UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 TECHNOLOGY ADVISORY COMMITTEE MEETING

 Washington, D.C.

 Tuesday, June 3, 2014
 2

 1 PARTICIPANTS:

 2 IRENE ALDRIDGE

 Able Alpha Trading

 3

 MICHAEL ATKIN

 4 EDM Council

 5 TRABUE BLAND

 ICE

 6

 MARISOL COLLAZO

 7 DTCC

 8 CHRISTOPHER CONCANNON

 Virtu Financial

 9

 ROB CREAMER

 10 FIA PTG

 11 ED DASSO

 NFA

 12

 GARY DEWAAL

 13 Katten Muchin Rosenman, LLP

 14 BRYAN DURKIN

 CME

 15

 KAREL ENGELEN

 16 ISDA

 17 KEITH FISHE

 Trade Forecaster Global Markets

 18

 SCOTT FITZPATRICK

 19 Tradition

 20 RICHARD GORELICK

 RMG Advisors

 21

 MICHAEL GORHAM

 22 Illinois Institute of Technology
 3

 1 PARTICIPANTS (CONT'D):

 2 WALTER HAMSCHER

 SEC

 3

 DAVID HARTNEY

 4 Bank of America

 5 JOEL HASBROUK

 Stern NYU

 6

 JORGE HERRADA

 7 CFTC

 8 JULIE HOLZRICHTER

 CME Group

 9

 STEVEN JOACHIM

 10 FINRA

 11 PIERRE LAMY

 Goldman Sachs

 12

 DAVE LAUER

 13 KOR Group

 14 BRAD LEVY

 Markit, MarkitSERV

 15

 CLIFFORD LEWIS

 16 Eris Exchange

 17 JUSTIN LLEWELLYN-JONES

 Fidessa

 18

 ADAM LITKE

 19 Bloomberg

 20 CHRIS LORENZEN

 Eagle Seven, LLC

 21

 JOHN LOTHIAN

 22 John J. Lothian Co. (CTA)
 4

 1 PARTICIPANTS (CONT'D):

 2 NANCY MARKOWITZ

 CFTC

 3

 JEFFREY MARON

 4 Markit

 5 VINCE MCGONAGLE

 CFTC

 6

 WILLIAM NICHOLS

 7 U.S. Treasury

 8 MICHAEL O'BRIEN

 Eaton Vance

 9

 LEE OLESKY

 10 Tradeweb

 11 SCOTT O'MALIA

 CFTC

 12

 STEVEN REICH

 13 FERC

 14 PETER REISS

 DE Shaw & Company

 15

 JOHN ROGERS

 16 CFTC

 17 JOSEPH SALUZZI

 Themis Trading

 18

 TOD SKARECKY

 19 Clarus Financial Technology

 20 NICK SOLINGER

 Traiana

 21

 SAYEE SRINIVASAN

 22 CFTC
 5

 1 PARTICIPANTS (CONT'D):

 2 ERIC SWANSON

 BATS Global Markets

 3

 LARRY TABB

 4 TABB Group

 5 MARSHALL TERRY

 South Ferry

 6

 JEFFREY TRAHAN

 7 Deere & Company

 8 CHUCK VICE

 ICE

 9

 JASON VOGT

 10 Cargill, Black River Asset Management

 11 ANDREW VRABEL

 CME

 12

 MARK WETJEN

 13 CFTC

 14 GREGORY WOOD

 Deutsche Bank

 15

 JAMES WOODS

 16 FIA

 17 WENDY YUN

 GSAM

 18

 19

 20 * * * * *

 21

 22
 6

 1 A G E N D A

 2 Opening Remarks:

 3 COMMISSIONER SCOTT D. O'MALIA, Chairman, TAC

 4 ACTING CHAIRMAN MARK P. WETJEN

 5 Panel I: High-Frequency Trading Impact on

 Derivatives Markets: Answering the Charges of

 6 Unfair Advantages by HFT Firms:

 7 BRYAN DURKIN, Managing Director and Chief

 Operating Officer, CME

 8

 CHUCK VICE, President and Chief Operating Officer,

 9 ICE

 10 ROB CREAMER, Chairman, FIA PTG

 11 JOE SALUZZI, Co-Founder, Themis Trading

 12 Panel II: Developing a 21st Century Surveillance

 Program:

 13 JORGE HERRADA, Associate Director, Office of Data

and Technology, CFTC 

 14 ANDREW VRABEL, Executive Director, Global

 Investigations, CME

 15

 STEVE JOACHIM, Executive Vice President, FINRA

 16

 ROB CREAMER, Chairman, FIA PTG

 17

 DAVE LAUER, President and Managing Partner, KOR

 18 Group

 19 TRABUE BLAND, Vice President, Regulation, ICE

 20 Panel III: Increasing Buy Side Participation on

 SEFs:

 21

 TOD SKARECKY, Senior Vice President, Americas,

 22 Clarus Financial Technology
 7

 1 A G E N D A

 2 WENDY YUN, Managing Director, GSAM

 3 MICHAEL O'BRIEN, Director of Global Trading, Eaton

 Vance

 4

 SCOTT FITZPATRICK, Executive Director, Tradition

 5

 Closing Remarks:

 6

 COMMISSIONER SCOTT D. O'MALIA, Chairman, TAC

 7

 Adjournment

 8

 9 * * * * *

 10

 11

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
 8

 1 P R O C E E D I N G S

 2 (10:06 a.m.)

 3 COMMISSIONER O'MALIA: 

 4 I'd like to welcome everyone to the 12th full TAC

 5 Committee meeting since we've reconstituted this

 6 back in, I guess, July of 2010. And I think out

 7 of the 12 full committee meetings I think we've

 8 probably talked about high-frequency trading at

 9 least 9 of them.

 10 So, as you can see, we have a record

 11 attendance, including members of the full

 12 committee, members of the Data Standardization

 13 Committee and the Subcommittee on Automated and

 14 High-Frequency Trading.

 15 I'm very grateful to have everybody's

 16 participation and involvement here. To get this

 17 many people from around the industry involved in

 18 one room, to spend the entire day, is no

 19 insignificant task, and I realize you've made a

 20 lot of changes to your schedule to be here, and

 21 I'm grateful for that.

 22 And I'd like to also thank our witnesses
 9

 1 way down at the end of the table, who have also

 2 made accommodations to their schedule and, of

 3 course, had to prepare their presentations to

 4 testify and to get this debate going.

 5 We also have a number of new TAC members

 6 here today as well as subcommittee members on the

 7 Data and High-Frequency Trading Subcommittees as

 8 well. So I'm very pleased that we were able to

 9 pull together all of these people, and I

 10 appreciate your service.

 11 Some of you, this is your first meeting.

 12 Turn to your right or turn to your left; there's

 13 somebody that's done this before.

 14 And what we want is honest, fresh and

 15 direct answers. We have a lot to get through. So

 16 your participation is appreciated. You're here

 17 because you're an expert, and to not offer your

 18 expert opinion would be a disservice to this

 19 little organization. So feel free to jump in.

 20 So today, we have three topics on the

 21 agenda. First, we'll address the issues raised by

 22 Michael Lewis's book, Flash Boys, to determine
 10

 1 whether these issues he raises in his book have

 2 any relevance to the derivatives markets.

 3 Second, in light of the evolving and

 4 complex market structures related to automated

 5 trading, I've pulled together a panel that will

 6 offer ideas about how the Commission should design

 7 a 21st Century surveillance system. Traders do

 8 not trade on just one market alone. They trade on

 9 many markets, and we need to adapt to that

 10 reality.

 11 Today, I'd like to discuss key elements

 12 of a 21st Century surveillance system that

 13 integrates swaps, futures and OTC derivatives

 14 data. I'd like to have our witnesses address

 15 these cross-market surveillance challenges and

 16 identify the key tools that will help us detect

 17 fraud and manipulative and deceptive trading

 18 practices.

 19 Finally, I'd like to receive an update

 20 on the state of the swap execution facilities.

 21 I'm concerned that the low level of participation

 22 by the buy side firms in SEF trading, and I would
 11

 1 like to know whether there are any regulatory

 2 impediments that might impact their participation.

 3 Now as to the first panel, Michael

 4 Lewis's book has stirred up quite a debate about

 5 HFT and market structure. The book claims that

 6 equity markets are rigged by HFTs that are

 7 front-running other traders' orders. The book

 8 raises other issues such as HFTs having faster

 9 data feeds, exchanges paying for brokers to take

 10 or provide liquidity and HFTs co-locating within

 11 the exchanges.

 12 I want to address these issues directly

 13 and to have a frank discussion with all of you to

 14 understand how automated trading and

 15 high-frequency trading impacts derivative markets.

 16 I can't think of a better forum to address these

 17 relevant market issues.

 18 We have four witnesses who will offer

 19 their opinions on the first panel. We have Bryan

 20 Durkin, COO of the CME Group; Chuck Vice,

 21 President and CEO of ICE; Joe Saluzzi, Co-Founder

 22 of Themis Trading; and, Rob Creamer of Geneva
 12

 1 Trading, currently serving as Chairman of the FIA

 2 Principal Traders Group.

 3 Now, for Panel II, we have posed several

 4 questions regarding the design of the 21st Century

 5 surveillance system.

 6 What are the essential tools and

 7 technologies that the Commission needs to have in

 8 place going forward?

 9 Should the Commission invest in order

 10 message surveillance systems and cross-market

 11 surveillance tools?

 12 What is the current trader and firm ID

 13 protocol? And what additional information, if

 14 any, should be required to monitor automated

 15 systems? We will start our presentation off, or

 16 our panel off, with a presentation. It will be a

 17 very interesting panel. This is something we've,

 18 for the first time, asked our staff to pull

 19 together. And Jorge Herrada, the Associate

 20 Director of the CFTC's Office of Data and

 21 Technology, has put together an outstanding

 22 presentation on kind of the state and the
 13

 1 opportunity that the Commission has in terms of

 2 its data.

 3 This is something that we haven't put on

 4 essentially one slide to look at all the different

 5 data sources and how we're going to integrate them

 6 to do our market surveillance, and I think that

 7 will provide some context in which then some of

 8 our other witnesses can talk about how we fully

 9 integrate that and really develop a top quality

 10 surveillance system.

 11 After Jorge, Andrew Vrabel, who is the

 12 Executive Director of Global Investigations at

 13 CME, will present -- and Trabue Bland, Vice

 14 President of Regulatory Affairs with ICE.

 15 We will hear from Steve Joachim,

 16 Executive Vice President of FINRA, to talk about

 17 comparable and similar systems in the equities

 18 markets.

 19 And, again, Rob Creamer will be on the

 20 hot seat to discuss his views from the FIA PTG

 21 group.

 22 And, finally, we'll hear from Dave
 14

 1 Lauer, President and Managing Partner at KOR

 2 Group, on his views.

 3 Panel III, the last panel, will update

 4 us on the current status of trading on the SEFs

 5 and will share some of the concerns we have heard

 6 from buy side participants.

 7 I'd like to know whether the Commission

 8 rules create a barrier to trading on SEFs and

 9 force market participants to turn to alternative

 10 trading solutions.

 11 We have a gentleman from Clarus

 12 Technology, Tod Skarecky, who will provide us kind

 13 of an overview on the state of SEF trading to

 14 date.

 15 And then we'll hear from Wendy Yun,

 16 Managing Director, Goldman Sachs Asset Management,

 17 and Michael O'Brien, Director of Global Trading at

 18 Eaton Vance, for the buy side perspective, and

 19 Scott Fitzpatrick, Executive Director of

 20 Tradition, who is also serving as Chairman of the

 21 Wholesale Market Brokers Association, for their

 22 perspectives on SEFs.
 15

 1 Since we have many TAC members that also

 2 operate SEFs, I would greatly appreciate any

 3 insight they can offer on SEF trading activity to

 4 date.

