much will it 

cost for a market participant to comply 

with such requirement(s)? 

133. Proposed § 1.81(c) requires that 

AT Persons implement policies 

designed to ensure that Algorithmic 

Trading operates in a manner that 

complies with the CEA and the rules 

and regulations thereunder. Among 

other controls, the policies should 

include a plan of internal coordination 

and communication between 

compliance staff of the AT Person and 

staff of the AT Person responsible for 

Algorithmic Trading regarding 

Algorithmic Trading design, changes, 

testing, and controls. Are any of the 

requirements of § 1.81(c) not already 

followed by the majority of market 

participants that would be subject to 

§ 1.81(c), and if so, how much will it 

cost for a market participant to comply 

with such requirement(s)? 

134. Proposed § 1.81(d) requires that 

AT Persons implement policies to 

designate and train their staff 

responsible for Algorithmic Trading, 

which policies should include 

procedures for designating and training 

all staff involved in designing, testing 

and monitoring Algorithmic Trading. 

Are any of the requirements of § 1.81(d) 

not already followed by the majority of 

market participants that would be 

subject to § 1.81(d), and if so, how much 

will it cost for a market participant to 

comply with such requirement(s)? 

AT Person and FCM Compliance 

Reports 

135. Please comment on whether any 

of the alternatives discussed above 

regarding compliance reports would 

provide a superior cost-benefit profile 

relative to the Commission’s proposal. 

DCM Test Environments 

136. Do any DCMs not currently offer 

a test environment that simulates 

production trading to their market 

participants, as would be required by 

proposed § 40.21? If so, how much 

would it cost a DCM to implement a test 

environment that would comply with 

the requirements of § 40.21? 

DCM Review of Compliance Reports 

137. Please comment on the cost 

estimates provided above with respect 

to DCMs’ review of compliance reports 

provided under § 40.22 and related 

review requirements, including the 

estimated cost for DCMs to: Establish 

the review program required by § 40.22; 

review the reports provided by AT 

Persons and clearing member FCMs; 

communicate remediation instructions 

to a subset of AT Persons and clearing 

member FCMs; and review and 

evaluate, as necessary, books and 

records of AT Persons and clearing 

member FCMs as contemplated by 

proposed § 40.22(e). 

Section 15(a) Considerations 

138. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

139. Are the compliance costs 

associated with the proposed rules of 

sufficient magnitude to potentially 

cause smaller market participants, 

FCMs, or DCMs to cease or scale back 

operations? Do these costs create 

significant barriers to entry? 

Registration—§ 1.3(x)(3) 

140. The Commission estimates that 

the costs of registration will encompass 

direct costs (those associated with NFA 

membership, and reporting and 

recordkeeping with the Commission), 

and indirect costs (e.g. those associated 

to risk control requirements placed on 

all registered entities). Has the 

Commission correctly identified the 

costs associated with the new 

registration category? What firm 

characteristics would change the level 

of direct and indirect costs associated 

with the registration? 

141. Has the Commission accurately 

estimated that approximately 100 

currently unregistered entities will be 

captured by the new registration 

requirement in proposed § 1.3(x)(3). 

142. Has the Commission accurately 

estimated that each currently 

unregistered entity captured by the new 

registration requirement in proposed 

§ 1.3(x)(3) will have approximately 10 

persons required to file Form 8–R? 

143. As defined, the new floor trader 

category restricts the registration 

requirement to those who make use of 

Direct Electronic Access. Is this 

requirement overly restrictive or unduly 

broad from a cost-benefit perspective? 

Are there alternate, or additional, 

characteristics of trading activity to 

determine registration status that would 

be preferable from a cost-benefit 

standpoint? For example, should 

persons with trading volume or message 

volume below a specified threshold be 

exempted from registration? 

144. Will any currently unregistered 

entities change their business model or 

exit the market in order to avoid the 

proposed registration requirement? 

145. The Commission believes that 

the risk control protocols required of 

registered entities, specifically those 

under the new registration category, will 

provide a general benefit to the safety 

and soundness of market activity and 

price formation. Has the Commission 

correctly identified the type and level of 

benefits which arise from placing these 

requirements on a new set of significant 

market participants? 

146. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

Transparency in Exchange Trade 

Matching Systems 

147. The Commission anticipates that 

costs associated with the transparency 

requirement would come from some 

additional testing of platform systems 

and from drafting and publishing 

descriptions of any relevant attributes of 

the platform. What new costs would be 

associated with providing descriptions 

of attributes of electronic matching 


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78936 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

platforms that affect market participant 

orders and quotes? 

148. Please compare the costs and 

benefits of the alternative of applying 

the transparency requirement only with 

respect to latencies within a platform 

and how a self-trade prevention tool 

determines whether to cancel an order 

with the costs and benefits of the 

proposed rule. 

149. What benefits might market 

participants receive through increased 

transparency into the operation of 

electronic matching platforms, 

particularly for those market 

participants without direct electronic 

access who may not be able to 

accurately measure latencies or other 

metrics of market efficiency? 

150. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

Self-Trade Prevention 

151. Please comment on the cost 

estimates described above for DCMs and 

market participants to comply with the 

requirements of § 40.23. The 

Commission is interested in commenter 

opinion on all aspects of its analysis, 

including its estimate of the number of 

entities impacted by the proposed 

regulation and the amount of costs such 

entities may incur to comply with the 

regulation. 

152. Please comment on the benefits 

described above. Do you agree with the 

Commission’s position that self-trade 

prevention requirements will result in 

more accurate indications of the level of 

market interest on both sides of the 

market and help ensure arms-length 

transactions that promote effective price 

discovery? Are there additional benefits 

to regulatory self-trade prevention 

requirements not articulated above? 

153. Are there any DCMs that neither 

internalize and apply self-trade 

prevention tools, nor provide self-trade 

prevention tools to their market 

participants? If so, please provide an 

estimate of the cost to such a DCM to 

comply with the requirement under 

§ 40.23(a) to apply, or provide and 

require the use of, self-trade prevention 

tools. 

154. Would any DCMs that currently 

offer self-trade prevention tools need to 

update their tools to meet the 

requirements of § 40.23? If so, please 

provide an estimate of the cost to such 

a DCM to comply with the requirements 

of § 40.23. 

155. What percentage of market 

participants do not currently make use 

of exchange-provided self-trade 

prevention tools, when active on a DCM 

that provides, but does not require such 

tools? Please provide an estimate of the 

cost to such a market participant to 

initially calibrate and use exchangeprovided self-trade prevention tools, in 

accordance with § 40.23. Please also 

comment on any other direct or indirect 

costs to a market participant that does 

not currently use self-trade prevention 

tools arising from the proposed 

requirement to implement such tools. 

156. The Commission estimates above 

that the number of market participants 

that will submit the approval requests 

described by § 40.23(c) is approximately 

equivalent to the number of AT Persons. 

Please comment on whether the 

estimate of the number of market 

participants submitting such approval 

requests should be higher or lower. For 

example, should the estimate be raised 

to account for proprietary algorithmic 

traders that will not be AT Persons, 

because they do not use Direct 

Electronic Access and therefore will not 

be required to register as floor traders? 

157. Proposed § 40.23 provides that 

DCMs may comply with the 

requirement to apply, or provide and 

require the use of, self-trade prevention 

tools by requiring market participants to 

identify to the DCM which accounts 

should be prohibited from trading with 

each other. With respect to this account 

identification process, the Commission’s 

principal goal is to prevent 

unintentional self-trading; the 

Commission does not have a specific 

interest in regulating the manner by 

which market participants identify to 

DCMs the account that should be 

prohibited from trading from each other, 

so long as this goal is met. Should any 

other identification methods be 

permitted in § 40.23? For example, 

please comment on whether the 

opposite approach is preferable: Market 

participants would identify to DCMs the 

accounts that should be permitted to 

trade with each other (as opposed to 

those accounts that should be prevented 

from trading with each other). In 

particular, please comment on whether 

this approach or other identification 

methods would reduce costs for market 

participants or be easier for both market 

participants and DCMs to administer. 

158. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

Market-Maker and Trading Incentive 

Programs 

159. The Commission requests 

comment on the accuracy of its cost 

estimates. 

160. To what extent are the costs 

imposed on the DCMs by the proposed 

rule already incurred pursuant to 

existing rules? 

161. To what extent are the benefits 

of the proposed rule currently being 

realized? 

162. Do DCM Web sites currently 

provide adequate information regarding 

market-maker and trading incentive 

programs, and is such information 

easily located? 

163. To what extent do DCMs 

currently make payments for self-trades 

pursuant to market-maker and trading 

incentive programs? 

164. The Commission requests 

comment on its discussion of the effects 

of the proposed rules on the 

considerations in Section 15(a) of the 

CEA. 

List of Subjects 

17 CFR Part 1 

Commodity futures, Commodity pool 

operators, Commodity trading advisors, 

Definitions, Designated contract 

markets, Floor brokers, Futures 

commission merchants, Introducing 

brokers, Major swap participants, 

Reporting and recordkeeping 

requirements, Swap dealers. 

17 CFR Part 38 

Commodity futures, Designated 

contract markets, Reporting and 

recordkeeping requirements. 

17 CFR Part 40 

Commodity futures, Definitions, 

Designated contract markets, Reporting 

and recordkeeping requirements. 

17 CFR Part 170 

Commodity futures, Commodity pool 

operators, Commodity trading advisors, 

Floor brokers, Futures commission 

merchants, Introducing brokers, Major 

swap participants, Reporting and 

recordkeeping requirements, Swap 

dealers. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR chapter I as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 

6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 

12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 

24 (2012). 


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■ 2. In § 1.3, add paragraphs (x)(3), (tttt), 

(uuuu), (vvvv), (wwww), (xxxx), (yyyy), 

and (zzzz) to read as follows: 

§ 1.3 Definitions. 

* * * * * 

(x) * * * 

(3)(i) Who, in or surrounding any 

other place provided by a contract 

market for the meeting of persons 

similarly engaged purchases or sells 

solely for such person’s own account— 

(A) Any commodity for future 

delivery, security futures product, or 

swap; or 

(B) Any commodity option authorized 

under section 4c of the Act; and 

(ii) Who uses Direct Electronic Access 

as defined in paragraph (yyyy) of this 

section, in whole or in part, to access 

such other place for Algorithmic 

Trading; and 

(iii) Who is not registered with the 

Commission as a futures commission 

merchant, floor broker, swap dealer, 

major swap participant, commodity 

pool operator, commodity trading 

advisor, or introducing broker. 

* * * * * 

(tttt) Algorithmic Trading Compliance 

Issue. This term means an event at an 

AT Person that has caused any 

Algorithmic Trading of such entity to 

operate in a manner that does not 

comply with the Commodity Exchange 

Act or the rules and regulations 

thereunder, the rules of any designated 

contract market to which such AT 

Person submits orders through 

Algorithmic Trading, the rules of any 

registered futures association of which 

such AT Person is a member, the AT 

Person’s own internal requirements, or 

the requirements of the AT Person’s 

clearing member, in each case as 

applicable. 

