Subcommittee on Automated 

and High Frequency Trading

Working Group 3

Oversight, Surveillance and Economic Analysis

10-30-2012

Technology Advisory Committee
Working Group 3 Participants

Ed Dasso National Futures Association

Robert Hegarty Thomson Reuters

Dean Payton CME Group

Frank Perry Newedge

Mark Wassersug Intercontinental Exchange

Jeremy Cusimano Commodity Futures Trading Commission

Richard Haynes Commodity Futures Trading Commission

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Working Group 3 Topics

 Tagging Attributes 

 Tagging Methodology Assessment

 Registration of HFTs

 Registration & Examination of Algorithms

 Controls & Monitoring 

 Supervision, Oversight and Analysis

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Tagging Attributes 

 ICE, CME Group and NFA capture common identifying attributes

 Current identifying attributes allow SROs to:

• Distinguish ATS from non-ATS activity

• Identify individuals operating an ATS

• Identify owners behind ATS activity

• Measure trade volume and messaging by firm, account or operator

 SROs capture highly granular data: 

• Message, transaction, timing and reference data 

• Comprehensive electronic audit trails of market activity and book data

• SROs enrich source data to create additional tags such as 

passive/aggressive identifiers

Clearing Firm Trading Firm Session ID Sender Location

Operator ID ATS Flag Account Give-Up Firm

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Tagging Methodology Assessment 

 Comprehensive SRO audit trails and reference data provide 

the information necessary to support effective monitoring and 

analysis of ATS activity

 ATS strategy-type identifiers will not add regulatory value 

• Substantial variability and overlap creates definitional ambiguity

• Routine strategy evolution and modification 

• Order and transaction activity is fully transparent

 If a potential problem is identified, regulators can obtain:

• Detailed information regarding the strategy, inputs and design of the ATS

• Information regarding controls employed, testing conducted and 

supervision protocols

• Any other relevant information, including front-end audit trails and the 

participant’s activity in related markets, that is deemed necessary

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Registration of High Frequency Traders?

 Registration of HFT requires static, arbitrary distinctions across 

different metrics

• Distinctions in degree of automation, latency, messaging and volume

• Distinctions across products, contract months, and range of strategies

• Distinctions in time horizon over which messaging/volume is measured

 Participants can be identified and differentiated as desired to 

serve surveillance objectives using current data

• Distinguish ATS from non-ATS activity

• Distinguish users’ type of connectivity

• Identify high messaging/volume participants at many levels (e.g. firm, 

account, operator) for any instrument over any time period

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Registration of High Frequency Traders?

 SROs already maintain identifying reference data regarding 

high messaging and high volume participants

 CFTC is poised to capture reference data with proposed 

Ownership and Control Report for active accounts on DCMs 

and SEFs 

 Market stability and market integrity considerations are not 

exclusive to HFT - any user can generate orders that disrupt 

the market or engage in abusive trading practices

 It is unclear what additional information, surveillance or 

analytical objectives registration of HFTs, however defined, 

achieves relative to current information and capabilities

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Registration and Examination of Algorithms

 Should Each Algorithm Be Registered?

• Algorithms, inputs and parameters change frequently 

• Difficult to consistently define what constitutes a unique algorithm

• No empirical basis to support need for strategy registration

 Should Algorithms Be Audited by SRO/Regulator?

• Enormous numbers of algorithms deployed 

• Inefficient use of limited regulatory resources even assuming expertise 

were available in regulatory bodies to assess each algorithm

• Foresight economic impact study estimated cost of $1.3 billion/year 

in EU if full descriptions of algorithmic trading strategies were collected 

and analyzed by regulators

• Entity employing the algorithm should be responsible for appropriate 

evaluation and testing

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ATS Controls & Monitoring

 ATSs impact on markets

 Enhanced Market Quality 

 Improved liquidity, lower transaction costs, efficient price discovery

 Risks

 Software malfunctions that disrupt markets

 Inefficient/excessive messaging that increases costs and degrades 

performance

 Robust and effective controls and supervision are key

 Properly calibrated controls established at all levels of the infrastructure to 

mitigate any single point of failure

 Trading venue, trading firm, clearing firm

 Active message efficiency monitoring by trading firms

 Trading venue programs that deter poor messaging practices

 Controls should not be limited to post-deployment operation

 Appropriate best practices and associated controls should be considered 

during every phase of ATS development and operation

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ATS Development Control Considerations