 5 Again, let me express, on behalf of the

 6 Commission and myself, our gratitude for everyone

 7 who took time to come here today and prepared

 8 presentations. We really look forward to the rest

 9 of the discussion today.

 10 With that, I will not recognize Chairman

 11 Wetjen, who is not here but who will be here, and

 12 when he does we will recognize him.

 13 But, in the meantime, I'm going to get

 14 started with our first panel, and I think we're

 15 going to start with Bryan to discuss HFT.

 16 MR. DURKIN: Thank you, Commissioner and

 17 the team from the CFTC.

 18 For the last three and a half years,

 19 this Committee and the TAC Subcommittee on

 20 High-Frequency Trading have examined market

 21 structure topics associated with electronic

 22 trading in the futures markets. Many respected
 16

 1 and noteworthy principles have emanated as a

 2 result of this in the context of risk management,

 3 pre and post-trade protocols, system safeguards,

 4 access to co-location facilities and messaging

 5 policies, among others, which have added to the

 6 integrity, the transparency and the vibrancy of

 7 our markets.

 8 This all occurred long before recent

 9 media attention on these topics, which is not

 10 surprising because the futures industry has a long

 11 history of combining self-reflection and

 12 innovation to deliver fair and secure markets that

 13 meet the risk management needs of all of its

 14 participants.

 15 The formation of the Technology Advisory

 16 Committee and the active discussions that have

 17 resulted are just another example of this sense of

 18 self-awareness. And I would like to commend

 19 Commissioner O'Malia, his team and the TAC

 20 participants over the years, including many of my

 21 colleagues sitting at this table today, for all

 22 that has been accomplished.
 17

 1 Now algorithmic and high-frequency

 2 trading are products of the evolution of markets

 3 from a floor-based model to an electronic model.

 4 Market participants sought greater price

 5 transparency through more immediate trade

 6 executions and confirmations, and electronic

 7 trading has met that demand.

 8 That technological change has been the

 9 catalyst for the development of more competitive,

 10 more efficient, more transparent markets as well

 11 as substantial improvements in innovation, in risk

 12 management and in regulatory capabilities. As a

 13 result, algorithmic and high-frequency trading has

 14 grown, contributing to significant volume growth

 15 across all asset classes and providing greater

 16 liquidity and tighter bid-ask spreads.

 17 The liquidity generated by these market

 18 participants is, in turn, relied upon by all types

 19 of market participants, including banks, hedge

 20 funds, asset managers, farmers and ranchers,

 21 corporations and commercial producers, to achieve

 22 their risk management and their investment
 18

 1 objections, and it allows them to do so at lower

 2 costs.

 3 Now, despite this progression, as you

 4 are all well aware, a particular type of

 5 electronic trading strategy has been negatively

 6 portrayed by some who assert that the presence of

 7 HFT -- a reference to a style of trading which

 8 this Committee has expended tremendous effort, I

 9 might add, trying to define -- is abusive and

 10 disruptive to markets, much of which has been

 11 based on generalization and misinformation as

 12 applied to these futures markets.

 13 The fact is that the increased

 14 innovation and the speed of electronic trading has

 15 challenged us to ensure that our markets operate

 16 with integrity and are fair and open to all

 17 customers. CME Group has been focused on this

 18 task for many, many years, and we've worked

 19 closely with our regulators and our customers to

 20 maintain a level playing field throughout this

 21 evolution.

 22 We've created a market structure of
 19

 1 which we are very proud of and should be proud of.

 2 In particular, we use a central limit order book.

 3 It's a single integrated marketplace, allowing for

 4 concentrated liquidity in one transparent

 5 location.

 6 The identity of traders and firms is

 7 protected from disclosure on all bids, offers and

 8 execution reports.

 9 Bids and offers are available to all

 10 market participants and are matched according to

 11 transparent exchange matching algorithms.

 12 Our market data is sent to everyone at

 13 once. There are no preferential data feeds that

 14 are provided exclusively to a particular segment

 15 of user base.

 16 While customers have several options in

 17 terms of how they can receive data from us, we do

 18 not restrict anyone's access. Having multiple

 19 connectivity options makes our markets available

 20 and accessible to a broad array of market

 21 participants.

 22 No one can see orders prior to them
 20

 1 hitting our match engine and being made available

 2 to the order book.

 3 We maintain a complete and a

 4 comprehensive audit trail of every single message,

 5 order and trade down to the message ID of every

 6 participant in our markets. This information is

 7 fed into a sophisticated surveillance system that

 8 allows us to identify and to prosecute prohibited

 9 trading practices that violate our rules.

 10 In addition to having built a market

 11 structure that promotes liquidity, efficiency,

 12 transparency, accessibility to customers from

 13 banks, hedge funds, commercial producers,

 14 merchandisers to farmers and ranchers, CME Group

 15 promotes market stability through industry-leading

 16 risk controls. We have developed a wide array of

 17 capabilities to manage risk and volatility and to

 18 mitigate market disruptions. These are applied to

 19 all levels of market participants.

 20 These include credit controls. Credit

 21 controls are pre-execution risk controls that are

 22 provided that enable clearing firms to set credit
 21

 1 limits for their executing firms. Our credit

 2 controls, which every clearing firm must use, can

 3 include order blocking, order cancellations,

 4 e-mail notifications which can be set at varying

 5 thresholds.

 6 We also employ a tool called cancel on

 7 disconnect that will cancel resting orders for a

 8 market participant who becomes disconnected from

 9 our system.

 10 We employ price banding. All orders are

 11 subject to price verification. Now bids that are

 12 at prices well above -- or offers that are at

 13 prices well below -- the market fall outside of

 14 that determined band that we establish; then those

 15 orders are rejected automatically.

 16 Maximum order quantity. Every product

 17 has a predefined maximum quantity per order. This

 18 step ensures that the order is not exceeding this

 19 limit. And, if the maximum quantity is exceeded,

 20 the order is automatically rejected.

 21 Messaging controls. These controls

 22 limit the rate at which firms can submit mass
 22

 1 quotes and can block orders from entering our

 2 system if volume thresholds or quantities are

 3 exceeded.

 4 Stop logic functionality. Stop logic

 5 can automatically halt the market for a

 6 predetermined time period in order to help prevent

 7 extreme price deviations. You all know when it

 8 was triggered on May 6, 2010 it was stop logic

 9 that reversed the course of the flash crash by

 10 halting the market for enough time for liquidity

 11 to be replenished and the market to retrace.

 12 Volatility logic functionality. This is

 13 designed to guard against rapid price spikes. It

 14 is triggered by a pre-specified price movement

 15 over a short, defined period of time. Like stop

 16 price logic, it places markets in a reserve state

 17 where orders may be entered, modified or

 18 cancelled, but they may not be executed.

 19 Circuit breakers. In our equity index

 20 and energy products, circuit breakers halt trading

 21 for a period of time when a specified price level

 22 is reached. In addition, daily price limits
 23

 1 prevent trading at prices higher or lower than

 2 limits that are preset by the CME.

 3 Protection points. Protection points

 4 act as a control against excessive price swings in

 5 illiquid markets. These points prevent market and

 6 stop orders from being filled at significantly

 7 aberrant prices because of the absence of

 8 sufficient liquidity.

 9 And, kill switches. These are designed

 10 to allow clearing firms a one-step shutdown of all

 11 CME Globex activity at the most granular of levels

 12 of a market participant.

 13 Another service that CME group provides

 14 to the marketplace is co-location. Now criticism

 15 of co-location in some of the public coverage of

 16 this issue has failed to recognize that

 17 co-location actually equalizes access to the

 18 benefits of the speed through proximity. Although

 19 co-location requires an investment, it is open to

 20 all market participants and serves to level the

 21 playing field unlike several years ago when a firm

 22 could gain an advantage by buying real estate near
 24

 1 an exchange or where a server was thought to be in

 2 a data center.

 3 Without the development of our

 4 co-location facilities, no one trader may gain an

 5 advantage over another -- I'm sorry.

 6 With the development of our co-location

 7 facilities, no one trader may gain an advantage

 8 over another due to proximity to that match

 9 engine. All customers located in our co-location

 10 facility are treated equally. That is, they

 11 receive the same contract; they receive the same

 12 pricing; they adhere to the same policies and

 13 principles.

 14 This includes redundant, equidistant

 15 fiber connectivity to the CME Globex as well as

 16 equidistant cross-connects to telecommunications

 17 carriers that get them into and out of our CME

 18 data center.

 19 Finally, as we are all aware, the

 20 futures markets are fundamentally different from

 21 the equity markets. Many of the recent complaints

 22 against high-frequency trading and the fragmented
 25

 1 equity markets simply do not apply to U.S.

 2 futures markets.

 3 We believe the futures markets strike

 4 the right balance of regulating the market without

 5 inhibiting true price discovery. This balance of

 6 regulation and market surveillance, along with

 7 deep pools of liquidity in a centralized market,

 8 gives our market participants the confidence that

 9 they have come to expect as they rely on our

 10 markets to efficiently manage their risk.

 11 I look forward to addressing the

 12 questions that have been outlined by you,

 13 Commissioner O'Malia, and I appreciate the

 14 offering of these remarks.

 15 COMMISSIONER O'MALIA: Thank you very

 16 much, Bryan. I'd like to recognize the Chairman

 17 for any remarks he may have.

 18 CHAIRMAN WETJEN: Thanks, Commissioner

 19 O'Malia. Thanks, everyone, for being here today.

 20 Obviously, a lot of issues and questions that

 21 people have on their minds, including our staff

 22 and both Scott and I, but I have one question, and
 26

 1 that is: Have we created a fire hazard with all

 2 the interest in today's meeting?

 3 COMMISSIONER O'MALIA: If we don't get

 4 the air conditioning turned up higher, we will.

 5 CHAIRMAN WETJEN: But, looking forward to

 6 the rest of the day. Thanks a lot.

 7 COMMISSIONER O'MALIA: Before we go to

 8 Chuck Vice, I do want to recognize -- you

 9 mentioned staff. Joining us at the table today

 10 are our Chief Economist, Sayee Srinivasan, Vince

 11 McGonagle from the Division of Market Oversight, and

 12 our Chief Data Officer, John Rogers. Obviously,

 13 the topics we're discussing today are squarely in

 14 their wheelhouse, and I'm pleased to have them

 15 joining us.

 16 And I've seen a number of staff here

 17 today that are also involved in oversight and

 18 issues as well, and I appreciate them joining us

 19 to take the opportunity to listen and follow this

 20 debate along.

 21 So, Chuck, if you could go ahead,

 22 please.
 27

 1 MR. VICE: Thank you, Commissioner

 2 O'Malia and Chairman Wetjen, for facilitating this

 3 discussion.

 4 I thought Bryan did an excellent job of

 5 summarizing, I think, the strong points of our

 6 industry and from an exchange perspective. We've

 7 talked a lot over the years in these committee

 8 meetings about the risk controls and, I think, a

 9 lot of the good things that the exchanges do to

 10 try to maintain the integrity of its markets.

 11 So I'm not going to rehash some of that

 12 from ICE. Like I said, I think Bryan did a great

 13 job.

 14 So I'll come at it from a couple of

 15 other different commentary points.