(uuuu) Algorithmic Trading 

Disruption. This term means an event 

originating with an AT Person that 

disrupts, or materially degrades— 

(1) The Algorithmic Trading of such 

AT Person, 

(2) The operation of the designated 

contract market on which such AT 

Person is trading, or 

(3) The ability of other market 

participants to trade on the designated 

contract market on which such AT 

Person is trading. 

(vvvv) Algorithmic Trading Event. 

This term means an event at an AT 

Person that constitutes— 

(1) An Algorithmic Trading 

Compliance Issue; or 

(2) An Algorithmic Trading 

Disruption. 

(wwww) AT Order Message. This 

term means each new order or quote 

submitted through Algorithmic Trading 

to a designated contract market by an 

AT Person and each change or deletion 

submitted through Algorithmic Trading 

by an AT Person with respect to such an 

order or quote. 

(xxxx) AT Person. This term means 

any person registered or required to be 

registered as a— 

(1) Futures commission merchant, 

floor broker, swap dealer, major swap 

participant, commodity pool operator, 

commodity trading advisor, or 

introducing broker that engages in 

Algorithmic Trading on or subject to the 

rules of a designated contract market; or 

(2) Floor trader as defined in 

paragraph (x)(3) of this section. 

(yyyy) Direct Electronic Access. This 

term means an arrangement where a 

person electronically transmits an order 

to a designated contract market, without 

the order first being routed through a 

separate person who is a member of a 

derivatives clearing organization to 

which the designated contract market 

submits transactions for clearing. 

(zzzz) Algorithmic Trading. This term 

means trading in any commodity 

interest as defined in paragraph (yy) of 

this section on or subject to the rules of 

a designated contract market, where: 

(1) One or more computer algorithms 

or systems determines whether to 

initiate, modify, or cancel an order, or 

otherwise makes determinations with 

respect to an order, including but not 

limited to: The product to be traded; the 

venue where the order will be placed; 

the type of order to be placed; the 

timing of the order; whether to place the 

order; the sequencing of the order in 

relation to other orders; the price of the 

order; the quantity of the order; the 

partition of the order into smaller 

components for submission; the number 

of orders to be placed; or how to manage 

the order after submission; and 

(2) Such order, modification or order 

cancellation is electronically submitted 

for processing on or subject to the rules 

of a designated contract market; 

provided, however, that Algorithmic 

Trading does not include an order, 

modification, or order cancellation 

whose every parameter or attribute is 

manually entered into a front-end 

system by a natural person, with no 

further discretion by any computer 

system or algorithm, prior to its 

electronic submission for processing on 

or subject to the rules of a designated 

contract market. 

■ 3. Add subpart A to read as follows: 

Subpart A—Requirements for Algorithmic 

Trading 

Sec. 

1.80 Pre-trade risk controls for AT Persons. 

1.81 Standards for the development, 

monitoring, and compliance of 

Algorithmic Trading systems. 

1.82 Clearing futures commission merchant 

risk management. 

1.83 AT Person and clearing member 

futures commission merchant reports 

and recordkeeping. 

Subpart A—Requirements for 

Algorithmic Trading 

§ 1.80 Pre-trade risk controls for AT 

Persons. 

For all AT Order Messages, an AT 

Person shall implement pre-trade risk 

controls and other measures reasonably 

designed to prevent an Algorithmic 

Trading Event, including but not limited 

to: 

(a) Pre-Trade Risk Controls. (1) The 

pre-trade risk controls shall include, at 

a minimum, the following: 

(i) Maximum AT Order Message 

frequency per unit time and maximum 

execution frequency per unit time; and 

(ii) Order price parameters and 

maximum order size limits. 

(2) Pre-trade risk controls shall be set 

at the level of each AT Person, or such 

other more granular level as the AT 

Person may determine, including but 

not limited to, by product, account 

number or designation, or one or more 

identifiers of natural persons associated 

with an AT Order Message. 

(3) Natural person monitors at the AT 

Person shall be promptly alerted when 

pre-trade risk control parameters 

established pursuant to this section are 

breached. 

(b) Order Cancellation Systems. (1) 

Systems that have the ability to: 

(i) Immediately disengage Algorithmic 

Trading; 

(ii) Cancel selected or up to all resting 

orders when system or market 

conditions require it; and 

(iii) Prevent submission of new AT 

Order Messages. 

(2) Prior to an AT Person’s initial use 

of Algorithmic Trading to submit a 

message or order to a designated 

contract market’s trading platform, such 

AT Person must notify the designated 

contract market on which it conducts 

Algorithmic Trading whether all of its 

resting orders should be cancelled or 

suspended in the event that the AT 

Person’s Algorithmic Trading system 

disconnects with the trading platform. 

(c) System Connectivity. AT Persons 

with Direct Electronic Access as defined 

in § 1.3(yyyy) shall implement systems 

to indicate on an ongoing basis whether 

they have proper connectivity with the 

trading platform and any systems used 

by a designated contract market to 

provide the AT Person with market 

data. 


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(d) Notification of Algorithmic 

Trading. Prior to an AT Person’s initial 

use of Algorithmic Trading to submit a 

message or order to a designated 

contract market’s trading platform, such 

AT Person shall notify its clearing 

member and the designated contract 

market on which it will be trading that 

it will engage in Algorithmic Trading. 

(e) Self-Trade Prevention Tools. To 

the extent that implementation of a 

designated contract market’s self-trade 

prevention tools requires calibration or 

other action by an AT Person, such AT 

Person shall calibrate or take such other 

action as is necessary to apply such 

tools. 

(f) Periodic Review for Sufficiency and 

Effectiveness. Each AT Person shall 

periodically review its compliance with 

this section to determine whether it has 

effectively implemented sufficient 

measures reasonably designed to 

prevent an Algorithmic Trading Event. 

Each AT Person shall take prompt 

action to remedy any deficiencies it 

identifies. 

§ 1.81 Standards for the development, 

monitoring, and compliance of Algorithmic 

Trading systems. 

(a) Development and testing of 

Algorithmic Trading Systems. (1) Each 

AT Person shall implement written 

policies and procedures for the 

development and testing of its 

Algorithmic Trading systems. Such 

policies and procedures shall at a 

minimum include the following: 

(i) Maintaining 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. 

(ii) Testing of all Algorithmic Trading 

code and related systems and any 

changes to such code and systems prior 

to their implementation, including 

testing to identify circumstances that 

may contribute to future Algorithmic 

Trading Events. Such testing must be 

conducted both internally within the 

AT Person and on each designated 

contract market on which Algorithmic 

Trading will occur. 

(iii) Regular back-testing of 

Algorithmic Trading using historical 

transaction, order, and message data to 

identify circumstances that may 

contribute to future Algorithmic Trading 

Events. 

(iv) Regular stress tests of Algorithmic 

Trading systems to verify their ability to 

operate in the manner intended under a 

variety of market conditions. 

(v) Procedures for documenting the 

strategy and design of proprietary 

Algorithmic Trading software used by 

an AT Person, as well as any changes to 

such software if such changes are 

implemented in a production 

environment. 

(vi) Maintaining a source code 

repository to manage source code 

access, persistence, copies of all code 

used in the production environment, 

and changes to such code. Such source 

code repository must include an audit 

trail of material changes to source code 

that would allow the AT Person to 

determine, for each such material 

change: who made it; when they made 

it; and the coding purpose of the 

change. Each AT Person shall keep such 

source code repository, and make it 

available for inspection, in accordance 

with § 1.31. 

(2) Each AT Person shall periodically 

review the effectiveness of the policies 

and procedures required by this 

paragraph (a), and take prompt action to 

document and remedy deficiencies in 

such policies and procedures. 

(b) Monitoring of Algorithmic Trading 

Systems. (1) Each AT Person shall 

implement written policies and 

procedures reasonably designed to 

ensure that each of its Algorithmic 

Trading systems is subject to continuous 

real-time monitoring by knowledgeable 

and qualified staff while such 

Algorithmic Trading system is engaged 

in trading. Such policies and procedures 

shall at a minimum include the 

following: 

(i) Continuous real-time monitoring of 

Algorithmic Trading to identify 

potential Algorithmic Trading Events. 

(ii) Automated alerts when an 

Algorithmic Trading system’s AT Order 

Message behavior breaches design 

parameters, upon loss of network 

connectivity or data feeds, or when 

market conditions approach the 

boundaries within which the 

Algorithmic Trading system is intended 

to operate, to the extent applicable. 

(iii) Monitoring staff of the AT Person 

shall have the ability and authority to 

disengage an Algorithmic Trading 

system and to cancel resting orders 

when system or market conditions 

require it, including the ability to 

contact staff of the applicable 

designated contract market and clearing 

firm, as applicable, to seek information 

and cancel orders. Such monitoring staff 

must also have dashboards and control 

panels to monitor and interact with the 

Algorithmic Trading systems for which 

they are responsible. 

(iv) Procedures that will enable AT 

Persons to track which monitoring staff 

is responsible for an Algorithmic 

Trading system during trading hours. 

(2) Each AT Person shall periodically 

review the effectiveness of the policies 

and procedures required by this 

paragraph (b), and take prompt action to 

document and remedy deficiencies in 

such policies and procedures. 

(c) Compliance of Algorithmic 

Trading Systems. (1) Each AT Person 

shall implement written policies and 

procedures reasonably designed to 

ensure that each of its Algorithmic 

Trading systems operates in a manner 

that complies with the Commodity 

Exchange Act and the rules and 

regulations thereunder. 

(2) Each AT Person shall implement 

written policies and procedures 

requiring: 

(i) Staff of the AT Person to review 

Algorithmic Trading systems in order to 

detect potential Algorithmic Trading 

Compliance Issues. Procedures shall 

indicate that such staff shall include 

staff of the AT Person familiar with the 

Commodity Exchange Act and the rules 

and regulations thereunder, the rules of 

any designated contract market to which 

such AT Person submits AT Order 

Messages, the rules of any registered 

futures association of which such AT 

Person is a member, the AT Person’s 

own internal requirements, and the 

requirements of the AT Person’s 

clearing member, in each case as 

applicable. 

(ii) A plan of internal coordination 

and communication between 

compliance staff of the AT Person and 

staff of the AT Person responsible for 

Algorithmic Trading regarding 

Algorithmic Trading design, changes, 

testing, and controls, which plan should 

be designed to detect and prevent 

Algorithmic Trading Compliance Issues. 

(3) Each AT Person shall periodically 

review the effectiveness of the policies 

and procedures required by this 

paragraph (c), and take prompt action to 

document and remedy deficiencies in 

such policies and procedures. 

(d) Designation and training of 

Algorithmic Trading staff. (1) Each AT 

Person shall implement written policies 

and procedures to designate and train 

its staff responsible for Algorithmic 

Trading. Such policies and procedures 

shall at a minimum include the 

following: 

(i) Procedures for designating and 

training all staff involved in designing, 

testing and monitoring Algorithmic 

Trading, and documenting training 

events. Training must, at a minimum, 

cover design and testing standards, 

Algorithmic Trading Event 

communication procedures, and 

requirements for notifying staff of the 


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applicable designated contract market 

when Algorithmic Trading Events 

occur. 