 Planning and analysis – new system, new functionality or enhancement

• Organizational objectives, economic and risk analysis, feasibility assessment

 Employ best practice standards for technology development

• Algorithm, trading software, risk management protections

• Hardware infrastructure and data networks 

 Conduct appropriate testing (internal & external conformance)

• Administrative (user, product and market setup)

• Quantitative (back testing algorithm changes against historic trade data)

• Technical (connection logic, disconnect/reconnect management)

• Functional (order entry, trade & market data processing, market support) 

• Error (trade bust/adjust management)

• Alerting (exchange message & internal alerting notification and display)

• Regulatory (clearing and regulatory tag validation)

• Stress (load, capacity, performance under unusual market conditions)

• Pre-trade risk management (order validation, position management, throttles)

 Acceptance, installation and deployment/validation of systems

 Maintenance and monitoring

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ATS Control Testing Considerations

 Conformance Testing and Certification

• Trading venues should expand conformance testing include ATS risk 

mitigation controls that are able to be tested by the trading venue

• Kill button, cancel on disconnect 

• Trading venues should require certification by the connecting entity that 

appropriate front-end controls have been implemented and tested

• Clearing firms should require client conformance certification establishing 

that appropriate controls have been implemented

• The industry should establish appropriate industry-wide standards

 Conformance recertification/retesting requirements

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Control Recommendation Summary

RECOMMENDED RISK CONTROLS

TRADING FIRM 

(ATS)

CLEARING 

FIRM

MARKET 

VENUE

Pre-Trade Price Reasonability Validation  

Maximum Order Size Limits (Fat-Finger Protection)  

Protection Points for Market and Stop Orders 

Price Spike Alerting  

Volume Spike Alert (Account/Trader/Firm/Market)  

Kill Button    

Alternate Order/User Management Interface    

User Connection Monitoring/Alerting   

Cancel Orders on Disconnect Functionality   

Messaging Throttle/Alerting & VR Monitoring  

Intraday Position Monitoring/Alerting & Risk Monitoring  

Credit Controls & Alerting   

Post Trade Validation (Drop Copy)    

Clear Trade Cancellation/Price Adjustment Policies  

Automated Market Session Pause / Circuit Breakers  

Error Control Procedures    

Emergency Notification Procedures    

Software Development Standards & Change Management    

Conformance/Certification Testing   
Supervision, Oversight and Analysis 

 Market abuse is not fundamentally a function of the means, 

speed or frequency of order entry and transactions

 Defining specific behaviors that undermine market integrity, 

irrespective of the means or pace of order entry, is paramount

 Data capture and surveillance technology must scale to meet 

the demands of the market

 Surveillance methods must evolve with the strategies and 

market structures

 Diversity of regulatory skill sets must be appropriate to today’s 

highly technical trading environment 

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Supervision, Oversight and Analysis

 Comprehensive exchange and front-end audit trails

 Data available on real-time and historical basis 

 Data supports effective surveillance for market abuse

 Data supports robust economic analysis

 Technology is available to effectively mine and analyze data 

and to alert on market, user and system anomalies

 Technology will continue to evolve – traders, market centers 

and regulators will continue to innovate

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Cross-Market Surveillance

 Competition, market structure changes, and blurring of lines 

across asset classes creates greater fragmentation

 Requires appropriate coordination and information sharing 

among regulators to ensure comprehensive and effective 

surveillance 

 SROs can surveil activity in their own markets and can obtain 

information regarding activity in other markets from the 

market participant or trading venue when necessary, but do 

not have data to perform direct cross-market surveillance 

 Federal regulators with access to data across venues should 

focus on cross-market abuses

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