 16 It was only 14 short years ago, ICE was

 17 formed to provide an electronic venue for trading

 18 energy swaps globally. In OTC markets dominated

 19 at the time by phone-broking and dealer-to-client

 20 business models, ICE was novel in promoting

 21 central limit order book execution and

 22 transmission of all market data to all market
 28

 1 participants at the same time. Customers chose

 2 among a variety of connectivity options, including

 3 dedicated point-to-point lines, managed networks

 4 or the public internet to suit their own cost and

 5 performance needs. Direct market access

 6 participants utilized our API to make prices and

 7 fulfill market-making obligations.

 8 As you can see, many of the issues to be

 9 discussed today are, by no means, new but perhaps

 10 more confusing to understand and more challenging

 11 to manage in a market measured in microseconds.

 12 Though ICE has built and bought numerous

 13 exchanges since 2000, we've never wavered from our

 14 core objectives of transparency, efficiency,

 15 liquidity and fairness, which leads me to my

 16 second point.

 17 Our company, as you know, merged with

 18 the New York Stock Exchange six months ago, and so

 19 my colleagues -- myself to some extent, but more

 20 my colleagues -- are knee-deep in the equity

 21 markets and the issues there and reform. And our

 22 CEO, Jeff Sprecher, has been very vocal on a lot
 29

 1 of the issues that were brought out in the book as

 2 practices that evolved over time and really need

 3 to change.

 4 And I think there are several of these

 5 that really illustrate the marked differences

 6 between the derivatives markets and equities

 7 markets. So I want to just hit on those briefly.

 8 I'm sure others will today as well.

 9 First of all, you can't help but notice

 10 the extreme fragmentation in the stock markets.

 11 There are 13 exchanges for executing the very same

 12 stocks, over 50 different total execution venues

 13 -- most of them off-exchange, largely lightly

 14 regulated or unregulated dark pools with prices

 15 published only after a transaction occurs.

 16 If you look at an analog in a futures

 17 market, all futures markets have to be -- all

 18 futures transactions, excuse me, have to be

 19 executed on exchange unless they meet various

 20 block minimum requirements or other EFS or EFP

 21 requirements.

 22 Also, in the equity markets, retail
 30

 1 brokers of U.S. equities typically sell their

 2 customer order flow to competing HFT firms. So

 3 there's no analog for this.

 4 Again, we have much less retail

 5 participation in the derivatives markets, but the

 6 participation that we do have is routed directly

 7 to the exchanges.

 8 And then, lastly, the pricing

 9 structures. Maker-taker pricing, which is the

 10 dominant pricing structure in the equity markets

 11 that Jeff has talked quite a bit about, our belief

 12 is that that has led to a lot of the problems that

 13 we have and, as pointed out in the book, people

 14 seeking to capture the rebate as opposed to paying

 15 the fee and, as a result, a proliferation of order

 16 types by the exchanges -- extremely complicated

 17 order types that effectively have conditional

 18 logic built into them so that the user of that

 19 order can either maximize his changes of capturing

 20 the rebate or minimize the chances of paying.

 21 And, as a result, I think you end up

 22 with markets that no one is really happy with, and
 31

 1 I think those things will get addressed and

 2 improved.

 3 For ICE, we don't have maker-taker

 4 pricing. We don't pay people to trade. Our

 5 market-making program consists of various

 6 discounts and caps -- pretty plain vanilla stuff.

 7 We don't have jump balls for equity, things like

 8 that. And so all of this is markedly different

 9 from what goes on in the equity markets.

 10 I think the thing that is the same in

 11 both markets is they obey the laws of physics.

 12 And so, independent of all of those other issues,

 13 there will always be a value to speed, and a

 14 function of how fast you can access the exchange

 15 is a function of what investment you want to make

 16 in connectivity, your PC, your firewall -- a

 17 million different things.

 18 And customers have shown that they're

 19 not all the same and they make choices along that

 20 spectrum and microsecond latency is important to

 21 some and irrelevant to others.

 22 And I think it's important to keep that
 32

 1 in mind. Now that's part of the challenge. I

 2 think once we get past today, hopefully, the

 3 differences in these markets and we scrutinize the

 4 derivatives markets and we come away as confident

 5 as we've ever been, that we feel good about what's

 6 going on in those markets.

 7 Technology continues to advance forward.

 8 You can't really put the toothpaste back in the

 9 tube.

 10 So I think I look forward to today's

 11 discussion, and I think there will be some good

 12 ideas and suggests coming out of this about how

 13 we, as exchanges, can continue to maintain a level

 14 playing field going forward.

 15 Thanks.

 16 COMMISSIONER O'MALIA: Thank you very

 17 much and for the perspective on equities.

 18 We're going to go to Rob Creamer with

 19 Geneva Trading but representing the FIA's

 20 Principal Traders Group here today.

 21 MR. CREAMER: So, I'm Rob Creamer. I'm

 22 CEO of Geneva Trading and Chairman of the FIA
 33

 1 Principal Traders Group. I'm grateful for the

 2 invitation to be here today and speak to you on

 3 behalf of the FIA PTG.

 4 The FIA PTG is comprised of firms that

 5 trade their own capital on exchange-traded

 6 markets. Our members engage in manual, automated

 7 and hybrid methods of trading and are active in a

 8 variety of asset classes such as foreign exchange,

 9 commodities, fixed income and equities. We are a

 10 critical source of liquidity in the

 11 exchange-traded markets, allowing those who use

 12 these markets to efficiently manage their business

 13 risks.

 14 The FIA PTG does not believe that a

 15 clear distinction can be made between

 16 high-frequency trading and automated trading. In

 17 fact, high-frequency trading, however defined, is

 18 a subset of automated trading and should not be

 19 used interchangeably with the term, automated

 20 trading, or as a way of arbitrarily identifying a

 21 type of market participant.

 22 The FIA, the FIA PTG and the FIA
 34

 1 European Principal Traders Association have been

 2 in the forefront of efforts to strengthen risk

 3 controls and system safeguards across the futures

 4 industry by identifying best practices with

 5 respect to risk controls that reduce the risk of

 6 market disruptions due to unauthorized access,

 7 software changes, system failures and order entry

 8 errors.

 9 The FIA PTG believes that automated

 10 trading technology has provided many benefits to

 11 the overwhelming majority of futures market

 12 participants. More quality metrics have improved

 13 across the board as trading has become more

 14 automated and more competitive. Trading costs are

 15 lower. Markets are deeper, more liquid.

 16 Discrepancies in prices across related markets are

 17 reduced, and prices better reflect information

 18 about the value of commodities underlying futures

 19 contracts.

 20 The FIA PTG, therefore, believes that

 21 any regulatory effort to improve market

 22 infrastructure must, at a minimum, preserve the
 35

 1 market quality -- quality improvements that have

 2 occurred as markets have become more automated and

 3 more competitive. If the CFTC determines that

 4 further regulation in this area is warranted, this

 5 determination should be supported by solid

 6 empirical evidence and rigorous economic analysis.

 7 The FIA PTG also believes that access to

 8 the market has never been fairer or more

 9 attainable. Access to the futures markets no

 10 longer requires you to stand in a trading pit and

 11 fight for a good seat at the table. It no longer

 12 requires membership, a family legacy or residence

 13 in the location of a trading floor.

 14 The need for physical proximity to

 15 exchanges has been eliminated with co-location

 16 services, which are widely available to all market

 17 participants. Exchange and third-party offerings

 18 are widely available and easy to analyze.

 19 Materials are published on web sites, the web

 20 sites of most exchanges, which list the available

 21 services, costs and additional resources to help

 22 one through the process.
 36

 1 Co-location has leveled the playing

 2 field for firms whose strategies demand the

 3 fastest access to market data and trade execution.

 4 While it is true that firms compete with each

 5 other on speed, from a technology perspective, the

 6 location of a firm no longer affects a firm's

 7 ability to remain competitive.

 8 For the vast majority of market

 9 participants, co-location is neither a source of

 10 advantage nor disadvantage and is not relevant for

 11 many participants in the markets.

 12 Central to the market structure

 13 discussion has been the issue of fragmented versus

 14 centralized markets. In the equity markets, the

 15 threat of monopoly was traded for hyper-complexity.

 16 While this tradeoff was effective at reducing

 17 cost, fragmentation in the equity markets created

 18 many additional challenges that have been largely

 19 avoided in the futures markets.

 20 The vertical silo model works well

 21 because of its simplicity, which improves the

 22 ability to manage risk. It reduces points of
 37

 1 failure. It centralizes data and maintains a

 2 level playing field.

 3 In addition to the inherent simplicity

 4 of the vertical silo model, the futures exchanges

 5 have made attempts to reduce the complexity and

 6 enhance the reliability of their platforms.

 7 Relative to equity markets, there are very few

 8 order types in futures markets, and exchanges

 9 publish transparent descriptions of their matching

 10 processes.

 11 A recent article has called into

 12 question the fairness of market-making programs.

 13 Exchanges have a long history of innovation, and

 14 the development of new markets is critical to meet

 15 the demands of the complex world in which we live.

 16 The research and development conducted

 17 by exchanges and product specialists will be

 18 fruitless without the service of market-making

 19 firms that shoulder the risk of supporting the

 20 launch of new products. Some firms have the

 21 capability and risk tolerance to support the

 22 launch of new products while others have the
 38

 1 ability to provide additional liquidity in more

 2 mature markets to reduce cost for end users.

 3 There is a healthy, symbiotic

 4 relationship between market-making firms and

 5 exchanges.

 6 It is our belief that exchanges should

 7 be allowed to use their discretion in the design

 8 of the programs in order to improve market quality

 9 and support innovation. The details of programs

 10 and eligibility requirements should be made

 11 available. The application process should be

 12 clear. The requisite qualifications should be

 13 specified, and the vetting of firms should follow

 14 a structured process. This should be conducted by

 15 exchanges with sole transparency provided to the

 16 Commission while protecting the anonymity of the

 17 firms that have been vetted and ultimately

 18 enlisted.

 19 It is my understanding that this largely

 20 reflects the process today and that the Commission

 21 is aware of such arrangements.

 22 In conclusion, the FIA PTG believes that
 39

 1 the futures markets are fair, have largely avoided

 2 the complexity faced in equity markets, and we

 3 support transparency and fair competition in the

 4 Commission's efforts to ensure that this is the

 5 case.

 6 We appreciate the opportunity to be here

 7 today and hope that our comments will provide

 8 value to this Committee.

 9 COMMISSIONER O'MALIA: Thank you, Rob.

 10 Next, we'll hear from Joe Saluzzi. And then after

 11 that it's going to be open to discussion about

 12 anything our panelists have said and open

 13 questions. Everybody knows the routine; put the

 14 cards up.

 15 I am having a hard time seeing down on

 16 that end of the table. So, if I don't see your

 17 card, make sure you wave it.

 18 So, Joe, wrap us up for the witnesses,

 19 please.

 20 MR. SALUZZI: Thanks, Scott. Thanks,

 21 Commissioner O'Malia.

 22 Thanks, CFTC, for having me here. I do
 40

 1 feel like a fish out of water. I'm an equities

 2 trader. So, sorry about that, folks, but I'm

 3 going to give you, I guess, an equities

 4 perspective.

 5 What I've heard so far is futures market

 6 is great; equity market is bad. I'm not a futures

 7 market guy. I'm not going to comment there, but I

 8 will comment on the problems that exist in the

 9 equities market, and hopefully, they don't

 10 transpose over to your markets.

 11 Themis Trading is an institutional

 12 equities broker. We trade solely on an agency

 13 basis for our institutional clients, which include

 14 mutual and hedge funds.

 15 In addition to trading, we focus a lot

 16 of our attention on equity markets' microstructure

 17 issues over the past few years. We wrote a book

 18 in 2012 called Broker Markets, and if you want to

 19 know anything about us, just read the book.