(ii) Training policies reasonably 

designed to ensure that natural person 

monitors are adequately trained for each 

Algorithmic Trading system or strategy 

(or material change to such system or 

strategy) for which such monitors are 

responsible. Training must include, at a 

minimum, the trading strategy for the 

Algorithmic Trading as well as the 

automated and non-automated risk 

controls that are applicable to the 

Algorithmic Trading. 

(iii) Escalation procedures to inform 

senior staff of the AT Person as soon as 

Algorithmic Trading Events are 

identified. 

(2) Each AT Person shall periodically 

review the effectiveness of the policies 

and procedures required by this 

paragraph (d), and take prompt action to 

document and remedy deficiencies in 

such policies and procedures. 

§ 1.82 Clearing member futures 

commission merchant risk management. 

(a) For all AT Order Messages 

originating with an AT Person, the 

futures commission merchant that is the 

clearing member for such AT Person 

shall comply with the following 

requirements: 

(1) Make use of pre-trade risk controls 

reasonably designed to prevent or 

mitigate an Algorithmic Trading 

Disruption, including at a minimum, 

those pre-trade risk controls described 

in § 1.80(a)(1). 

(2) Pre-trade risk controls must be set 

at the level of each AT Person, or such 

other more granular level as the clearing 

futures commission merchant may 

determine, including but not limited to, 

by product, account number or 

designation, or one or more identifiers 

of natural persons associated with an 

AT Order Message. 

(3) The futures commission merchant 

shall have policies and procedures 

reasonably designed to ensure that 

natural person monitors at the clearing 

futures commission merchant are 

promptly alerted when pre-trade risk 

control parameters established pursuant 

to this section are breached. 

(4) Make use of the order cancellation 

systems described in § 1.80(b)(1). 

(b) Direct Electronic Access orders. 

For all AT Order Messages originating 

with an AT Person submitted to a 

trading platform through Direct 

Electronic Access as defined in 

§ 1.3(yyyy), the futures commission 

merchant that is the clearing member for 

the AT Person shall comply with the 

requirements of paragraphs (a)(1), (2), 

and (4) of this section by implementing 

the pre-trade risk controls and order 

cancellation systems provided by 

designated contract markets pursuant to 

§ 38.255(b) and (c) of this chapter. 

(c) Non-Direct Electronic Access 

orders. For all AT Order Messages 

originating with an AT Person that are 

not submitted to a trading platform 

through Direct Electronic Access as 

defined in § 1.3(yyyy), the futures 

commission merchant that is the 

clearing member for the AT Person shall 

comply with the requirements of 

paragraphs (a)(1), (2), and (4) of this 

section by itself establishing and 

maintaining the pre-trade risk controls 

and order cancellation systems 

described therein. 

§ 1.83 AT Person and clearing member 

futures commission merchant reports and 

recordkeeping. 

(a) AT Person Reports. Each AT 

Person shall annually prepare a report 

and submit such report by June 30 to 

each designated contract market on 

which such AT Person engaged in 

Algorithmic Trading. Together with the 

annual report, each AT Person shall 

submit copies of the written policies 

and procedures developed to comply 

with § 1.81(a) and (c). Such report shall 

cover the time period from May 1 of the 

previous year to April 30 of the year 

such report is submitted. The report 

shall include the following: 

(1) A description of the pre-trade risk 

controls required by § 1.80(a), including 

a description of each item enumerated 

in § 1.80(a) and a description of all 

parameters and the specific quantitative 

settings used by the AT Person for such 

pre-trade risk controls; and 

(2) A certification by the chief 

executive officer or chief compliance 

officer of the AT Person that, to the best 

of his or her knowledge and reasonable 

belief, the information contained in the 

report is accurate and complete. 

(b) Clearing member futures 

commission merchant reports. Each 

futures commission merchant that is a 

clearing member for one or more AT 

Person(s) shall annually prepare and 

submit a report by June 30 to each 

designated contract market on which 

such AT Person(s) engaged in 

Algorithmic Trading. Such report shall 

cover the time period from May 1 of the 

previous year to April 30 of the year 

such report is submitted. The report 

shall include the following: 

(1) A description of the clearing 

member futures commission merchant’s 

program for establishing and 

maintaining the pre-trade risk controls 

required by § 1.82(a)(1) for its AT 

Persons at the designated contract 

market; and 

(2) A certification by the chief 

executive officer or chief compliance 

officer of the futures commission 

merchant that, to the best of his or her 

knowledge and reasonable belief, the 

information contained in the report is 

accurate and complete. 

(c) AT Person recordkeeping. Each AT 

Person shall keep, and provide upon 

request to each designated contract 

market on which such AT Person 

engages in Algorithmic Trading, books 

and records regarding such AT Person’s 

compliance with all requirements 

pursuant to §§ 1.80 and 1.81. 

(d) Clearing member futures 

commission merchant recordkeeping. 

Each futures commission merchant that 

is a clearing member for an AT Person 

shall keep, and provide upon request to 

each designated contract market on 

which such AT Person engages in 

Algorithmic Trading, books and records 

regarding such clearing member futures 

commission merchant’s compliance 

with all requirements pursuant to § 1.82. 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 4. The authority citation for part 38 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 

6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– 

1, 7b–3, 8, 9, 15, and 21, as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376. 

■ 5. Revise § 38.255 to read as follows: 

§ 38.255 Risk controls for trading. 

(a) The designated contract market 

must 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. 

(b) For all AT Order Messages 

originating with an AT Person that are 

submitted to a designated contract 

market through Direct Electronic Access 

as defined in § 1.3(yyyy) of this chapter, 

the designated contract market shall 

make available to the clearing member 

futures commission merchant for such 

AT Person effective systems and 

controls, reasonably designed to 

facilitate the items enumerated below: 

(1) The clearing member futures 

commission merchant’s management of 

the risks, pursuant to § 1.82(a)(1) and (2) 

of this chapter, that may arise from such 

AT Person’s Algorithmic Trading using 

Direct Electronic Access. 

(i) Such systems and controls shall 

include, at a minimum, the pre-trade 


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risk controls described in § 1.80(a)(1) of 

this chapter. 

(ii) Such systems shall, at a minimum, 

enable the clearing member futures 

commission merchant to set the pretrade risk controls at the level of each 

such AT Person, product, account 

number or designation, and one or more 

identifiers of natural persons associated 

with an AT Order Message. Designated 

contract market rules should permit 

clearing member futures commission 

merchants to choose the level at which 

they place control, so long as clearing 

member futures commission merchants 

use at least one of the levels. 

(2) The clearing member future 

commission merchant’s ability, 

pursuant to § 1.82(a)(4) of this chapter, 

to make use of the order cancellation 

systems described in § 1.80(b)(1) of this 

chapter. The designated contract market 

shall enable the clearing member future 

commission merchant to apply such 

order cancellation systems to orders 

from each such AT Person, product, 

account number or designation, or one 

or more identifiers of natural persons 

associated with an AT Order Message. 

(c) A designated contract market that 

permits Direct Electronic Access as 

defined in § 1.3(yyyy) of this chapter 

shall also require clearing member 

futures commission merchants to use 

the systems and controls described in 

paragraph (b) of this section with 

respect to all AT Order Messages 

originating with an AT Person that are 

submitted through Direct Electronic 

Access. 

■ 6. Amend § 38.401 as follows: 

■ a. Revise paragraph (a)(1)(iii); 

■ b. Add paragraph (a)(1)(iv); 

■ c. Revise paragraph (a)(2); and 

■ d. Add paragraph (c)(3). 

■ The revisions and additions read as 

follows: 

§ 38.401 General requirements. 

(a) * * * (1) * * * 

(iii) Rules and specifications 

pertaining to the operation of the 

electronic matching platform or trade 

execution facility, including but not 

limited to those pertaining to the 

operation of its electronic matching 

platform that materially affect the time, 

priority, price, or quantity of execution, 

or the ability to cancel, modify, or limit 

display of market participant orders. 

(iv) Any known attributes of the 

electronic matching platform, other than 

those already disclosed in rules or 

specifications under paragraph (a)(1)(iii) 

of this section, that materially affect the 

time, priority, price, or quantity of 

execution of market participant orders, 

the ability to cancel, modify, or limit 

display of market participant orders, or 

the dissemination of real-time market 

data to market participants, including 

but not limited to latencies or other 

variability in the electronic matching 

platform and the transmission of 

message acknowledgements, order 

confirmations, or trade confirmations, or 

dissemination of market data. 

(2) Through the procedures, 

arrangements and resources required in 

paragraph (a) of this section, the 

designated contract market must ensure 

public dissemination of information 

pertaining to new product listings, new 

rules, rule amendments, rules pertaining 

to the operation of the electronic 

matching platform or trade execution 

facility, known attributes of its 

electronic trading platform under 

paragraph (a)(1)(iv) of this section, or 

other changes to previously-disclosed 

information, in accordance with the 

timeline provided in paragraph (c) of 

this section. 

* * * * * 

(c) * * * 

(3) A designated contract market, in 

making available on its Web site 

information pursuant to paragraphs 

(a)(1)(iii) and (iv) of this section, shall 

place such information and submissions 

on its Web site within a reasonable time, 

but no later than 10 business days, 

following the identification of or 

changes to such attributes. Such 

information shall be disclosed 

prominently and clearly in plain 

English. 

* * * * * 

■ 7. In Appendix B to part 38, in the 

paragraph with the subject heading Core 

Principle 4 of section 5(d) of the Act: 

PREVENTION OF MARKET 

DISRUPTION, revise paragraph (b)(5) to 

read as follows: 

Appendix B to Part 38—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles 

* * * * * 

Core Principle 4 of section 5(d) of the Act: 

PREVENTION OF MARKET DISRUPTION 

* * * * * 

(b) * * * 

(5) 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 must employ the 

pre-trade risk controls specified in the 

Commission’s regulations (including 

applicable regulations contained in part 40 of 

this chapter), and may employ additional 

controls that the designated contract market 

believes are appropriate to its market. 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, or as they 

are otherwise required to be designed 

pursuant to Commission regulation. 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. 

* * * * * 

PART 40—PROVISIONS COMMON TO 

REGISTERED ENTITIES 

■ 8. The authority citation for part 40 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 

12, as amended by Titles VII and VIII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

■ 9. Revise § 40.1(i) to read as follows: 

§ 40.1 Definitions. 

* * * * * 

(i) Rule means any constitutional 

provision, article of incorporation, 

bylaw, rule, regulation, resolution, 

interpretation, stated policy, advisory, 

terms and conditions, market maker or 

trading incentive program, trading 

protocol (including but not limited to 

any operation of an electronic matching 

platform that materially affects the time, 

priority, price, or quantity of execution 

of market participant orders, the ability 

to cancel, modify, or limit display of 

market participant orders, or the 

dissemination of real-time market data 

to market participants), agreement or 

instrument corresponding thereto, 

including those that authorize a 

response or establish standards for 

responding to a specific emergency, and 

any amendment or addition thereto or 

repeal thereof, made or issued by a 

registered entity or by the governing 

board thereof or any committee thereof, 

in whatever form adopted. 

* * * * * 

§§ 40.13 through 40.19 [Reserved] 

■ 10. Add reserved §§ 40.13 through 

40.19. 

