Technology Advisory Committee

Subcommittee on Automated and 

High Frequency Trading

Working Group 3

Oversight, Surveillance 

and Economic Analysis

6-20-2012
Working Group 3 Topics

• Tagging Attributes 

• Assessment of Current Tagging Methodology

• Oversight of ATS/HFT

• Appropriate ATS/HFT Controls

• Registration and Examination of Algorithms

• Supervision, Oversight and Analysis
Tagging Attributes – Identification of ATS Activity

• ICE, CME Group and NFA capture common key attributes

• Currently identified 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

• Entities are also required to maintain front-end audit trails 

Clearing Firm Trading Firm Session ID Sender Location

Operator ID ATS Flag Account Give-Up Firm
Assessment of Current Tagging Methodology

• SROs capture highly granular order, transaction, timing and 

reference data that provide the source data necessary to conduct 

effective surveillance and analysis of ATS and non-ATS activity

• Specific ATS strategy-related identifiers will provide little benefit 

– Significant variability likely to create definitional ambiguity that undermines utility

– Constant evolution of strategies creates operational churn for questionable benefit

– Activity in market informs analysis of order and transaction activity

• If a potential problem is identified, regulatory staff can obtain:

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

– Information regarding controls employed, testing conducted and supervision protocols

– Any other information, including related transaction information, deemed necessary
Oversight of ATS/HFT

• Trade practice rules apply regardless of the means or frequency of 

order entry, and monitoring for market abuse occurs across all 

types of traders

• Effective controls and supervision are necessary for all electronic 

trading

– Any user type can generate orders that disrupt the market

– ATSs require testing and supervision protocols and control 

mechanisms appropriately calibrated to the nature of the ATS

• SROs’ controls, data and monitoring capabilities must scale to and adapt 

to the speed and volume of activity in today’s markets 

– SRO capabilities have significantly evolved, and SROs continue to 

 refine, improve and innovate in these areas

– Federal regulators need to enhance data capture and technology
Oversight of ATS/HFT 

• Effective testing and supervisory protocols

– Conformance testing and certification of connections by 

SRO for system specific controls and responses

– Software development standards, testing, change 

management, re-certification 

– Real time monitoring of ATS system performance and 

metrics

• Messaging policies to promote efficient messaging practices 

without compromising liquidity
Appropriate ATS/HFT Controls

• We agree with the prior recommendations to the Technology Advisory 

Committee regarding the need for effective risk controls at each level of 

the supply chain to protect the market from disruptions and mitigate the 

risk of a single point of failure. For example:

• Pre-trade and post-trade controls and parameters reasonably designed 

to mitigate risks based on the nature of the business and the market.

Trading Firm Clearing Firm Exchanges

Pre-Trade Quantity Limits Certify Use of Pre-Trade Controls Pre-Trade Quantity Limits

Pre-Trade Price Collars Approve Pre-Trade Parameters Pre-Trade Price Banding

Execution Throttles Kill Button Protection Points

Message Throttles Credit Controls Volatility Protections

Kill Button Message Throttles

Credit Controls

Kill Button
Registration and Examination of Algorithms

• Defining HFT requires static, arbitrary distinctions across 

different metrics (automation, latency, messaging and 

volume) and products

 – Regulators can easily distinguish highest volume, 

 highest messaging participants in particular products 

 over particular time frames 

 – Data and tools allow regulators to identify participants 

 and distinguish their activity according to relevant 

 surveillance or analytical objectives 

– Regulators should focus on defining unacceptable 

 conduct
Registration and Examination of Algorithms

• Should Algorithms Be Registered?

– Difficult to consistently define what constitutes a unique algorithm

– Algorithms, inputs and parameters change frequently 

– Unclear why trading strategies should be registered simply because

they are fully automated – activity in market is fully transparent

– No empirical basis to support need for strategy registration

• Should Algorithms Be Audited by SRO / Regulator?

– Enormous numbers of algorithms deployed – significant cost

– Ineffective use of limited regulatory resources - unclear benefit

– Entity developing the algorithm is responsible for testing

– SROs establish and enforce appropriate market integrity rules
Supervision, Oversight and Analysis 

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

speed or frequency of order entry and transactions – focus 

should be on specific behaviors that undermine market 

integrity irrespective of the means or pace of order entry, 

and on ensuring surveillance capabilities scale to the market 

infrastructure 

• Automated trading poses certain risks that should not be 

taken lightly - appropriate risk/operational safeguards must 

be implemented that keep pace with advancements in 

technology in order to protect the orderly functioning of 

markets
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 available to effectively mine and analyze data

• Continue to elevate diversity of regulatory skill sets

• Establish and enforce appropriate rules with regard to 

testing, supervision, controls, market abuse and fair access

• Technology will continue to evolve – traders, market centers 

and regulators will continue to innovate
Continuing Working Group Focus

• 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 – role for federal 

regulators