 20 While some have called us HFT critics,

 21 we prefer to be thought of as market structure

 22 critics. Years of regulations have helped create
 41

 1 a fragmented equity market that currently is the

 2 focus of much debate. This fragmentation has led

 3 to the creation of time and price arbitrages that

 4 many HFT strategies seek to exploit.

 5 While we're not sure if any of these

 6 practices are illegal, it's clear to us that

 7 securities regulators lack the surveillance

 8 methods required to police this high-speed,

 9 low-latency stock market. Their recently adopted

 10 surveillance system, MIDAS, falls woefully short

 11 of what is needed. The SEC has essentially

 12 admitted this deficiency by proposing the

 13 consolidated audit trail, otherwise known a CAT,

 14 which is still years away from being built.

 15 Essentially, securities regulators have come to a

 16 gun fight armed with a very dull knife.

 17 While we acknowledge that HFT is hard to

 18 define, it is clear that many HFT strategies

 19 employ cross-asset strategies, including trading

 20 options, currencies, bonds and futures. This new

 21 breed of high-speed, cross-asset trading has

 22 stretched the boundaries of the traditional
 42

 1 regulation.

 2 While the SEC struggles with their own

 3 workload and budget constraints, it appears that

 4 the CFTC faces some similar issues. In its

 5 statement of dissent of the 2015 budget,

 6 Commissioner O'Malia stated: While slightly more

 7 measured than the November request, this budget

 8 request perpetrates the futile strategy of hiring

 9 more staff to oversee a vastly complex, high-speed

 10 and technology-driven market. This lack of

 11 mission priorities makes these wide-ranging

 12 budget requests seem somewhat random and

 13 ill-defined only because they are.

 14 I'll leave that to you, Commissioner.

 15 Recently, the book, Flash Boys, as we've discussed

 16 already, brought the secretive and complex subject

 17 of high-frequency trading to the public. While

 18 some may dispute some of the book's facts, there

 19 is no question that the book successfully achieved

 20 what we and many others have been trying to do for

 21 the past few years -- have an open debate about

 22 our market structure.
 43

 1 We've heard numerous calls for top-down

 2 or so-called holistic reviews of our market

 3 structure. We submit that this would be neither

 4 productive nor effective. Correcting the

 5 systematic unfairness in the market structure can

 6 be done simply and without disenfranchising any

 7 key market participants.

 8 The best solutions to complexity are

 9 usually simple ones. We have three that we

 10 believe can change the equity markets for the

 11 better.

 12 Number one, eliminate payment for order flow

 13 whereby brokers sell their orders to a trading

 14 firm along with the maker-taker policy whereby

 15 exchanges provide rebates to traders who post in

 16 liquidity. There's nothing unprecedented in

 17 either of these suggestions, and markets can

 18 readily adjust and adapt. Rebates are polluting

 19 the trading ecosystem and unnecessary incentives

 20 and need to be done away with.

 21 Number two, mandate complete disclosure

 22 of dark pool and smart order routing practices.
 44

 1 Without knowing how orders are routed and how dark

 2 pool policies factor in, it's hard to determine

 3 whether or not they contribute to, or detract

 4 from, the market's well-being and designated

 5 objective as a means of allocating capital.

 6 Number three, regulate the data feeds.

 7 Trading information should not be fair game to be

 8 made available by the exchange to the highest

 9 bidder. Exchanges should grant investors the

 10 right to opt out of having their data sold to

 11 trading firms, which can then track and act in

 12 advance on information.

 13 There's no longer any reason to continue

 14 to create exploitable opportunities from

 15 unintended consequences. What's needed are

 16 straightforward solutions to fix current

 17 problems that provide exploitive opportunities and

 18 impair market liquidity. Our markets need simple,

 19 straightforward solutions that provide fairness,

 20 that can easily eliminate inefficiencies and

 21 complexity that hobble their fundamental purpose.

 22 Thank you for allowing me to comment. I
 45

 1 look forward to the remaining discussion.

 2 COMMISSIONER O'MALIA: Thank you very

 3 much. Larry Tabb, first tab up.

 4 MR. TABB: Thank you, Commissioner. I'd

 5 like a little clarification, Joe, on --

 6 MR. SALUZZI: I think Larry is asking

 7 me, what about opting out of data feeds that I

 8 just mentioned?

 9 One of the issues that we have with data

 10 feeds, particularly in the equities market -- all

 11 my comments, by the way, obviously, are equities

 12 market-related.

 13 Data feeds are not only fast. Well, we

 14 all know they're fast, and we all read the book

 15 about how the latency and 350 microseconds and the

 16 Lincoln Tunnel and all that stuff. Right?

 17 We get that. They also contain a lot of

 18 content, okay.

 19 Content is king, as well as speed, okay.

 20 Content, from an institutional investor's

 21 perspective is extremely critical. I would like

 22 only the information that is visible on the
 46

 1 consolidated tape to be shown in these data feeds.

 2 In other words, why would my order that's just

 3 gotten cancelled need to be shown? Why would a

 4 revision need to be shown in the data feed?

 5 A couple years back, we wrote a paper

 6 called "Data Theft on Wall Street." I guess a lot

 7 of you guys don't like the topic.

 8 But, the bottom line was we found that

 9 the two exchanges in particular were giving out

 10 hidden order information. There was a flag

 11 attached to each one of these orders, and that

 12 flag basically allowed someone reading the data

 13 feed to reengineer the fact that there was a

 14 hidden buyer.

 15 Well, after our paper went out there, it

 16 took a couple of weeks and actually kind of

 17 stalled in the U.S. But in Europe they got a hold

 18 of it, and lo and behold, a few weeks later these

 19 practices were fixed.

 20 My point is, as an institutional

 21 investor, I don't want the exchange to have that

 22 ability to sell that information. It's my
 47

 1 information. It's my clients' information.

 2 But you do need, obviously, the basics

 3 of, obviously, price, time and so on.

 4 But we think limiting that and allowing

 5 the institutional investor to at least opt out of

 6 that is a good suggestion.

 7 MR. TABB: So what kind of information

 8 are we talking about?

 9 They're not doing the hidden order

 10 information anymore. So you wanted them to opt

 11 out of providing cancels --

 12 MR. SALUZZI: Well, we don't know

 13 exactly.

 14 MR. TABB: -- and rebooks?

 15 MR. SALUZZI: But there's a good point

 16 there, Larry.

 17 I don't think there's been much work

 18 done on data feeds and content, and we would

 19 actually like to see a study as to what's in some

 20 of these data feeds. They're very cryptic.

 21 Obviously, they're all available online, and you

 22 can see the NASDAQ gauge and so on.
 48

 1 We would like the basics of information.

 2 Why would you need to know when my revision took

 3 place when that order that's sitting on the book,

 4 which you can't see with the visible eye, has now

 5 been revised?

 6 You're giving out more information that

 7 the user didn't ask to be given out.

 8 COMMISSIONER O'MALIA: Is there any way

 9 that that cuts both ways, that more data -- you

 10 know, a lot of our rulemaking has been to disclose

 11 more. Right?

 12 You know, publish more. Disclose more.

 13 How does that -- I could see where an argument

 14 could be made that it cuts both ways, that too

 15 little information isn't informative of what's in

 16 the market and your point being that --

 17 MR. SALUZZI: Look, the basics still

 18 need to be there. Absolutely, when a trade takes

 19 place, we see it on a consolidated tape. When

 20 there's a quote being put on there, we should all

 21 see that.

 22 But I guess it's the personal
 49

 1 information that's being given out about that

 2 particular order that needs to be -- there's a

 3 linkage there between the order and the trade

 4 books that needs to be adjusted, or addressed,

 5 rather.

 6 COMMISSIONER O'MALIA: Can I get maybe

 7 somebody to comment from either CME or ICE? Maybe

 8 Julie or anybody?

 9 What is the content of the futures

 10 market, and are the concerns that Joe raised

 11 similar to what we have in our market?

 12 You mentioned, Bryan, that we have one

 13 single data feed that goes out.

 14 MR. DURKIN: We send out an aggregated

 15 feed of the price and quantity that comes out --

 16 bids and offers; that's it.

 17 COMMISSIONER O'MALIA: Nothing -- none

 18 of the cancels or some of the things that Joe

 19 raised?

 20 MR. DURKIN: We don't do it by the

 21 order. We don't provide all of that information.

 22 That's correct.
 50

 1 MR. SRINIVASAN: I have a question. So

 2 the exchanges do sell tick-by-tick data, right,

 3 from what we understand. So tick-by-tick data, as

 4 we understand, is every message and order

 5 submission, modification, cancellation. That's

 6 something that especially I think some firms can

 7 acquire from the exchange and get it on a

 8 real-time basis.

 9 MR. DURKIN: We provide tick-for-tick

 10 data that's price changes.

 11 MR. DEWAAL: Just a question. I'm just

 12 curious. One of the hallmarks that has been

 13 highlighted about the futures market that sort of

 14 protects it is the lack of fragmentation.

 15 I'm curious, Bryan and Chuck, in

 16 particular, your views on the introduction of SEFs

 17 and perhaps the introduction of MTFs into the

 18 regime. Does that create an opportunity for

 19 fragmentation that will bring some of the issues

 20 that we discussed about the equities markets to

 21 the futures and swaps markets?

 22 MR. VICE: I think it's certainly
 51

 1 possible. We haven't talked about it really in

 2 the rulemaking for SEFs, and now the SEFs are out

 3 there. There's been no talk of any kind of best

 4 bid or offer system.

 5 You know, with a RFQ of one and a

 6 dealer-to-client models still alive and well, I

 7 don't know that -- you know, it may be that it

 8 doesn't get to that point. That's a topic for the

 9 third session, I suppose.

 10 But I think if there is success in

 11 seeing more central limit order book trading on

 12 SEFs, then, yes, that's something that presumably

 13 going to have to be addressed.

 14 But if you think about -- you know, one

 15 thing you have to put in perspective with the HFTs

 16 -- I mean, we have hundreds of futures contracts.

 17 We have HFTs in probably 20.

 18 It's a very liquid market type of

 19 trading. I mean, they help make it liquid, and

 20 they can only participate because it can get to

 21 that level of liquidity.

 22 I don't know if interest rate swap --
 52

 1 I'm not an interest rate swap expert.

 2 Does that market get to a point that you

 3 have the kind of HFT activity where the

 4 interaction of the different SEFs and different

 5 resting bids and offers rising to the problem of

 6 people are racing from one SEF to another, as

 7 described in the book?

 8 More questions there than answers, but

 9 that's --

 10 MR. MCGONAGLE: Thank you, Commissioner.

 11 So most folks might notice I write furiously, but

 12 that's just to keep my attention. Listening to

 13 just the past 50 minutes, going through pre-trade

 14 transparency, ATS, HFT -- should they be defined?

 15 Registration -- I don't know. Content

 16 of trading activity during the day -- what are we

 17 doing with messages? Should message information

 18 tick data? How that information should be

 19 available to market participants? Co-location --

 20 do we have it? Does it work?

 21 Should we do something else?

 22 Market-maker incentive program. So each one of
 53

 1 those topics seems like we could spend an awful

 2 lot of time digging down. And we did the concept

 3 release; I get that.

 4 A lot of discussion. Nine out of eleven

 5 on HFT. So I think, sitting here, about the case

 6 for change in these discussions that we have

 7 surrounding. And are we circling the wagons with

 8 respect to trading activity and derivatives

 9 markets because folks are saying we do such a good

 10 job as compared to the equity markets?

 11 And what lessons can be learned from

 12 that activity?