■ 11. Add §§ 40.20 through 40.23 to 

read as follows: 

§ 40.20 Risk controls for trading. 

A designated contract market shall 

implement pre-trade and other risk 


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controls reasonably designed to prevent 

an Algorithmic Trading Disruption (or, 

pursuant to paragraph (d) of this 

section, similar disruption resulting 

from orders that originate from manual 

order entry or other non-Algorithmic 

Trading) or an Algorithmic Trading 

Compliance Issue, including at a 

minimum all of the following: 

(a) Pre-trade risk controls. Pre-trade 

risk controls reasonably designed to 

address the risks from Algorithmic 

Trading on a designated contract 

market. 

(1) The pre-trade risk controls to be 

established and used by a designated 

contract market shall include, at a 

minimum, those described in 

§ 1.80(a)(1) of this chapter. 

(2) At a minimum, the pre-trade risk 

controls established and used pursuant 

to this section shall be set at the level 

of each AT Person. Designated contract 

markets must also evaluate whether to 

establish pre-trade risk controls at a 

more granular level, including at a 

minimum, by product or one or more 

identifiers of natural persons associated 

with an AT Order Message. Where 

deemed appropriate by the designated 

contract market, pre-trade risk controls 

should be set at such more granular 

levels. 

(3) A designated contract market shall 

have policies and procedures reasonably 

designed to ensure that natural person 

monitors at such designated contract 

market are promptly alerted when pretrade risk control parameters established 

pursuant to this section are breached. 

(b) Order cancellation systems. (1) 

Order cancellation systems that have the 

ability to: 

(i) Perform the actions described in 

§ 1.80(b)(1) of this chapter with respect 

to orders from AT Persons; and 

(ii) Cancel or suspend all resting 

orders from AT Persons in the event of 

disconnect with the trading platform. 

(2) [Reserved] 

(c) System connectivity. (1) Systems 

that enable the systems of an AT Person 

with Direct Electronic Access as defined 

in § 1.3(yyyy) of this chapter to indicate 

to the AT Person on an ongoing basis 

whether the AT Person has proper 

connectivity with— 

(i) The designated contract market’s 

trading platform, and 

(ii) Any systems used by the 

designated contract market to provide 

the AT Person with market data. 

(2) [Reserved] 

(d) Risk control mechanisms for 

manual order entry and other nonAlgorithmic Trading. (1) A designated 

contract market shall implement the risk 

control mechanisms described in 

paragraphs (a) and (b)(1)(i) of this 

section for orders that do not originate 

from Algorithmic Trading, after making 

any adjustments to the mechanisms that 

the designated contract market 

determines are appropriate for such 

orders. 

(2) [Reserved] 

§ 40.21 DCM test environments. 

(a) A designated contract market shall 

provide a test environment that will 

enable AT Persons to simulate 

production trading. Such test 

environment shall provide access to 

historical transaction, order and 

message data and shall also enable AT 

Persons to conduct conformance testing 

of their Algorithmic Trading systems to 

verify compliance with the 

requirements of §§ 1.80(a) through (c) 

and 1.81(a)(1)(ii) through (iv) and (c)(1) 

of this chapter. 

(b) [Reserved] 

§ 40.22 DCM review of compliance reports; 

maintenance of books and records. 

A designated contract market shall 

comply with the following: 

(a) Review of reports. Implement rules 

that require each AT Person that trades 

on the designated contract market, and 

each futures commission merchant that 

is a clearing member of a derivatives 

clearing organization for such AT 

Person, to submit the reports described 

in § 1.83(a) and (b), respectively, of this 

chapter; 

(b) Submission date. Require the 

submission of such reports by June 30th 

of each year; 

(c) Review program. Establish a 

program for effective periodic review 

and evaluation of reports described in 

paragraph (a) of this section, and of the 

measures described therein. An effective 

program shall include measures by the 

designated contract market reasonably 

designed to identify and remediate any 

insufficient mechanisms, policies and 

procedures described in such reports, 

including identification and 

remediation of any inadequate 

quantitative settings or calibrations of 

pre-trade risk controls required of AT 

Persons pursuant to § 1.80(a) of this 

chapter; 

(d) Maintenance of books and records. 

Implement rules that require each AT 

Person to keep and provide to the 

designated contract market books and 

records regarding such AT Person’s 

compliance with all requirements 

pursuant to §§ 1.80 and 1.81 of this 

chapter, and require each clearing 

member futures commission merchant 

to keep and provide to the designated 

contract market books and records 

regarding such clearing member futures 

commission merchant’s compliance 

with all requirements pursuant to § 1.82 

of this chapter; and 

(e) Review and evaluate, as necessary, 

books and records required to be kept 

pursuant to paragraph (d) of this 

section, and the measures described 

therein. An appropriate review shall 

include measures by the designated 

contract market reasonably designed to 

identify and remediate any insufficient 

mechanisms, policies, and procedures 

described in such books and records. 

§ 40.23 Self-trade prevention tools. 

(a) A designated contract market shall 

implement rules reasonably designed to 

prevent self-trading by market 

participants, except as specified in 

paragraph (b) of this section. ‘‘Selftrading’’ is defined for purposes of this 

section as the matching of orders for 

accounts that have common beneficial 

ownership or are under common 

control. A designated contract market 

shall either apply, or provide and 

require the use of, self-trade prevention 

tools that are reasonably designed to 

prevent self-trading and are applicable 

to all orders on its electronic trade 

matching platform. For purposes of 

complying with this requirement, a 

designated contract market may either 

determine for itself which accounts 

should be prohibited from trading with 

each other, or require market 

participants to identify to the designated 

contract market which accounts should 

be prohibited from trading with each 

other. 

(b) Notwithstanding the foregoing, a 

designated contract market may, in its 

discretion, implement rules that permit 

self-trading described in paragraphs 

(b)(1) or (b)(2) of this section to occur, 

in each case subject to the requirements 

of paragraph (c) of this section: 

(1) A self-trade resulting from the 

matching of orders for accounts with 

common beneficial ownership where 

such orders are initiated by independent 

decision makers. A designated contract 

market may through its rules further 

define for its market participants 

‘‘independent decision makers.’’ 

(2) A self-trade resulting from the 

matching of orders for accounts under 

common control where such orders 

comply with the designated contract 

market’s cross-trade, minimum 

exposure requirements or similar rules, 

and are for accounts that are not under 

common beneficial ownership. 

(c) A designated contract market may 

permit self-trading described in 

paragraph (b) of this section only if the 

designated contract market: 

(1) Requires market participants to 

request approval from the designated 

contract market that self-trade 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78942 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

prevention tools not be applied with 

respect to specific accounts under 

common beneficial ownership or 

control, on the basis that they meet the 

criteria of paragraph (b) of this section. 

The designated contract market must 

require that such approval request be 

provided to it by a compliance officer or 

senior officer of the market participant; 

and 

(2) Requires market participants to 

withdraw or amend an approval request 

if any change occurs that would cause 

the information provided in such 

approval request to be no longer 

accurate or complete. 

(d) For each product and expiration 

month traded on a designated contract 

market in the previous quarter, the 

designated contract market must 

prominently display on its Web site the 

following information: 

(1) The percentage of trades in such 

product including all expiration months 

that represent self-trading approved 

(pursuant to paragraph (c) of this 

section) by the designated contract 

market, expressed as a percentage of all 

trades in such product and expiration 

month; 

(2) The percentage of volume of 

trading in such product including all 

expiration months that represents selftrading approved (pursuant to paragraph 

(c) of this section) by the designated 

contract market, expressed as a 

percentage of all volume in such 

product and expiration month; and 

(3) The ratio of orders in such product 

and expiration month whose matching 

was prevented by the self-trade 

prevention tools described in paragraph 

(a) of this section, expressed as a ratio 

of all trades in such product and 

expiration month. 

§ 40.24 [Reserved] 

■ 12. Add reserved § 40.24. 

■ 13. Add §§ 40.25 through 40.28 to 

read as follows: 

§ 40.25 Additional public information 

required for market maker and trading 

incentive programs. 

(a) When submitting a Rule regarding 

a market maker or trading incentive 

program pursuant to § 40.5 or § 40.6, a 

designated contract market shall, in 

addition to information required by 

such sections, include the following 

information in its public Rule filing: 

(1) The name of the market maker 

program or trading incentive program, 

the date on which it is scheduled to 

begin, and the date on which it is 

scheduled to terminate (if applicable); 

(2) An explanation of the specific 

purpose for the market maker or trading 

incentive program; 

(3) A list of all products or services to 

which the market maker or trading 

incentive program applies; 

(4) A description of any eligibility 

criteria or categories of market 

participants defining who may 

participate in the market maker or 

trading incentive program; 

(5) For any market maker or trading 

incentive program that is not open to all 

market participants, an explanation of 

why such program is limited to the 

chosen eligibility criteria or categories 

of market participants, and an 

explanation of how such limitation 

complies with the impartial access and 

comparable fee structure requirements 

of § 38.151(b) of this chapter for 

designated contract markets; 

(6) An explanation of how persons 

eligible for the market maker or trading 

incentive program may apply to 

participate, and how eligibility will be 

evaluated by the designated contract 

market; 

(7) A description of any payments, 

incentives, discounts, considerations, 

inducements or other benefits that 

market maker or trading incentive 

program participants may receive, 

including any non-financial incentives; 

and 

(8) A description of the obligations, 

benchmarks, or other measures that a 

participant in a market maker or trading 

incentive program must meet to receive 

the benefits described in paragraph 

(a)(7) of this section. 

(9) A description of any legal 

affiliation between the designated 

contract market and any entity acting as 

a market maker or participating in a 

market maker program. 

(b) In addition to any public notice 

required pursuant to this part (including 

without limitation the requirements of 

§§ 40.5(a)(6) and 40.6(a)(2)) of this 

chapter a designated contract market 

shall ensure that the information 

required by paragraphs (a)(1) through 

(a)(8) of this section is easily located on 

its public Web site from the time that 

such designated contract market begins 

accepting participants in the market 

maker or trading incentive program 

through the time that it ceases operation 

of the market maker or trading incentive 

program. 

(c) A designated contract market shall 

notify the Commission upon the 

termination of a market maker or trading 

incentive program prior to the 

termination date previously notified to 

the Commission; any extension or 

renewal of a market maker or trading 

incentive program beyond its original 

termination date shall require a new 

Rule filing pursuant to this part. 

§ 40.26 Information requests from the 

Commission or the Director of the Division 

of Market Oversight. 

(a) Upon request by the Commission 

or the Director of the Division of Market 

Oversight, a designated contract market 

shall provide such information and data 

as may be requested regarding 

participation in market maker or trading 

incentive programs offered by the 

designated contract market, including 

but not limited to, individual program 

agreements, names of program 

participants, benchmarks achieved by 

program participants, and payments or 

other benefits conferred upon program 

participants. 

(b) [Reserved] 

§ 40.27 Payment for trades with no change 

in ownership prohibited. 

(a) A designated contract market shall 

implement policies and procedures 

reasonably designed to prevent the 

payment of market maker or trading 

incentive program benefits, including 

but not limited to payments, discounts, 

or other considerations, for trades 

between accounts that are: 

(1) Identified to such designated 

contract market as under common 

beneficial ownership pursuant to the 

approval process described in § 40.23(c); 

or 

(2) Otherwise known to the 

designated contract market as under 

common ownership. 

(b) [Reserved] 

§ 40.28 Surveillance of market maker and 

trading incentive programs. 

(a) A designated contract market, 

consistent with its obligations pursuant 

to subpart C of part 38 of this chapter, 

shall review all benefits accorded to 

participants in market maker and 

trading incentive programs, including 

but not limited to payments, discounts, 

or other considerations, to ensure that 

such benefits are not earned through 

abusive practices. 

(b) [Reserved] 

PART 170—REGISTERED FUTURES 

ASSOCIATIONS 

■ 14. The authority citation for part 170 

continues to read as follows: 

Authority: 7 U.S.C. 6d, 6m, 6p, 6s, 12a, and 

21. 

■ 15. Add § 170.18 to subpart C to read 

as follows: 

§ 170.18 AT Persons. 

Each registrant, as defined in 

§ 1.3(oooo) of this chapter, that is an AT 

Person, as defined in § 1.3(xxxx) of this 

chapter, that is not otherwise required 

to be a member of a futures association 

that is registered under Section 17 of the 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78943 

Act pursuant to §§ 170.15, 170.16, or 

170.17 of this chapter must become and 

remain a member of at least one futures 

association that is registered under 

Section 17 of the Act and that provides 

for the membership therein of such 

registrant, unless no such futures 

association is so registered. 

■ 16. Add subpart D, consisting of 

§ 170.19, to read as follows: 

Subpart D—Standards for Automated 

Trading and Algorithmic Trading 

Systems 

§ 170.19 RFA Standards for Automated 

Trading and Algorithmic Trading Systems. 

(a) A registered futures association 

must establish and maintain a program 

for the prevention of fraudulent and 

manipulative acts and practices, the 

protection of the public interest, and 

perfecting the mechanisms of trading on 

designated contract markets by adopting 

rules for each category of member, as 

deemed appropriate by the registered 

futures association, requiring: 

(1) Pre-trade risk controls and other 

measures for algorithmic trading 

systems; 

(2) Standards for the development, 

testing, monitoring, and compliance of 

algorithmic trading systems; 

(3) Designation and training of 

algorithmic trading staff; and 

(4) Operational risk management 

standards for clearing member futures 

commission merchants with respect to 

customer orders originating with 

algorithmic trading systems. 

(b) [Reserved] 

Issued in Washington, DC, on November 

27, 2015, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Regulation Automated 

Trading—Commission Voting 

Summary, Chairman’s Statement, and 

Commissioners’ Statements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Massad and 

Commissioners Bowen and Giancarlo voted 

in the affirmative. No Commissioner voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

Today, the Commission has approved a 

proposal that addresses the increased use of 

automated trading in our markets. I strongly 

support this important action. In the futures 

markets, today almost all trading is electronic 

in some form. And over the last few years, 

more than 70 percent of all trading has 

become automated. 

Automated trading has brought many 

benefits to market participants. These 

include more efficient execution, lower 

spreads and greater transparency. But its 

extensive use also raises important policy 

and supervisory questions and concerns. 

The Commission has already taken a 

number of steps to respond to the 

development of automated trading in our 

markets. Following the 2010 ‘‘Flash Crash,’’ 

the CFTC worked with the SEC to establish 

certain controls to minimize the risk of 

market disruptions. The Commission has also 

required clearing members to implement 

policies and procedures governing the use of 

automated trading programs. We have also 

required automatic screening of orders for 

compliance with risk limits if they are 

automatically executed. 

But as markets continue to evolve, it is 

important to continue looking at this issue. 

Therefore, in September 2013, the 

Commission issued a Concept Release that 

requested public comment on the necessity 

and operation of a variety of risk controls and 

measures. The Commission received many 

written comments and also held a meeting of 

its Technological Advisory to discuss the 

issues raised. It served as a very useful way 

to understand existing industry practices and 

discuss what further actions might make 

sense. 

The proposal approved today addresses 

several areas discussed in the Concept 

Release, and incorporates much of that 

public input. It focuses on minimizing the 

potential for disruptions and other 

operational problems that may arise from the 

automation of order origination, transmission 

or execution. They may come about due to 

malfunctioning algorithms, inadequate 

testing of algorithms, errors and similar 

problems. 

No set of rules can prevent all such 

problems. But that doesn’t discharge us from 

our duty to take reasonable measures to 

minimize these risks. It is our responsibility 

as regulators to create a framework that 

promotes the integrity of these markets. And 

I believe this proposed rule helps do that. 

Our futures market infrastructure is already 

very strong. Our regulatory framework—and 

the controls and measures that exist at the 

exchange and clearing member level in 

particular—have helped create the best 

futures markets in the world. Our proposal 

seeks to maintain that strength as our markets 

evolve further. 

We have proposed a number of measures 

that largely reflect what are industry best 

practices to minimize the risk of disruptions 

and similar problems. We have tried to be 

principles-based. We have set forth 

requirements for certain controls, but we 

have avoided prescribing the parameters or 

levels at which they should be set. The 

proposed risk controls will apply regardless 

of whether the automated trading is high- or 

low-frequency. The proposal does not define 

high frequency trading. 

A key principal of this proposed rule is to 

have risk controls at three levels—the 

exchange level, clearing member level and 

trading firm level. Market participants 

generally supported this multi-level 

approach in response to the Concept Release, 

and I believe it is important to achieving a 

sound framework. But in doing so, we must 

seek efficiency, and avoid conflicting or 

unnecessary requirements at multiple levels. 

In order to make the multi-level approach 

effective, we are proposing to require the 

registration of proprietary traders who engage 

in algorithmic trading on our regulated 

exchanges via ‘‘direct electronic access.’’ 

Today, our staff estimates that roughly 35 

percent of the futures trading in our markets 

is done by traders who use direct electronic 

access and are not registered with us. A 

registration requirement will ensure that all 

those with direct electronic access to our 

markets are complying with pre-trade risk 

controls, testing and other requirements. And 

it would enhance the Commission’s ability to 

carry out its oversight responsibilities. 

While we believe a registration 

requirement is appropriate, we have also 

invited market participants to comment on 

whether there are alternatives that can 

achieve the proposal’s underlying objectives. 

We have also asked whether the registration 

requirement should be limited to trading 

firms meeting certain volume, order or 

message levels—or be based on other 

characteristics. Further, we are seeking 

comment on whether all firms trading 

through direct electronic access should be 

required to register, even if they are not using 

algorithmic trading. 

We believe that many of the requirements 

we are proposing for trading firms represent 

the best practices already followed by many 

larger firms. However, we know that a faulty 

algorithm at a single firm, regardless of size, 

can potentially cause a significant problem. 

As a result, we have proposed standards that 

are applicable regardless of the size or similar 

attributes of a trading firm. We also are 

cognizant of the importance of establishing 

effective standards without creating barriers 

to entry for small firms. So we welcome 

comment on whether these requirements 

should vary in any way depending on the 

size or activity level of the trading firm. 

We have also proposed certain risk 

controls for clearing member futures 

commission merchants (FCMs) with respect 

to their customers engaged in algorithmic 

trading. FCMs play a critical role in overall 

risk management. As I noted earlier, they 

have implemented measures already to 

require order limits and screening of orders. 

We believe the requirements we are 

proposing today help achieve an effective 

multi-layered approach. 

We have asked for public comment on 

whether there are any aspects of the required 

controls that may pose an undue burden on 

clearing member FCMs or that are 

unnecessary for reducing the risks associated 

with algorithmic trading. We’ve also asked 

about what technological development 

would be required by clearing members to 

comply with some requirements of this 

proposal. 

I’ve said frequently that it’s very important 

that we have a robust clearing member 

industry and that all customers—particularly 

smaller ones—are able to access the markets 

effectively and efficiently. We want to make 

sure this proposal is consistent with 

achieving that objective. 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78944 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

1 Keynote Address by Commissioner Sharon Y. 

Bowen before ISDA North America Conference, 

CFTC (Sep. 17, 2015), http://www.cftc.gov/

PressRoom/SpeechesTestimony/opabowen-6. 

2 Id. 

3 Id. 

4 Id. 5 Id. 

We have also included measures on some 

additional topics not covered in the Concept 

Release. These include provisions to increase 

transparency for exchanges’ electronic trade 

matching platforms, as well as for market 

maker and trading incentive programs, which 

have become more significant as automated 

trading has increased. 

There are concerns that have been raised 

with respect to automated trading that also go 

beyond the scope of this proposal. These 

include whether our markets are best served 

by this speed, and what are its impacts on 

volatility and liquidity? These are important 

topics for market participants and the 

Commission to continue to study and 

discuss. 

This proposal provides some commonsense risk controls that I believe embrace the 

benefits that automated trading has brought 

to our markets, while also protecting against 

the increased possibility of breakdowns and 

disruptions that come with it. We 

encourage—and welcome—public comment, 

which will carefully be taken into account 

before we take any final action. 

Appendix 3—Concurring Statement of 

Commissioner Sharon Y. Bowen 

I want to thank the Commission staff for 

the time they have devoted to the proposed 

rule on automated trading. It is a timely 

topic. 

As I have previously said, our markets 

have seen immense technological change 

over the last fifteen years.1 Futures trading 

used to involve ‘‘throngs of traders with 

jackets and badges using hand-gestures’’ to 

purchase futures and options.2 That trading 

structure has largely disappeared, with even 

CME closing the vast majority of its futures 

pits this summer. Meanwhile, algorithmic 

trading has substantially increased. Algo 

trading comprised less than 10% of futures 

volume at the turn of the millennium.3 Yet, 

‘‘per CFTC staff’s estimates, for the most 

liquid U.S. futures contracts which account 

for over 75% of total trading volume, more 

than 90 percent of all trades make use of 

algorithms or some other form of 

automation.’’ 4 Of course, these estimates are 

just that, estimates. We still do not have 

comprehensive, precise data on the 

percentage of trades created or entered by 

algorithms in many product classes. Clearly, 

further research and work remain for all 

stakeholders, from regulators, to industry 

participants, to academics and advocates of 

financial reform. 

Yet, I do not believe this lack of 

information requires that regulators passively 

wait for this information to emerge. Simply 

waiting for that kind of data to materialize 

could allow problems to emerge in the 

interim that harm investors and the broader 

financial system. Given the current state of 

our economy and a global financial system 

still recovering from the 2008 financial crisis, 

that is a risk that I believe we must not take. 