 13 So where's the case for change? Where

 14 should the Commission interact with the market on

 15 mandating certain risk, pre-trade risk controls?

 16 Whether we should impose some registration regime

 17 -- what benefit do we see for that registration

 18 regime? Should we be asking the Commission to

 19 consider making available the exchanges making

 20 more information available about the types of

 21 trading?

 22 On co-location, should we be asking --
 54

 1 and I'm just putting all these questions out, and

 2 then I'll be quiet.

 3 For co-location, should we be interested

 4 in seeing latency?

 5 What's the publication of the latency

 6 for the different uses, the different access to

 7 the various futures markets?

 8 How does that compare by exchanges?

 9 Should we require that all exchanges, separate

 10 from impartial access, establish a co-location

 11 facility rather than doing it on exchange?

 12 And then, particularly, this

 13 market-maker incentive program -- I was interested

 14 in the comment about, all right, we'll start up

 15 for new markets and then maybe market-maker for

 16 mature markets. Does that work when the markets

 17 are highly liquid, and what do we do with these

 18 rebate programs?

 19 How transparent should we require the

 20 exchanges to be about the types of participants

 21 that are actually reaping benefits and the amount

 22 of proceeds that are being paid as part of these
 55

 1 market-maker incentive programs?

 2 So these are the types of questions that

 3 I'm hearing, going through the course of the

 4 presentation.

 5 Where is the case for change for the

 6 Division of Market Oversight?

 7 Where is it meaningful for us to come in

 8 with an opinion?

 9 MR. LORENZEN: Chris Lorenzen, Eagle

 10 Seven. Both Bryan Durkin and Chuck Vice earlier

 11 made statements referring to the fact that futures

 12 markets are very different from the equity

 13 markets. I think it's extremely important to

 14 point out some of the main differences between the

 15 two.

 16 Futures markets have a single

 17 transparent point of execution whereas on the

 18 equity markets trading takes place in numerous

 19 exchanges, dark pools and ECNs.

 20 Futures exchanges offer limited common

 21 order types. In the equity markets, one will find

 22 numerous and unique order types being used.
 56

 1 Pricing. On the futures exchanges, all

 2 prices are visible and executable by all

 3 participants. This differs in the equity markets

 4 where not all prices are transparent due to such

 5 things as sub-penny pricing and dark pools.

 6 Common practices in the equity markets,

 7 such as payment for order flow and internalization

 8 of orders, are not prevalent and part of the

 9 market structure in the futures markets.

 10 These important points help lay out the

 11 differences between complexity and simplicity when

 12 analyzing equities versus futures markets.

 13 MR. HASBROUK: Thank you, Mr. Chairman.

 14 Joel Hasbrouk from New York University. I want to

 15 connect a couple of dots here because the themes

 16 sometimes arise and with different words and

 17 terminology.

 18 So I was struck by Mr. Durkin's

 19 presentation stressing the equality of the way

 20 orders were treated and handled in the Globex

 21 matching engine.

 22 I was also struck by Rob Creamer's
 57

 1 subsequent point that market-making firms are

 2 entitled to the advantages that they enjoy.

 3 Now you can't have market-maker

 4 subsidies and all orders being treated equally.

 5 I'm not arguing one way or the other, but there

 6 are tradeoffs.

 7 And the third dot is Mr. Saluzzi's point

 8 about disclosure and maker-taker fees.

 9 Maker-taker fees are, after all, also another form

 10 of market-maker subsidies, and the same principles

 11 that make market subsidies good on the futures

 12 markets might also make them good in equities

 13 markets.

 14 My last point is that, with respect to

 15 selective disclosure, to argue that there should

 16 be more disclosure for dark pools and

 17 simultaneously allowing individual traders to opt

 18 out of reporting certain information about their

 19 trades is -- you know, I'd be curious as to what

 20 principles we should allow there to justify the

 21 difference.

 22 But I think one thing that we could
 58

 1 agree on would be that informational asymmetries

 2 are bad. You're giving somebody inside

 3 information. So whatever information is getting

 4 disclosed should be disclosed to all people as

 5 equally as possible.

 6 Thank you.

 7 COMMISSIONER O'MALIA: Thank you.

 8 Bryan, do you want to respond to that?

 9 MR. DURKIN: Well, I would invite you to

 10 spend some time with the CME Group so that we

 11 could give you a more in-depth understanding of

 12 our market model and our market structure. So I

 13 offer that out to you because I think you were

 14 confusing a few terms that were discussed here

 15 today with respect to orders being treated

 16 equally.

 17 I assure you, sir, all orders are

 18 treated equally in our system and in our matching

 19 engine. When an order comes in, it goes

 20 immediately into the system. If it's at the

 21 current bid or the offer, it is matched

 22 appropriately and according to very transparent
 59

 1 algorithms that are very well described on our web

 2 site.

 3 In terms of market-maker programs and

 4 incentive type programs, you have to be very

 5 careful not to confuse the differences between

 6 what occurs in the equity markets and what occurs

 7 in the futures markets -- very careful distinction

 8 between the two of those.

 9 In the development of incentive programs

 10 or those types of programs in the future markets

 11 have always been based on developing liquidity in

 12 new products and evolving markets. So it's

 13 bringing market participants into a system to help

 14 them build a marketplace and help develop

 15 liquidity in a marketplace.

 16 There's very transparent criteria that

 17 participants in those programs must adhere to.

 18 The programs themselves are posted on our web

 19 site. They're filed with the Commission for

 20 approval. There's prescribed criteria that people

 21 need to meet.

 22 But the fundamental premise is to
 60

 1 develop and build markets and build liquidity.

 2 That has nothing to do with how the orders, when

 3 they come into the system, are treated by the

 4 platform.

 5 COMMISSIONER O'MALIA: Bryan, I believe

 6 CME has nine separate order types.

 7 MR. DURKIN: Seven.

 8 COMMISSIONER O'MALIA: Seven. Similar

 9 --

 10 MR. VICE: Yes.

 11 COMMISSIONER O'MALIA: And --

 12 MR. VICE: Single-digit.

 13 COMMISSIONER O'MALIA: Okay. And on the

 14 equities, do you have a sense?

 15 MR. VICE: Let's just say well over 50.

 16 COMMISSIONER O'MALIA: Okay.

 17 MR. VICE: I would guess 100. I don't

 18 know. I'm guessing, but I know there's more than

 19 50.

 20 And New York Stock Exchange, again, in

 21 trying to take a first step, on our least earnings

 22 call, Jeff announced that we're trying to scale
 61

 1 those back. Some things we can do unilaterally.

 2 Other things have to be more of an industry or the

 3 SEC saying that it needs to be done. But we're at

 4 least retiring 15 order types.

 5 So it's a very small step, but it's a

 6 step in the right direction, I think, to try to

 7 get back to I think what Joe said. Simplification

 8 is part of the answer here.

 9 MS. ALDRIDGE: Yes. Hi. It's Irene

 10 Aldridge from Able Alpha Trading.

 11 I think that what we've learned at the last

 12 meeting, or during the last meeting, that it's

 13 very difficult to agree on philosophies of trading

 14 -- manual is better than automated, et cetera.

 15 But, however, we can all agree on a few

 16 basic principles; that is, that market

 17 manipulation is bad in whatever form and that

 18 crashes and other market disruptions are bad.

 19 And to Mr. McGonagle's comment, I think

 20 the key thing that I'm very excited to see on the

 21 second part of today is that the Commission is

 22 already focusing, and we should spend more
 62

 1 attention on is really market surveillance.

 2 If we have strong market surveillance

 3 that can detect a sort of activity, or a kind of

 4 undesirable activity, and potentially detect

 5 runaway algorithms and predict risk events, market

 6 disruptions and even track high-frequency

 7 trading, given the currently available information

 8 -- and there is a lot of new research that has

 9 come out in the last year that allows us to do

 10 that -- I think everybody will feel that there is

 11 more confidence in the markets.

 12 And if it's a scientific approach that

 13 creates more transparency, everybody will be more

 14 confident in what is going on.

 15 Obviously, there are some issues with

 16 surveillance that are, I guess, going to be

 17 discussed in the second part, such as whether

 18 pre-trade is optimal or run time is optimal or

 19 post-trade is optimal, and there are some time

 20 sensitivities to various of these issues.

 21 But the bottom line is I think the

 22 Commission is on the right track and it's the
 63

 1 surveillance that's really going to unite, if you

 2 will, different parties and further strengthen the

 3 confidence that the markets are rally functioning

 4 the way they should.

 5 Thank you.

 6 COMMISSIONER O'MALIA: I'm going to call

 7 on Cliff, and then I'm going to go to Mr. Lothian,

 8 Concannon and then Keith Fishe.

 9 MR. LEWIS: Three points. First point,

 10 just I think it's worth remembering that one of

 11 the big changes in the futures industry is when

 12 the exchanges -- exchange clearinghouse verticals

 13 -- became public companies, for-profit public

 14 companies, and were no longer controlled by their

 15 members. It fundamentally changed the landscape

 16 in terms of incentives.

 17 Now Chuck's and Bryan's colleagues have

 18 a fiduciary responsibility to their shareholders

 19 to maximize revenue and no longer provide, let's

 20 say, special privileges to certain market

 21 participants. They would be subject to the

 22 plaintiff's bar who is always enthusiastic about
 64

 1 bring suits against public companies for not

 2 maintaining their primary responsibility, which is

 3 maximizing shareholder value.

 4 That was not the case previously, nor

 5 does it exactly fit even though many of these are

 6 private companies. Many of the exchanges,

 7 so-called, in the equity market are actually owned

 8 by market-makers. It's quite a different market

 9 structure between the two that's a pretty

 10 fundamental difference.

 11 Second point is -- and I've said this

 12 before, but I just want to make very clear -- that

 13 the co-location problem that people talk about is

 14 very simple. It's the co-location of a sensible

 15 market structure, as is the case with derivatives,

 16 with an insane market structure that was designed

 17 by GS-14 lawyers in the securities market.

 18 And the major take-away for the

 19 Commission should be you guys have it right; they

 20 have it wrong. They should change; you don't have

 21 to change.

 22 And, in fact, I would say as my final
 65

 1 point that the biggest threat to the market -- and

 2 this is particularly prevalent given that we're

 3 talking in a very low volatility, frankly, low

 4 interest rate environment, low inflation

 5 environment, which is not going to last. It may

 6 go on for years. I'm not making any bets.

 7 But I think we need to all be thinking

 8 about what the next crisis is.

 9 And the next crisis, I think, is

 10 actually being promoted by the Commission, which

 11 is abandoning its traditional approach of

 12 principles-based regulation for SEC-style

 13 prescriptive regulation, by which -- the way those

 14 GS-lawyers created

 15 the problem was they

 16 didn't know anything about markets. They didn't

 17 think like economists. They thought like lawyers,

 18 which the principle is to employ more lawyers,

 19 right, not increase liquidity.

 20 The question, I think, that the

 21 Commission needs to worry about is not that HFT

 22 guys are too powerful. On the contrary, I think
 66

 1 it's almost the opposite problem, which is where

 2 is liquidity coming from in the future that helps

 3 stabilize markets?

 4 Where does the speculative interest come

 5 from in the future when markets go volatile in the

 6 face of hugely increased costs being imposed on

 7 those market participants?

 8 I think that's the scary thing -- is

 9 that there will be insufficient HFT to handle the

 10 requirements of a more volatile interest rate

 11 environment. So that's the threat that I think we

 12 ought to worry about in the derivatives market.

 13 MR. LOTHIAN: I wanted to ask Mr.

 14 Saluzzi about his point number one about

 15 eliminating payment for order flow.