Recent events have raised important 

questions about the impact and role of 

algorithmic trading in our markets. As I said 

earlier, this fall, ‘‘Even though the amount of 

algorithmic trading and definitions of these 

various terms are not crystal clear, what is 

clear is trades involving algorithms make up 

a substantial portion of our markets, and 

algorithms can and do malfunction at times, 

with negative effects on the markets. As a 

result, I believe we are obligated to consider 

if it is prudent to establish some regulations 

on algorithmic trading in our markets.’’ 5

Today, we begin the process of potentially 

establishing those regulations. From what I 

have seen, I believe we now owe it to market 

participants, investors, and ordinary 

consumers to ensure that a reasonable level 

of regulation exists over this new trading 

technology. I have said such regulation 

should include requirements that entities 

utilizing algorithms to trade must use risk 

management strategies, be required to 

disclose information to regulators, and have 

people who understand the Commodity 

Exchange Act and our regulations involved 

in the creation and maintenance of their 

algorithms. I think this proposed regulation 

meets that standard and does so in a way that 

allows for innovation and continued 

development of this nascent technology. 

Having said what I think lies at the core 

of this regulation, let me also be clear about 

what this regulation is not. The rule before 

us today should not substantially change 

how many firms utilize algorithms. If, as I 

hope, a firm already uses risk management 

strategies, has various protections against 

malfunctions in place, and retains the 

services of talented attorneys, this new 

regulation will not create significant new 

burdens for that firm. In effect, this 

rulemaking largely formalizes and mandates 

firms involved in algorithmic trading to 

engage in a variety of practices that they 

should already be doing for their own 

protection. 

I expect that some observers will have 

issues with this regulation for not doing more 

to constrain the growth and use of 

algorithmic trading, and I expect there will 

be further debate. I do not regard this 

regulation as the final word on regulation of 

algorithmic trading. If there is clear evidence 

that more precise regulations are needed on 

this technology to protect investors or ward 

off systemic risk, I would support further 

regulatory action. And I am sure that, given 

the ferocious rate of change of this 

technology, we will need to update this 

regulation regularly to account for those 

changes. In many ways, this regulation is 

merely the first step in a process, it’s a starter 

home rather than a two-story. But we have 

to start somewhere, and starting with 

something that formalizes best practices and 

increases disclosure is an excellent place to 

start. 

I have said numerous times that I support 

smart regulation, regulation that works. That 

goal is especially critical when it comes to 

regulation of such a nascent, significant, and 

widespread technology as algorithmic 

trading. I therefore hope we’ll get comments 

on this proposal from a wide swath of 

stakeholders, from industry experts, to endusers being impacted by this technology, to 

even ordinary investors and consumers 

concerned about the potential effects of 

algorithmic trading on commodity prices. I 

do not expect that everyone will have the 

same views on this subject or that there will 

be unanimity of opinion on any part of this 

rule. Even though I’ve only been in 

Washington for a year and a half, I’m 

experienced enough to know that people 

have different opinions on high-visibility 

issues like this one. However, I do encourage 

people to comment so that we can get a full 

and fair read of popular opinion on both this 

proposal and the topic in general. And if 

people have concrete evidence that 

algorithmic trading is distorting markets and 

needs to be curtailed, please submit it via a 

comment. 

There are a few sections of this rule on 

which I think public comment would be 

particularly helpful. First, the proposal’s 

sixth and seventh questions ask about the 

nature of our proposed definition of 

algorithmic trading, including whether we 

should expand ‘‘the definition of Algorithmic 

Trading to encompass orders that are 

generated using algorithmic methods . . . but 

are then manually entered into a front-end 

system by a natural person. . . .’’ The 

definition of algorithmic trading is at the 

heart of this proposal, and we need 

comments on this point. If there is evidence 

that a form of algorithmic trading poses 

systemic risks but is not captured by this 

definition, we should expand the definition 

to expand to cover that form of trading. 

Second, section 1.83(a) of the proposal 

requires that persons engaged in algorithmic 

trading and registered as such with the 

Commission must prepare and submit an 

annual report to the Commission. These 

persons are required to include in their 

reports a description of the pre-trade risk 

controls in place, copies of policies crafted to 

comply with requirements regarding the 

testing and development of algorithmic 

trading systems and how their algorithmic 

trading systems comply with the Commodity 

Exchange Act and our regulations, and a 

certification by their chief executive officer 

or chief compliance officer that the 

information in the report is accurate and 

complete. 

I think the current 1.83(a) does not ask 

registrants for enough information. Now, we 

don’t want to require each registered 

algorithmic trader to submit a tome of several 

thousand pages each year that lays out every 

arcane factoid about their trading systems. 

Such a requirement would bury our staff in 

paper and create significant expense for 

registrants. Yet, having already asked each 

registered algorithmic trader to submit an 

annual report, I believe we should ask for 

more information in the report. After all, at 

the point a company has to file an annual 

report, it should already be doing a 

comprehensive review of its policies. As a 

result, asking for one or two more pieces of 

information to be included in the annual 

report should not be a substantial additional 

cost to registrants. I therefore hope that 


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Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78945 

1Remarks of CFTC Commissioner J. Christopher 

Giancarlo before the U.S. Chamber of Commerce, 

Re-Balancing Reform: Principles for U.S. Financial 

Market Regulation In Service to the American 

Economy, Nov. 20, 2014, http://www.cftc.gov/

PressRoom/SpeechesTestimony/opagiancarlos-2. 

2 Id. The ‘‘SMART REG’’ standard follows 

whether new CFTC regulations S—Solve for real 

problems, not anecdotes of bad behavior; M— 

Measure success through a rigorous cost benefit 

analysis; A—Advance innovation and competition 

through flexible rules; R—Represent the best 

approach among alternative courses of action; T— 

Take into account evidence, rather than 

assumptions; R—Realistically set compliance 

deadlines; E—Encourage employment of American 

workers; and are G—Grounded in law. 

3 Keynote Address of CFTC Commissioner J. 

Christopher Giancarlo before the 2015 ISDA Annual 

Asia Pacific Conference, Top-Down Financial 

Market Regulation: Disease Mislabeled as Cure, Oct. 

26, 2015, http://www.cftc.gov/PressRoom/

SpeechesTestimony/opagiancarlo-10. 

4See Regulation AT Preamble, Section II.C.1.: 

‘‘Background on Regulatory Responses to 

Automated Trading.’’ 

commenters will let us know what additional 

information registrants should be required to 

submit in their annual reports. For instance, 

should we require registrants to submit 

information about how they train and 

monitor the staff responsible for handling 

algorithmic trading or about their order 

cancellation systems? 

Finally, the proposal prohibits designated 

contract markets (DCMs) from paying market 

maker incentive program benefits for trades 

between accounts under common ownership. 

I think that’s a good change and worthy of 

being formalized in rule text. These programs 

serve a critical purpose of encouraging 

liquidity, but we don’t get increased liquidity 

by increasing the amount of trades a person 

does with herself. 

However, I wonder whether this 

prohibition should not go further. Perhaps 

we should also prohibit DCMs from paying 

these program benefits for trades in which 

the benefits are, on a per trade basis, greater 

than the fees charged by the relevant DCM 

and affiliated derivatives clearing 

organization (DCO). Paying benefits for such 

trades seems tantamount to giving a subsidy 

to un-economic trades and thereby 

potentially risks distorting the overall 

market. I would therefore welcome 

comments about whether this section is 

adequate as is or whether we should also 

prohibit DCMs from giving benefits to such 

seemingly non-economic trades. 

In closing, let me stress again that I want 

this rule to be both effective and workable. 

No one benefits from rules that work in the 

abstract but are confusing, impossible to 

implement as written, or full of gaps that 

prompt stakeholders to engage in widespread 

regulatory arbitrage. I believe this automated 

trading proposal is a commonsense effort at 

establishing reasonable regulation on a 

nascent technology, but if there are flaws 

with it, if it goes too far or not far enough, 

I want to know that now, before it is 

finalized. Thank you. 

Appendix 4—Statement of 

Commissioner J. Christopher Giancarlo 

Introduction 

The electronification of trading over the 

past 30 to 40 years and the advent of 

exponential digital technologies have 

transformed financial businesses, markets 

and entire economies, with dramatic 

implications for capital formation and risk 

transfer. In U.S. futures markets, we see this 

change most presently in the area of 

algorithmic or automated trading that now 

constitutes up to seventy percent of regulated 

futures markets. Automated trading can 

lower transaction costs while increasing 

trader productivity through greater 

transaction speed, precision and 

sophistication. For many markets, automated 

trading brings trading liquidity, broader 

market access, enhanced transparency and 

greater competition. 

At the same time, automated trading 

presents a host of potential new challenges. 

They include increased risk of sudden spikes 

in market volatility and ‘‘phantom’’ liquidity 

arising from the sheer speed of execution, 

potentially flawed algorithms and position 

crowding. They also include the risk of data 

misinterpretation by computerized analysis 

and mathematical models that increasingly 

replace human thought and deliberation. 

Legal scholars raise important questions 

about the viability of traditional market 

regulation in automated trading markets. 

How markets and market regulators adjust 

to this change from human to automated 

trading will be extremely important. It 

requires delicate balancing. To ensure 

vibrant, accessible and durable markets, we 

must cultivate and embrace new technologies 

without harming innovation. Without a 

doubt, there must be effective safeguards of 

market integrity and credibility, but those 

safeguards should not bar promising 

innovation and continuous market 

development. 

In turning to Regulation Automated 

Trading (‘‘Regulation AT’’), I acknowledge 

that my staff and I had dozens of issues and 

concerns that we brought to the attention of 

the Division of Market Oversight. While they 

were responsive to a few small topics, many 

other issues require much further attention 

and consideration that I will summarize in 

this statement. 

Still, after reading through the almost five 

hundred pages of this proposal, I am left with 

one major question that I still cannot answer. 

That question is: does this proposal 

sufficiently benefit the safety and soundness 

of America’s futures markets so as to 

outweigh its additional costs and burdens? 

I wish the answer was clearer. 

I have three main concerns with Regulation 

AT. First, some of the requirements of the 

proposal appear to be window dressing. That 

is especially the case in its requirement for 

development and implementation of risk 

controls and related testing standards that the 

industry has already widely adopted. 

Second, I am concerned about the high 

costs and burdens of this proposal, especially 

on small market participants. I am especially 

concerned about its requirement that 

registrants hold their proprietary source code 

in data repositories available for inspection 

by the Commission or the U.S. Department of 

Justice at any time for any reason. 

Third, I question the regulatory 

inconsistencies regarding the market 

participants that must comply with this 

rulemaking. 

For these reasons and others, I have serious 

doubts about today’s proposed rulemaking. 

Last November, I delivered a speech at the 

U.S. Chamber of Commerce where I set forth 

six principles that I would follow as I 

evaluate financial market regulations.1 As 

part of those principles, I proposed the 

‘‘SMART REG’’ standard to help analyze 

whether CFTC rules actually solve for real 

problems and promote the U.S. economy and 

the American markets.2 I struggle to see how 

Regulation AT passes the SMART REG 

standard. 

Nevertheless, I want to hear the views of 

market participants on this proposal. I will 

evaluate any final rule based on the SMART 

REG standard and thereafter determine 

whether to support or reject it. 

I will explain my areas of concern. 

I. Necessity of Regulation AT 

It is hard to identify exactly what issue in 

automated trading Regulation AT is designed 

to address. The agency is basically playing 

catch-up to an industry that has already 

developed and implemented risk controls 

and related testing standards for automated 

trading. Regulation AT describes the 

extensive best practices and 

recommendations for automated trading 

issued by industry organizations and notes 

that the majority of industry participants are 

following such best practices. Regulation AT 

simply codifies industry best practices in 

many respects, but does not go as far as 

current industry efforts. As such, the 

Commission admits that many of the benefits 

of this proposal are already being realized in 

the marketplace. In reality, current industry 

standards on automated trading have well 

surpassed Regulation AT in many areas. 