 16 It has been suggested to me that you

 17 can't ever eliminate payment for order flow, that

 18 it's a little bit like outlawing prostitution.

 19 You can make it against the law, but you can't

 20 eliminate it.

 21 Historically speaking, there's the

 22 payment for order flow that you would see on the
 67

 1 books, and then there are also incentives that are

 2 offered to those decision-makers who are the ones

 3 that are directing that order flow.

 4 You know, to say that there's not

 5 payment for order flow in the futures market is

 6 correct in an electronic market, but historically

 7 speaking, if you were ever around the trading

 8 floor at Christmas time, you would know that

 9 brokers rewarded trading desks and clerks and

 10 runners very handsomely for the order flow that

 11 they directed them.

 12 The difference being is that the brokers

 13 were executing orders. They were brokering and

 14 filling those contracts. They weren't on the

 15 execution side of receiving the benefits of the

 16 trade.

 17 And, in terms of you mentioned future

 18 markets, good; equity markets, bad, okay, yeah.

 19 But, historically speaking, there's been

 20 a bias in the markets that if you go back to when

 21 I came into the markets, in the specialist market,

 22 the things that they did on the New York Stock
 68

 1 Exchange with that model, if you did that in the

 2 futures market, would land you in jail. Okay.

 3 And so there's some very historical kind

 4 of differences and biases that I think have

 5 delineated those two markets and made practices

 6 different.

 7 There are some of the same incentives.

 8 You know, we all want the order flow to come to

 9 us.

 10 But I'd like to ask you, how do you

 11 think you police it when it's just going to go

 12 underground?

 13 MR. SALUZZI: Well, I mean, that's a

 14 question for the regulators, obviously, in how can

 15 they police it.

 16 And I think John brings up a point about

 17 the 90s, and we all know the pictures of the

 18 specialists getting carted off in handcuffs.

 19 Well that was a problem with regulation. Okay.

 20 They're going to take advantage. People

 21 are going to do what they can do as long as no one

 22 is looking. Right?
 69

 1 So I think, just like we had then, we

 2 have a similar problem now except that the floor

 3 has now been transferred to server forms. Right?

 4 And now it's harder to even spot where these maybe

 5 potential problems are.

 6 But when it comes to payment for order

 7 flow, there are certainly two that we focus on.

 8 You know, the maker-taker is a

 9 no-brainer in our opinion. Get rid of it. The

 10 exchanges are paying for order flow.

 11 But I don't want to take away the

 12 exchange profit because they need to make money.

 13 Right? We get that.

 14 So, if on average it's a 10 mils spread,

 15 let's just call it 10 mils to make, 10 mils to

 16 take. I'm more than happy to pay them. Right?

 17 That should be their fee for putting

 18 those buyers and sellers together as opposed to

 19 now where a rebate could be maybe 35 mils if

 20 you're a high-end client and a take fee is maybe

 21 28 mils.

 22 Well, let's just flatten this thing out
 70

 1 and call it what it is. Okay?

 2 So there you don't have that incentive

 3 anymore to go to -- what happens, obviously, is

 4 the broker-routers are going to certain spots, or

 5 at least they were, and maybe they still are.

 6 We're still not sure on that. Depending on where

 7 the payments were highest. Right?

 8 So, if you get rid of, one, maker-taker,

 9 you're getting rid of some of the problems.

 10 But, two, the payment for order flow

 11 where brokers are selling it to market-makers is a

 12 big issue that no one seems to want to talk about.

 13 It was addressed in Michael's book. But that's

 14 where we think price discovery is getting

 15 distorted.

 16 And just as an easy example, just say

 17 you're in your own retail account and you're

 18 bidding 10 cents for 500 shares and you want to

 19 buy this stock. Well, if someone wants to sell

 20 you that 500 shares, he hits the button, sells it

 21 to you. But instead, you get nothing, and they

 22 get it at 10.0001, and that's considered price
 71

 1 improvement for the seller.

 2 Well, what's not talked about is, what

 3 about the disadvantage of that buyer who was

 4 sitting there, wanting to buy stock and basically

 5 got disenfranchised and stepped ahead of by that

 6 internalizing broker?

 7 Well, what most likely happens is then

 8 the model -- the order flow is modelled. We all

 9 know how this works. And, possibly, that buyer

 10 ends up paying 12 cents or 15 cents.

 11 So who got hurt? You know, did the subpenny

 12 price improvement mean anything to that seller of 500

 13 shares? Or, did the buyer now, who has to go pay

 14 up, really get hurt? So, when we talk about

 15 off-exchange volume -- and a lot of people toss

 16 the 40 percent number around -- part of that is

 17 dark pools, but a good chunk of that is these

 18 internalization market-makers.

 19 So, for us, to get a true price

 20 discovery, get rid of all these payments; have the

 21 buyers and sellers meet. You may widen spreads a

 22 bit. Okay?
 72

 1 It may happen. It may not. But we

 2 don't know. So that's why we actually do applaud

 3 the SEC at this point for looking into pilot

 4 programs. Those are necessary. You want to do

 5 these steps.

 6 You don't want to do it right away, like

 7 we do with Reg NMS, and we just roll the thing

 8 out.

 9 Maybe there's a pilot program. I'm

 10 talking about the wide tick pilot program now.

 11 Right?

 12 That's a good idea. Let's bucket them

 13 into two different ways.

 14 Does it make sense; let's have a

 15 maker-taker elimination pilot program?

 16 Let's start to look at these things, but

 17 let's not wait any longer. You know, we've been

 18 talking about this for years. Two-thousand and

 19 seven was Reg NMS.

 20 What year is it now? Right? How long

 21 is this going to continue?

 22 COMMISSIONER O'MALIA: Chris Concannon.
 73

 1 MR. CONCANNON: Thanks, Commissioner. I

 2 thought I would try and respond to Vince's

 3 question around what action could the Commission

 4 take. I mean, I do appreciate coming to the CFTC

 5 and learning so much about the equity markets.

 6 It's been very helpful and illuminating.

 7 Apparently, the equity market is bad;

 8 the futures market is good. We can all go home.

 9 And, Cliff, for the record, I was a

 10 GS-13 and had something to do with that market

 11 structure you complained about.

 12 First, you know, in terms of risk

 13 controls, I think that's one area where the

 14 Commission has an opportunity to take action that

 15 is actually protective. We have the exchanges in

 16 the futures world that has, in fact, provided

 17 exceptional risk controls, exceptional behavioral

 18 controls.

 19 But with respect to an individual firm

 20 that has connectivity to an exchange in the

 21 futures world, the exchange doesn't have the full

 22 picture of that firm's risk. Only the firm has
 74

 1 the full picture of that firm's risk. Only the

 2 firm knows the full picture of its behavior -- the

 3 behavior that's appropriate for that firm.

 4 And so we can rely on the exchanges

 5 today. I don't think there's this looming risk

 6 out there.

 7 But I do think that each individual firm

 8 can define its true risk controls, and those risk

 9 controls can be overseen by the exchanges, by the

 10 regulators or even by the CFTC.

 11 So, in the terms of risk controls, if

 12 there is a firm connecting directly, whether

 13 through co-lo or a physical connection to the

 14 exchange, it should have appropriate controls

 15 before the orders pass into the exchange

 16 environment. These are firms that have computers.

 17 They are trading with computers. We have that

 18 nowadays.

 19 And I just think that that's one simple

 20 step that the Commission can act on to add further

 21 protection.

 22 And when I talk about risk controls, I'm
 75

 1 talking about not only credit risk controls but

 2 behavioral risk controls -- sending too many

 3 orders, sending too many messages. That's defined

 4 by what's unique to the firm, and it should be

 5 something that's the responsibility of the firm if

 6 they choose to connect directly to the exchange.

 7 If they want to go through an FCM or another

 8 intermediary, that member would then have those

 9 risk controls obligation.

 10 And this is a model that has been

 11 adopted in Europe in cash equities by ESMA. It's

 12 been adopted in Australia, Canada and, yes, on the

 13 equity side, by some GS-14

 14 lawyers who actually wrote some risk

 15 controls rules. So there's models that the CFTC

 16 can look at and be informed by. They don't need

 17 to be prescriptive. They can define several

 18 minimum levels of control. And it's a fairly

 19 simple principle-based rule, to Cliff's point.

 20 I just have one more question. Joe, you

 21 had mentioned in your point about the surveillance

 22 of the U.S. equities market, that you had some
 76

 1 concerns around flaws around that system.

 2 And I agree with you that there are some

 3 improvements that should be made, and the

 4 consolidated audit trail is coming, taking a

 5 while.

 6 But I want to understand exactly, what

 7 is the flaw? You have folks here from FINRA that

 8 largely surveil all of the U.S. equities. Options

 9 are surveilled, and data are shared from futures

 10 to equities.

 11 And I'm trying to understand, what is

 12 the flaw in the U.S. equities surveillance system

 13 that you're so concerned about?

 14 MR. SALUZZI: Sure. I appreciate that.

 15 And I think the current system, MIDAS, which was

 16 obviously built by an HFT firm, is a system which

 17 tracks --

 18 MR. CONCANNON: No, I'm sorry. I'm not

 19 talking about MIDAS.

 20 MR. SALUZZI: Okay.

 21 MR. CONCANNON: I'm talking about FINRA,

 22 which surveils the U.S. equity market.
 77

 1 MR. SALUZZI: Right. We currently have

 2 OATS, which is a good spot. Right? You're

 3 getting it.

 4 And I think the consolidated audit trail

 5 --

 6 MR. CONCANNON: No, it's not OATS.

 7 FINRA runs a surveillance system that takes the

 8 full depth of book and surveils the full depth of

 9 book, separate from OATS.

 10 MR. SALUZZI: I think what we're looking

 11 for is more in the way of routing -- where the

 12 orders are being routed, at what point they're

 13 going through, are they -- what the consolidated

 14 audit trail is trying to do. Okay?

 15 But, from a user level, it would be nice

 16 as well. And I think the one fault of the

 17 consolidated audit trail, if it ever does get

 18 built, would be that it doesn't go down to the

 19 user level. It's going to be down to the market-

 20 maker ID.

 21 So, in other words, if I was a

 22 sponsoring market-maker and I had 30 firms
 78

 1 underneath my umbrella, I think it's going to be

 2 pretty difficult to identify the actual user who

 3 may be using some, let's just say, nefarious

 4 behavior.

 5 Let's just say there's some spoofing

 6 going on. Will I be able to tell? I don't know.

 7 We want to get it -- drill it down to

 8 the actual user.

 9 Why not? It doesn't seem like anybody

 10 -- and I think one of the criticisms there was

 11 from some folks saying, well, if the regulator had

 12 that level of detail on my activity, he could then

 13 maybe leave the regulator and go to a private firm

 14 and then know what I was doing.

 15 And I think that's a ridiculous

 16 argument. I mean, that's an absolutely ridiculous

 17 argument.

 18 So you need to drill down to the actual

 19 user. You need to figure out if there is spoofing

 20 or banging the close or whatever these things are

 21 that are actually going on out there. I think

 22 it's pretty -- it's not much to ask.
 79

 1 COMMISSIONER O'MALIA: Can I -- I want

 2 to get a response to your other question. You

 3 were talking about direct market access, and this

 4 is actually a futures term.

 5 And this was a question that we asked in

 6 the questions to all the Commission -- to all the

 7 TAC members. So I would like to have either Chuck

 8 or Bryan, or both, to touch on:

 9 What are the exchange policies and

 10 procedures for direct market access?

 11 What risk controls are in place today,

 12 and are they the same for all participants, or do

 13 they differ by self-clearing members and clients?