It is clear that the industry has long been 

at the forefront of creating market solutions 

for risk controls in automated trading well 

before any regulatory mandate. As I recently 

stated, I favor this type of ongoing bottom-up 

market-driven approach to risk controls for 

automated trading.3 Given the industry’s 

leadership role and the fact that Regulation 

AT simply codifies a small subset of industry 

best practices, while adding heavy 

compliance burdens, I question the necessity 

and value-add of this proposal. 

The staff partly justifies the proposal as 

necessary to ensure market integrity given 

the risks of automated trading. As support, 

Regulation AT illustrates examples of recent 

disruptive events in automated trading. 

However, the dearth of incidents in the 

futures market seems to indicate that current 

industry solutions are working well. 

Regulation AT only cites three U.S. 

disruptive automated trading events in the 

past five and a half years and two of those 

events occurred in the equities market, 

obviously outside of our jurisdiction. In 

addition, the equities market events occurred 

despite the Securities and Exchange 

Commission (‘‘SEC’’) having implemented 

some reforms related to automated trading.4

Thus, I question whether Regulation AT will 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78946 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

5 ICE Comment Letter at 1–3 (Jan. 17, 2014); 

Katten Muchin Rosenmann Comment Letter on 

behalf of Gelber Group at 5, 20 and 22–24 (Dec. 9, 

2013). 

6 Id. 

7See e.g., Commission regulations 1.11(e)(3)(ii), 

1.73, 23.600(d)(9), 23.609, 38.255 and 38.607. 

8 I also note that the Commission uses old 

compensation data from 2012 in calculating the 

costs of Regulation AT, which underreports these 

costs estimates. 

9See definition of Algorithmic Trading in 

proposed Commission regulation 1.3(zzzz). 

10See Regulatory Flexibility Act section of 

Regulation AT. 

11E.g., CME Comment Letter at 25–26 (Dec. 11, 

2013) (discussing CME’s two testing environments 

for its users and its certification requirement). 

12AT Person is defined in proposed Commission 

regulation 1.3(xxxx) and captures the persons 

subject to Regulation AT, including existing 

Commission registrants engaged in Algorithmic 

Trading and the newly expanded definition of floor 

trader. 

13Proposed Commission regulation 40.22(c). 

in fact reduce future disruptive events and 

enhance market integrity. 

As further support for market integrity, the 

preamble asserts that the proposal may limit 

a ‘‘race to the bottom,’’ in which certain 

entities sacrifice effective risk controls in 

order to minimize costs or increase the speed 

of trading. In this, the proposal betrays a 

naı ̈ve misunderstanding of elementary microeconomics. Market participants have every 

economic incentive to implement effective 

risk controls to prevent the loss of their 

capital and being forced out of business. That 

is why the industry has been a leader in best 

practices for automated trading, including 

development of risk controls and related 

testing standards. This ongoing bottom-up 

market-driven approach to risk controls for 

automated trading has raised, not lowered, 

the standards. 

Several commenters cited in Regulation AT 

supported a principles-based approach to 

regulation citing the need for flexibility 

because each market and the participants in 

those markets are different.5 These 

commenters also noted that the Commission 

already has robust regulations in place to 

address the risks of automated trading.6

Tweaking the Commission’s existing 

regulations 7 in line with a principles-based 

approach may be a better way to build upon 

ongoing industry efforts regarding automated 

trading, while reducing the compliance 

burdens of Regulation AT. 

I invite comment on the necessity of 

Regulation AT and on other approaches to 

automated trading that support—rather than 

burden—ongoing industry efforts. 

II. Costs of Regulation AT Versus the 

Benefits 

I am concerned about the costs of 

Regulation AT, especially on small market 

participants. The Commission tries to 

downplay the costs of this proposal because 

in many respects it simply codifies industry 

best practices and many market participants 

are already following such practices.8 The 

proposal also repeatedly asserts that the rules 

are flexible seemingly in an effort to highlight 

its low burdens. However, in reality, 

Regulation AT adds compliance, reporting 

and registration requirements, and 

establishes designated contract market 

(‘‘DCM’’) and registered futures association 

(‘‘RFA’’) review programs. These additional 

requirements will certainly increase costs to 

all market participants engaged in 

Algorithmic Trading that are subject to this 

proposal. 

A. Small Market Participants 

The costs of this proposal may 

disproportionately impact small market 

participants. While Regulation AT raises this 

concern and asks questions in this regard, at 

the same time, the proposal dismisses the 

possibility that it will capture many small 

entities. I am not so sure that will be the case 

as the definition of Algorithmic Trading is 

very broad and would appear to capture 

market participants using off-the-shelf type 

automated systems or simple excel 

spreadsheets to automate trading.9 If that is 

the case, then this proposal could capture, for 

example, a small proprietary trading firm, a 

small commodity trading advisor (‘‘CTA’’) or 

a rural grain elevator company that uses 

simple automation. 

Regulation AT would add numerous costs 

to small market participants and raise 

barriers to entry. Small market participants 

may be less likely to employ risk controls 

consistent with Regulation AT so they would 

incur costs to develop or purchase such risk 

controls. They would also incur costs to hire 

additional employees to develop and 

implement policies and procedures for the 

development, testing, monitoring and 

compliance of their Algorithmic Trading 

systems. Small market participants would 

have to hire additional employees to 

continuously monitor their Algorithmic 

Trading systems on a real-time basis. They 

would incur costs to annually prepare and 

submit a pre-trade risk control compliance 

report to each DCM on which they trade. 

Furthermore, the proposal would add costs to 

small market participants given the required 

registration with the Commission and an 

RFA. That sounds like a whole lot of extra 

costs to me for a ‘‘principles-based’’ nonprescriptive rule. 

The proposed rule admits that the 

Commission does not know how many small 

entities this proposal will affect— 

unfortunately, a common theme for CFTC 

rules when discussing costs and burdens on 

the marketplace. I am disappointed that the 

Commission did not get a better sense of the 

potential universe of small market 

participants that may be impacted by 

Regulation AT. To this point, I am very 

interested to hear estimates of costs 

Regulation AT will impose on smaller market 

participants and how it will impact their 

ability to conduct business. 

Interestingly, the proposed rule also asserts 

that a technological malfunction or error in 

a very small proprietary trading firm’s 

algorithm could have a significant, 

detrimental impact on the market despite 

providing no evidence to support this 

claim.10 I invite commenters to weigh in on 

this issue. I am also interested to hear 

comments on whether the proposed rules 

make sense for those market participants 

using off-the-shelf type automated systems or 

simple excel spreadsheets to automate 

trading, especially the rules around 

development, testing, monitoring and 

compliance of Algorithmic Trading systems. 

B. Overlapping Requirements and 

Duplicative Costs 

Regulation AT contains a potential overlap 

in some requirements and duplicative costs 

in that it requires AT Persons to register with 

an RFA and, at the same time, to be subject 

to reviews by DCMs. The National Futures 

Association (‘‘NFA’’), the only RFA at this 

time, will need to hire additional employees 

to establish and maintain a program for 

Algorithmic Trading systems. The preamble 

to Regulation AT also contemplates that NFA 

would conduct routine examinations of its 

members to ensure that they are complying 

with NFA rules. This requirement translates 

into additional costs that will be passed 

down to NFA’s members. Regulation AT 

notes that NFA is the frontline regulator and 

is well-positioned to address rules and issues 

related to Algorithmic Trading as market 

conditions and technology develops. 

However, it seems that DCMs have the 

most intimate knowledge of the markets and 

their participants trading in those markets. 

DCMs have been at the forefront of creating 

market solutions for risk controls in 

automated trading, along with testing and 

certification of automated systems.11 In this 

regard, Regulation AT requires AT Persons 12

and their clearing member futures 

commission merchants (‘‘FCMs’’) to submit 

annual reports and policies and procedures 

regarding their Algorithmic Trading to all 

DCMs on which they trade. DCMs must 

establish a program to review these reports 

and procedures and provide feedback, 

including any deficiencies in participants’ 

pre-trade risk control settings or 

calibrations.13 AT Persons and their clearing 

member FCMs must also keep, and provide 

upon request to DCMs, books and records 

regarding compliance with the proposed 

rules. DCMs must review these books and 

records as necessary. 

Although the preamble states that the NFA 

and DCM requirements are not intended to 

create conflicting obligations, I am afraid that 

the lack of clarity provides a potential to 

subject AT Persons to some duplication. As 

noted above, DCMs already have standards 

for risk controls, testing and certification of 

automated systems, but Regulation AT 

requires NFA to address these topics in its 

program. Regulation AT also discusses 

reviews for both NFA and DCMs. Duplicative 

requirements would add unnecessary costs 

that would be especially harmful to small 

market participants. 

I am interested to hear from market 

participants if Regulation AT provides 

enough clarity on this issue or if the 

Commission should provide further detail. I 

am particularly interested to hear comments 

on the requirement for market participants to 

register with NFA and to be subject to NFA’s 

program for Algorithmic Trading systems. In 

light of DCMs’ existing efforts on risk 

controls and testing, is such a requirement 

necessary or are DCMs already serving as the 

frontline regulator? Would NFA serve a 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 78947 

14See supra note 5. 

15Under Regulation AT, in accordance with 

Commission Regulation 1.31 (17 CFR 1.31), AT 

Persons would have to make their source code 

repository available for inspection to any 

representative of the CFTC, in addition to the U.S. 

Department of Justice. 

16Records of Commodity Interest and Related 

Cash or Forward Transactions, 79 FR 68140, 68148 

(proposed Nov. 14, 2014). 

17Managed Funds Association Comment Letter at 

4–7 (Jan. 13, 2015); Commodity Markets Council 

Comment Letter at 5 (Jan. 13, 2015); SIFMA AMG 

Comment Letter 5–6 (Jan. 13, 2015). 

18Managed Funds Association, the Investment 

Adviser Association and the Alternative Investment 

Management Association, Petition for Rulemaking 

to Amend CFTC Regulations 1.31, 4.7(b) and (c), 

4.23 and 4.33 (Jul. 21, 2014). 

19Records of Commodity Interest and Related 

Cash or Forward Transactions, 79 FR 68140 

(proposed Nov. 14, 2014). 

20 Id. at 68146, Proposed Commission regulation 

1.35(a)(3)(i). 

21 79 FR at 68146, Proposed Commission 

regulation 1.35(a)(3)(ii). 

22Proposed Commission regulation 1.82(a)(1). 

23Statement of Commissioner J. Christopher 

Giancarlo for the Market Risk Advisory Committee 

Meeting, Jun. 1, 2015; http://www.cftc.gov/

PressRoom/SpeechesTestimony/

giancarlostatement060115. 

24 17 CFR 1.3(x). 

25Another requirement is that the person must be 

trading for their own account. 

useful role in setting consistent standards 

across all markets or do DCMs need 

flexibility in setting rules because each 

market and the participants in those markets 

are different?14 I also invite comment on 

alternatives to the requirement that AT 

Persons and their clearing member FCMs 

prepare and submit annual reports to DCMs 

and DCM reviews of those reports. One 

possibility is to require AT Persons and their 

clearing member FCMs to conduct selfassessments (like FINRA requires) and only 

require submission to DCMs upon request. 

C. Source Code Repository and Commission 

Regulation 1.31 

Source code is the intellectual property of 

AT Persons representing their current and 

future trading strategies. Source code of AT 

firms is unlike traditional trading firm 

information in that it reveals not what 

positions are held in the past or present, but 

what positions the firm intends to buy or sell 

in the future upon specified market events. 

I am particularly concerned that Regulation 

AT requires that each market participant 

keep a source code repository for algorithms 

and make it available for inspection to any 

representative of the Commission or the U.S. 

Department of Justice for any reason.15

Currently, the federal government may only 

obtain such sensitive information through a 

subpoena. Regulation AT dramatically lowers 

the bar for the federal government to obtain 

this information. 

I am unaware of any other industry where 

the federal government has such easy access 

to a firm’s intellectual property and future 

business strategies. Other than possibly in 

the area of national defense and security, I 

question whether the federal government has 

similarly unfettered access to the future 

business strategy of any American industrial 

sector. Does the SEC require such access from 

its registrants? Do other agencies in the 

federal government have ready access to 

businesses’ intellectual property and 

business strategies? 

I am unclear why either the Commission or 

the U.S. Department of Justice needs access 

to source code information without a 

subpoena, especially the Justice Department, 

whose only use for such information would 

be in criminal proceedings. Does today’s rule 

proposal presume that the use of automated 

trading technology makes a trading firm more 

likely to engage in criminal behavior than a 

manual trading operation? 

There is strong reason for concern about 

maintaining the confidentiality of this source 

code. As we all know, the federal government 

has a poor track record of keeping sensitive 

information secure from cyberattacks and 

other data breaches. Any data breach of this 

information would be devastating for such 

entities and, potentially, for the safety and 

orderly operation of U.S. markets. Imagine 

the harm that could be caused to U.S. 

financial markets, if cyber terrorists or other 

belligerents were able to get their hands on 

this technology the same way some of the 

U.S.’ most important industrial, military and 

other sensitive data have been hacked. I 

question the need for this new requirement 

and request commenter feedback on this 

issue. 

In addition to my concerns above, I 

previously expressed reservations about 

Commission regulation 1.31 in the proposed 

rulemaking on Records of Commodity 

Interest and Related Cash or Forward 

Transactions.16 Commenters to that proposed 

rulemaking stated that Commission 

regulation 1.31 is technologically outdated 

and compliance with the rule is overly 

burdensome, infeasible and costly.17

Managed Funds Association, the Investment 

Adviser Association and the Alternative 

Investment Management Association even 

petitioned the Commission to amend Rule 

1.31 back on July 21, 2014.18 Unfortunately, 

the Commission has not acted on this 

request. 

Regulation AT’s requirement that source 

code repositories must be kept and made 

available for inspection pursuant to 

Commission regulation 1.31 will impose 

unnecessary costs and burdens on AT 

Persons. Given the voluminous comments 

that the staff has received on the 

unworkability of Rule 1.31, I am surprised 

that Regulation AT would subject source 

codes to this rule. As an alternative, the 

Commission should consider allowing AT 

Persons to keep source code repositories in 

accordance with their own reasonable and 

secure internal recordkeeping procedures. I 

welcome comments on the costs of 

Commission regulation 1.31 in this regard. 

Finally, I would like to note that currently 

unregistered market participants who will 

now be required to register under the revised 

floor trader definition may be subject to 

heighted record keeping requirements under 

proposed Commission regulation 1.35.19

Proposed Rule 1.35 states that a member of 

a DCM that is not registered or required to 

be registered with the Commission in any 

capacity would not have to keep (i) records 

of transactions in a manner that is searchable 

or allows for identification of a particular 

transaction 20 and (ii) text messages related to 

those transactions.21 If the Commission 

finalizes Rule 1.35 as proposed, Regulation 

AT’s registration requirement would increase 

the burdens under that rule. I invite 

commenters to provide feedback on the 

intersection of Regulation AT and Rule 1.35. 

D. Other Costs 

I would also like to obtain industry input 

on the following costs of Regulation AT: 

1. The costs on FCMs under proposed 

Rules 1.82 and 1.83, especially the 

requirement that an FCM prevent or mitigate 

an Algorithmic Trading Disruption for its AT 

Persons.22 I have previously expressed 

concerns about the harm caused to the FCM 

industry by the heightened cost of regulation, 

so I am especially interested to hear 

comments in this regard.23

2. The costs to DCMs to establish and 

maintain a program for the review and 

evaluation of compliance reports and books 

and records of each AT Person and their 

clearing member FCMs trading on the DCMs, 

as required under proposed Rule 40.22. 

3. The ease and costs for DCMs to generate 

and publish self-trading statistics, as required 

under proposed Rule 40.23(d). 

E. Costs Versus Benefits 

Based on all the costs described above, 

Regulation AT does not seem to be a nonprescriptive, low-burden rule that simply 

codifies industry best practices as the 

proposal asserts. It goes much further and, I 

fear, does greater harm. While Regulation AT 

does recognize industry best practices with 

respect to several risk controls, it adds 

prescriptive compliance, reporting and 

registration requirements and establishes 

overlapping and duplicative DCM and RFA 

review programs of questionable value. Given 

the industry’s extensive efforts to date, I 

question whether the costs of Regulation AT 

actually justify the benefits. The principlesbased approach that I discussed above may 

be as effective and less costly than Regulation 

AT’s approach. I invite commenters to 

provide feedback regarding the costs and 

benefits of Regulation AT and the specific 

points I raised above. 

III. Regulatory Inconsistency of Regulation 

AT 

I would like to note three regulatory 

inconsistencies in Regulation AT. The staff 

proposes to amend the definition of floor 

trader 24 in order to register currently 

unregistered persons using direct electronic 

access for algorithmic trading on DCMs.25

The preamble to Regulation AT states that in 

1993, when the Commission finalized rules 

regarding the definition and registration of 

floor traders, the Commission decided to 

include as floor traders only those traders 

operating on the trading floor of an exchange. 

However, in that 1993 rulemaking, the 

Commission stated that certain traders using 

electronic trading systems come within the 

floor trader definition. Back then, the 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
78948 Federal Register / Vol. 80, No. 242 / Thursday, December 17, 2015 / Proposed Rules 

26E.g., CME Comment Letter at 43, 44 (Dec. 11, 

2013). 

27 17 CFR 38.607. 28See also proposed Commission regulations 

1.81(a)(1)(iii), (a)(1)(iv), (a)(2) and (c)(2)(i) for 

further examples. 

Commission took a technological approach to 

the definition of floor trader. 

Today, Regulation AT is taking that same 

approach and is proposing to register persons 

using direct electronic access for algorithmic 

trading, but not those using manual means. 

I am not clear on the rationale for this 

technology driven distinction to registration 

(as the preamble does not articulate one) 

when the proposal acknowledges that 

manual trading also poses risks. Several 

commenters cited in Regulation AT also 

noted the importance of risk controls for 

manual and automated trading systems.26 I 

invite industry comments on this issue, 

notwithstanding my above concerns about 

the registration requirement. 

Another regulatory inconsistency is that 

Regulation AT only captures floor traders 

who use direct electronic access for 

algorithmic trading, but it captures all 

existing registrants, such as FCMs, swap 

dealers and CTAs regardless of whether they 

use direct electronic access for algorithmic 

trading. Again, Regulation AT does not 

articulate a reason for this inconsistency and 

I question its logic. I invite comment on this 

issue, including whether, for existing 

registrants, the proposal should only capture 

those using direct electronic access. 

Finally, Regulation AT only applies to 

trading on DCMs and not on SEFs. 

Regulation AT justifies this distinction by 

stating that compared to DCMs, SEFs and 

SEF markets are newer and less liquid and 

have less automated trading. However, DCMs 

can also list swaps and Regulation AT 

applies to that trading. In this regard, 

Regulation AT may disadvantage DCMs who 

list swaps as compared to SEFs. I welcome 

comments on this competitive disadvantage, 

including whether Regulation AT should 

exclude from its scope swaps listed on 

DCMs. 

IV. Other Comments on Regulation AT 

I also invite industry comment on the 

following issues: 

1. Whether the Algorithmic Trading 

Compliance Issue definition in proposed 

Commission regulation 1.3(tttt) is necessary. 

If a major reason for Regulation AT is market 

integrity then it seems the Algorithmic 

Trading Disruption definition is sufficient. 

Furthermore, if an AT Person violates a rule 

or regulation it will be liable so the 

Algorithmic Trading Compliance Issue 

definition appears unnecessary. 

2. Whether the definition of Direct 

Electronic Access in proposed Commission 

regulation 1.3(yyyy) should be harmonized 

with the definition in Rule 38.607.27

3. Whether several of the proposed rules 

that require periodic review of compliance 

measures or regular testing of Algorithmic 

Trading systems open up AT Persons to 

liability risk. For example, proposed 

Commission regulation 1.80(f) 28 requires 

each AT Person to periodically review its 

compliance with the pre-trade risk control 

requirements to determine whether it has 

effectively implemented sufficient measures 

reasonably designed to prevent an 

Algorithmic Trading Event. What happens if 

market conditions change rapidly between 

periodic reviews and the AT Person’s risk 

controls are no longer sufficient to prevent an 

Algorithmic Trading Event? Is the AT Person 

now liable for a violation of Commission 

rules? Will this periodic review become a 

continuous review in order to avoid liability? 

Conclusion 

While I am pleased that Regulation AT 

provides flexibility in setting risk control 

parameters and does not require the preapproval or pre-testing of algorithms, the 

proposal appears to add many burdensome 

compliance costs and does not adequately 

take into account small market participants 

or the work of the industry in developing 

algorithmic trading risk controls and related 

testing requirements. Rather than duplicating 

their efforts and adding additional burdens, 

the Commission should look to support and 

enhance ongoing industry progress. On the 

other hand, I am highly concerned about 

Regulation AT’s several significant 

inconsistencies and its extraordinary 

requirement that AT source codes be placed 

in government accessible repositories. 

Overall, I have a great many concerns with 

Regulation AT. Most principally, I struggle to 

figure out if it will benefit the safety and 

soundness of America’s futures markets 

enough to outweigh its additional costs and 

burdens. Its purpose must not be to allow a 

Federal regulator to say that it has ‘‘done 

something’’ about computerized trading in 

response to media headlines, best-selling 

books or political campaign agendas. The 

development of automated trading is too 

complicated and too important to be 

addressed with such superficiality. 

For my part, I will carefully review 

thoughtful comments from market 

participants and the public. I will measure 

my support for any final rule against the 

SMART REG standard. 

[FR Doc. 2015–30533 Filed 12–16–15; 8:45 am] 

BILLING CODE 6351–01–P 


tkelley on DSK3SPTVN1PROD with PROPOSALS2