 14 And should there be a minimum standard,

 15 as Chris raised, or a registration required for

 16 direct market participants?

 17 If we could kind of tick some of those

 18 off, that would address some of the things on our

 19 list.

 20 MR. DURKIN: First of all, as an

 21 exchange, we support clearing members allowing for

 22 direct market access, and we hold any participant,
 80

 1 including those that have direct market access to

 2 our platforms, accountable and are required to

 3 adhere to our credit control requirements.

 4 So we have pre and post-trade credit

 5 controls that have been adopted by CME Group, and

 6 we require every single one of our clearing firms

 7 to abide by those controls.

 8 There is a customer acknowledgment

 9 agreement that is signed, and it must be signed

 10 and authored by both the participant that's having

 11 the access as well as the clearing firm. And they

 12 ascribe to, and commit to, ensuring and validating

 13 that all of those credit controls that we require

 14 are in place and adhered to.

 15 We also require the direct market

 16 participant themselves to subscribe to conformance

 17 testing. So they don't come into our system

 18 blindly in any way, shape or form. They adhere to

 19 those same criteria and principles that we hold

 20 all of our market participants to.

 21 Ultimately, the clearing firm is

 22 financially liable for anything that occurs or a
 81

 1 misstep, and that's part of the overall

 2 authorization to allow that type of access to come

 3 into our system.

 4 In terms of registration, you know, we

 5 have that granular level of registration. So I

 6 can tell you I know every single participant

 7 that's bringing every single order message into

 8 our system every single day, all day, down to that

 9 granular level.

 10 So we also have a criteria that

 11 requires, under our Tag 1028, an identifier to see

 12 whether or not a message has come in through

 13 manual or automated means.

 14 So we know the individual participant.

 15 We also know the style and the way in which the

 16 order came into the system. And we have every

 17 single message that comes into our system, every

 18 single day. And that information feeds itself

 19 into a surveillance system.

 20 I just have to mention about the

 21 consolidated audit trail. So I'm sorry to be a

 22 little bit redundant, but you know, in these
 82

 1 markets, we have 100 percent of the activity that

 2 comes into our markets every day. That

 3 information is used to feed very meticulously

 4 designed surveillance systems.

 5 For example, what occurred on May 6th,

 6 we were able to have a full accounting of what

 7 occurred in those markets to the CFTC. I think it

 8 was 11:30, maybe midnight, by that evening, but we

 9 were able to give you a full accounting of the

 10 activity that occurred in these markets, message

 11 by message.

 12 CHAIRMAN WETJEN: Bryan, I'm just

 13 curious. You don't have to get into all the

 14 detail, but in surveilling the risk controls of

 15 the firms that have direct market access, how

 16 often do you look at compliance with what they've

 17 agreed to along with the clearing member?

 18 Like just generally speaking, what kind

 19 of program do you have in place?

 20 MR. DURKIN: Through our audits team,

 21 it's incorporated in terms of their financial risk

 22 audits. I don't know the exact rotation, but I
 83

 1 believe that they're hit every year in the context

 2 of validating the risk protocols and the risk

 3 procedures of the current firm and those that are

 4 clearing through them.

 5 MR. VICE: I mean, I don't have a lot to

 6 add to that. Our processes and procedures are

 7 largely identical.

 8 I think we don't have any situations

 9 where we're investigating something, or somebody

 10 has complained about something in a market, and

 11 we're at a loss for data; we don't know exactly

 12 who it is; we don't have granular enough

 13 information to figure out what is going on. We

 14 just don't have anything like that. It's not a

 15 problem.

 16 COMMISSIONER O'MALIA: So we put forward

 17 our testing and supervision document, a concept

 18 release. We talked about direct market access.

 19 We talked about controls in place.

 20 I would assume -- and it's clear from

 21 the document -- that ICE and CME do not have

 22 identical kind of risk management tools. You have
 84

 1 similar but not identical.

 2 So, if the Commission is thinking about

 3 establishing or federalizing controls that you

 4 already have in place, how do we think about

 5 enabling both sets of controls without trying to

 6 overreach and create a one-size-fits-all

 7 solution?

 8 What advice do you have for the

 9 Commission?

 10 MR. VICE: I think Cliff or someone

 11 mentioned it earlier; remain as principles-based

 12 as possible.

 13 I think getting prescriptive on this is

 14 a bad idea.

 15 And what we're doing today -- I suspect

 16 we'll be doing something differently tomorrow. We

 17 will continue to try to improve. We are layering

 18 more and more both pre and post-trade risk

 19 controls.

 20 I mean, Bryan and I are cordial. We

 21 compete fiercely in this marketplace, and we watch

 22 what each other is doing, and we watch what the
 85

 1 market-making programs, each one, has. We're

 2 probably each other's best policeman about what is

 3 going on. I think it also spurs us both to

 4 improve what we're doing, particularly on the

 5 technology side.

 6 So I don't -- you know, I would urge

 7 you; please do not get prescriptive, whether it's

 8 risk controls or something else we talked about in

 9 these meetings, matching engines and discrete

 10 auctions and should it be a continuous market, or

 11 should it be -- maybe. I don't know.

 12 I mean, there are a lot of -- you know,

 13 there are very liquid futures markets, and there

 14 are very illiquid. And what works in one doesn't

 15 necessarily work in others.

 16 And I think if you leave the exchanges

 17 there under your regulation, in full transparency

 18 of what we're doing, to improve whatever problem

 19 there may be -- I think ideally that's the best

 20 approach as opposed to trying to get in a room,

 21 write down on paper what the ideal, optimal

 22 solution would be in a vacuum and then hope that
 86

 1 when you implement it in the real world it

 2 actually works the same way.

 3 MR. DURKIN: Just one comment,

 4 Commissioner. It's your work and this team's work

 5 over the last few years when you take a look at

 6 the controls that we've articulated today. Yes,

 7 there's a number of these that we've had in place

 8 for a period of time. There's been some that have

 9 evolved as a result of the work and the effort of

 10 the group around this table. So that's, you know,

 11 a testament to the futures markets and our ability

 12 to evolve and continue to adapt and innovate as

 13 these markets continue to innovate.

 14 COMMISSIONER O'MALIA: I would point out

 15 this was the very first meeting we had -- was on

 16 risk controls -- and Michael Gorham ended up

 17 bringing together a consensus document on what the

 18 Commission should do three years ago. Four years

 19 ago now.

 20 So I'm going to -- Mr. Chairman.

 21 CHAIRMAN WETJEN: Can I ask the same

 22 question of you, Chuck?
 87

 1 If you're ensuring for compliance, with

 2 whatever risk controls, those who have direct

 3 market access in the exchange, what do you,

 4 generally speaking? Like how do you monitor that?

 5 MR. VICE: I think, as Chris pointed

 6 out, there is a limit to what we can do.

 7 I mean, we don't go into their office

 8 and ask them to demonstrate behavioral checks over

 9 what are too many messages or what you're doing in

 10 this market relative to ours.

 11 We have -- you know, when they initially

 12 come into our markets, they have to pass a battery

 13 of conformance tests. When we have major upgrades

 14 to the system, software releases, they have to

 15 repass those conformance tests.

 16 In the pre-trade risk controls that are

 17 administered, there are single order size limits,

 18 net long-short by product, absolute long-short by

 19 product. So, all the different options, different

 20 risk limits set for options. So, as many

 21 different kind of controls that we can put around

 22 that.
 88

 1 And it's important to note that those

 2 controls are the clearing members' controls. The

 3 clearing members set those for the HFTs. So the

 4 HFTs are not setting those for themselves.

 5 Maybe that's stating the obvious, but

 6 it's important to note that.

 7 So we really -- you know, it's only the

 8 clearing members' responsibility that they're

 9 taking that risk and clearing that firm. We're

 10 providing exchange-level controls, and then

 11 largely relying on the clearing firm's

 12 relationship with the HFT because the clearing

 13 firm and the firm level should both have their own

 14 controls aside from the exchange-level controls.

 15 COMMISSIONER O'MALIA: After Sayee makes

 16 a comment, I'm going to go to Keith Fishe. Walter

 17 Hamscher had his sign up, Larry Tabb after that

 18 and Steve Joachim and then Richard Gorelick and

 19 then Brad Levy.

 20 MR. SRINIVASAN: This is a question for

 21 Chuck. Bryan was mentioning what we call the ATS

 22 flag, I guess. That's there in the data we get from 
 89

 1 CME. I'm curious to learn, what are your plans? Is ICE

 2 planning to have market participants submit a

 3 similar flag?

 4 MR. VICE: Honestly, I can't tell you if

 5 we have that exact flag.

 6 I mean, we have an exhaustive authorized

 7 trader management system. I think we've done some

 8 presentations here before, and Trabue can speak to

 9 it on the next panel, but you know, we have very

 10 detailed information on who is the firm

 11 financially responsible for this order, who is the

 12 individual that's working the order or at least

 13 responsible for the computer that's working the

 14 order, so if we have to get in touch with

 15 somebody.

 16 So there's -- this is all -- this isn't

 17 order by order, but this is set up for the idea

 18 that on that order we can map that back to our

 19 authorized trader management system, and we have

 20 all of that static information about who that

 21 person is.

 22 Whether order by order, it's flagged as
 90

 1 from an ATS or a human, I honestly don't know the

 2 answer. Trabue would have to answer that.

 3 COMMISSIONER O'MALIA: Keith.

 4 MR. FISHE: Thank you, Commissioner.

 5 I'm Keith Fishe from Trade Forecaster Global

 6 Markets, and I've served on the Subcommittee for

 7 Automated and High-Frequency Trading.

 8 I want to go back to something that Joel

 9 raised and then Chris commented on, and that's the

 10 issue of equal access. Equal access doesn't mean

 11 equal cost, and so trading cost, as Rob alluded

 12 to, might be -- you might be incented to help

 13 support a market, and those same incentives may

 14 not flow down to the retail guy trading from home.

 15 But equal access is a very important

 16 thing, and I think the exchanges do a very good

 17 job of making sure that the demand for access in

 18 all types, co-location and otherwise, is satisfied

 19 by their ability to supply it. And that's

 20 something to look -- you know, I'm sure they have

 21 to balance to their shareholders as how much

 22 excess capacity that they build out so that they
 91

 1 can meet emerging demand.

 2 But the nature of access, you know, is

 3 pretty important. And I think that if we look at

 4 the equity side, where they developed the model of

 5 sponsored access, I would really hesitate to adopt

 6 a similar framework on the futures side. I think

 7 that the intent of sponsored access was to move

 8 firms to a more controlled environment, but that

 9 basically reduced competition for providing liquid

 10 markets and created other frictions in that whole

 11 microstructure environment.

 12 COMMISSIONER O'MALIA: Keith, do you

 13 want to touch on what those frictions are because

 14 if we've got direct market access and sponsored

 15 access when does it become too much?

 16 MR. FISHE: Well, so direct -- so, if

 17 you model after the equity market and you go down

 18 the path of sponsored access, you're increasing

 19 the latency, essentially, of someone trying to

 20 provide liquid markets to those various exchanges.

 21 So a firm that might have been very well

 22 suited to provide markets, if they were directly
 92

 1 connected with the proper risk controls and proper

 2 vetting and proper conformance testing for those

 3 exchanges, has basically now been shut out of the

 4 market by having to route through another entity

 5 in order to do that.

 6 You know, I'm sure there -- you know,

 7 that doesn't necessarily affect firms whose

 8 business model isn't to do that, but it changes

 9 the competition landscape on the equity side, and

 10 I would want you to very carefully look at it if

 11 you were going to do that on the futures side.

 12 But going back to access issues, you

 13 know, the features, choices, specifications are

 14 very transparent, and I hope they continue to be

 15 transparent for access.

 16 And I, again, repeat that regulatory

 17 initiatives or exchange initiatives for access

 18 issues should not create unevenness or,

 19 specifically, should not create institutionalized

 20 unevenness between participants.

 21 There's another issue that came up in

 22 terms of timing differences, and I don't think
 93

 1 that this is really talked about a lot, but the

 2 question is whether there are timing differences

 3 between order confirmations and how they're

 4 received between participants. And my

 5 understanding is that there really is an effort to

 6 get that information out to participants at near

 7 concurrency, if not at the exact same time.

 8 But the question comes up because there

 9 are differences in people's responses to that

 10 information. And I'd like to suggest that really

 11 there will always be differences, always be timing

 12 differences in how people process information and

 13 then act on it, and it's a systemic quality of the

 14 market, not a systemic problem.

 15 You know, I think that that issue --

 16 COMMISSIONER O'MALIA: On that point,

 17 why don't we just have Julie with CME, who's

 18 responsible for the Globex and making the changes

 19 in the latency between trade and confirmation,

 20 address this question directly?

 21 MR. FISHE: Hi, Julie.

 22 MS. HOLZRICHTER: Thank you for asking
 94

 1 that question.

 2 It's a great opportunity for, I think,

 3 us to really explain what I think a lot of people

 4 don't understand very well, and that is there's a

 5 very big difference between I think what you hear

 6 in the media about different market data feeds,

 7 where certain individuals can pay for a

 8 proprietary feed that's faster than the

 9 consolidated feed, and a trade confirmation. And

 10 I want to kind of explain the two very, very

 11 quickly and move on.

 12 So I think for an average investor,

 13 whether you're sitting at home, whether you are a

 14 commercial investor and you are co-located in a

 15 high-frequency shop, you are looking for the same

 16 thing, and that is when you're sitting at your

 17 computer you're looking to make sure that when you

 18 put an order in you get some type of confirmation

 19 that it was filled, that it was acted on.

 20 So, again, even the grandmother sitting

 21 in her home, who's buying one share, is still

 22 waiting to get that confirmation that says, yes,
 95

 1 you were filled. That is a trade confirmation.

 2 That is the information that goes back directly to

 3 the individuals that were part of a trade.

 4 There is market data. That is a

 5 separate type of delivery of information. That

 6 information goes to the whole world.

 7 So, when we talk about the fact that we

 8 have one market data feed, you're not able to buy

 9 or purchase a faster data feed, we're talking

 10 about our market data feed that goes to the whole

 11 world. We provide it in one way. You can choose

 12 to receive it in multiple ways -- all very

 13 transparent. But we push it out our door in the

 14 same, exact way, and we don't offer different

 15 types of services based on how much you're willing

 16 to pay, at all.

 17 Trade confirmation. We'll go back to

 18 that. Every single time there is a trade that

 19 occurs in a match engine, it's not always a

 20 one-for-one, as we know.

 21 But when a market data message goes out

 22 -- because, Joe, we don't do market by order -- we
 96

 1 aggregate the information.

 2 So, on the market data feed, you might

 3 see a 10,000 lot just traded. But guess what?

 4 For the trade confirmations, you are sending out

 5 potentially 10,000 individual confirmations, or

 6 5,000 if you just want to say they were buyers and

 7 sellers.

 8 So, when we talk about the fact that

 9 there is inherently going to be variability, it's

 10 because of just pure, basic physics and

 11 technology.

 12 So these are not the types of things

 13 that I think when you hear about them -- and what

 14 I think the Flash Boys book was referring to was

 15 the market data, the information that goes out to

 16 the whole world. You get different options for

 17 how you receive it.

 18 I think the information that's been

 19 discussed recently with CME Group and

 20 confirmations is different.

 21 And I'm not saying it's right or wrong.

 22 I'm just saying it's really important that we
 97

 1 understand that they are two completely different

 2 things.

 3 And it's very important to understand

 4 that trade confirmations go back to only the

 5 people that were involved in the trade; market

 6 data goes back to the whole world so the whole

 7 world knows what trade occurred.

 8 Having said that, for the last -- you

 9 know, I've been with CME for 27 years. So I've

 10 seen the evolution of open outcry to electronic

 11 trading to co-location to faster markets to

 12 demanding, you know, different types of products

 13 and services.

 14 And I'll say that this evolution is not

 15 new. This whole idea of constantly improving your

 16 technology and constantly understanding what the

 17 needs of our customer base and making sure that

 18 we're, you know, bringing those two closer and

 19 closer together -- this is an ongoing project

 20 that's been years and years and years in the

 21 making.

 22 So I'm very comfortable that, you know,
 98

 1 it's a focus for us, always has been a focus for

 2 us and will continue to be a focus for us, and I'm

 3 very confident that I can say the same for pretty

 4 much every exchange out there with respect to

 5 technology and enhancements to technology. Some

 6 may act on it, you know, a little more quickly than

 7 others, but it's part of being a technology-based

 8 industry.

 9 So that's all I'll say.

 10 COMMISSIONER O'MALIA: Walter. Walter

 11 has been patient. Representing the SEC, he might

 12 have something to say now.

 13 MR. HAMSCHER: Yes, I'm on the Data

 14 Standardization Committee.

 15 What intrigued me very early on, Joe,

 16 your very counterintuitive remark that maybe it

 17 would be better if less market data were

 18 available.

 19 And the reason it's so counterintuitive

 20 to me is I'm part of the division in the SEC that

 21 is the Division of Economic and Risk Analysis. As

 22 we try and do an ever better job of understanding
 99

 1 market behavior, trader behavior, we're very much

 2 hampered by the lack of transparency in market

 3 data. So I understand that some uniformity would

 4 be a good thing.

 5 What I'm -- and I appreciate Bryan's

 6 sort of forthright description of the relatively

 7 limited amount of data, price, orders.

 8 What I'm wondering is, though, are there

 9 not other commodity exchanges that are providing

 10 more, and does that provide an opportunity for

 11 arbitrage?

 12 And that conversation seemed to be

 13 starting this morning, and I just wanted to hear

 14 from ICE and other market representatives whether,

 15 in fact, there are substantial differences in the

 16 amount and type of market data.

 17 Thank you, Julie, for your elaboration

 18 of what is available to whom as a good

 19 explanation, but I'm just curious about the other

 20 markets that the CFTC regulates. And is there

 21 asymmetry in the amount of information provided by

 22 markets, and is it significant?
 100

 1 So I'd like to start with ICE.

 2 MR. VICE: Sure.

 3 MR. HAMSCHER: -- to speak to that.

 4 MR. VICE: Sure. So on several of those

 5 topics -- so we have -- as Julie said, ICE has one

 6 price feed. There's no premium feed that anyone

 7 gets.

 8 We are order by order. Our markets --

 9 you know, we have both futures markets, and we've

 10 had OTC-cleared bilateral markets on the same

 11 platform. And so there has been historical need

 12 to actually have more information on orders, where

 13 an order -- given who the counterparty -- or the

 14 trader was that was receiving the order may be

 15 executable, may not be, on a bilateral basis.

 16 So we are order by order. We have a

 17 price-level price feed as well that we are

 18 considering moving to now, which would reduce some

 19 of the data that Joe's alluding to, specifically

 20 order by order information. We may move to that,

 21 but historically, we've been order by order.

 22 COMMISSIONER O'MALIA: Walter, does that
 101

 1 answer your question?

 2 MR. HAMSCHER: It does although there

 3 are other commodity markets.

 4 COMMISSIONER O'MALIA: I think maybe in

 5 the next panel we can talk about some of the

 6 cross-market. I mean, obviously, the relationship

 7 between equity markets and futures markets,

 8 derivative markets.

 9 MR. HAMSCHER: I'm not defending equity

 10 markets this morning.

 11 COMMISSIONER O'MALIA: No, no.

 12 Nonetheless, I mean, that is --

 13 MR. HAMSCHER: I'm genuinely curious

 14 about how this works --

 15 COMMISSIONER O'MALIA: Okay.

 16 MR. HAMSCHER: -- between the commodity

 17 markets because arbitrage is kind of where it's

 18 at.

 19 COMMISSIONER O'MALIA: Yeah, and I'm

 20 curious as to what our 21st Century surveillance

 21 system may look like in light of the arbitrage

 22 opportunities and the different regulatory
 102

 1 structures.

 2 So after Walter was Larry Tabb, Steve

 3 and then Richard Gorelick, Brad Levy, Nick

 4 Solinger, Jason Vogt.

 5 MR. TABB: I don't have a real comment

 6 on the discussion. I just wanted to basically say

 7 I think, you know, the CFTC and SEC have

 8 historically kind of looked at this separately and

 9 then kind of diverged -- I don't know -- maybe 15

 10 or so years ago, maybe a little longer.

 11 But the whole idea of two major routes

 12 -- one is around order flow segmentation and the

 13 SEC's view of kind of looking after the individual

 14 investor and this whole idea of, you know, we need

 15 to do good by the individual investor. And the

 16 second, I think, is around competition and

 17 fragmentation of the markets.

 18 So, with the idea of we need to give the

 19 individual investor a better price or a truer

 20 market, they went through this whole idea of

 21 starting to segment order flow. And I think a

 22 whole lot of things transpired from there. When
 103

 1 we started segmenting order flow, we can provide

 2 price improvement to different classes of

 3 investors. Then you start looking at toxic versus

 4 nontoxic order flow, and then we can start

 5 avoiding the toxic order flow and kind of focusing

 6 on the uninformed order flow.

 7 And then the issue of are centralized

 8 markets -- you know, do they have too much power?

 9 And then we start breaking them apart,

 10 and then you wind up with this kind of view that,

 11 you know, we need to try to segment and understand

 12 and certain -- you know, monetize or understand

 13 the financial impact of a stream of order flow.

 14 And that goes into RLPs and now this whole idea of

 15 institutional liquidity programs.

 16 And you wind up with finer and finer

 17 grained liquidity which, to some extent, in some

 18 cases, if you're a retailed uninformed investor,

 19 is good. But if you're trying to get stuff done

 20 and you're an institution, it may not be good.

 21 And you wind up with all these discrete

 22 liquidity tools that then you wind up either
 104

 1 having to glue together or not glue together, and

 2 you wind up with this fragmentation challenge.

 3 So, if you want to keep the holistic

 4 market, if you want to keep better surveillance,

 5 you want to try to understand exactly what's

 6 operating at every given -- I would try not to go

 7 down that path.

 8 On the other hand, that path has

 9 provided a lot of benefits in terms of competition

 10 and cheap executions, but it creates other

 11 problems as well.

 12 So that's, I think, the --

 13 COMMISSIONER O'MALIA: Make sure you

 14 stick around for Panel III on SEF regulation.

 15 Next, Steve with FINRA.

 16 MR. JOACHIM: Thank you. I'm not going

 17 to get into the equity fragmentation debate, but

 18 certainly equity fragmentation creates some unique

 19 challenges for the regulatory side of the

 20 business. And we have made some great in-roads,

 21 as Chris referred to the work that FINRA has been

 22 able to do to consolidate some of the regulatory
 105

 1 activity across markets, and today we can actually

 2 see across-market participation and strategies

 3 across those environments.

 4 But there are a number of differences in

 5 the equity marketplace, and I'm curious to see

 6 whether they are problems for the futures

 7 marketplace.

 8 When we think of market integrity, most

 9 investors come to market today, working not just

 10 across execution venues, but they work across

 11 broker-dealers, and they've done that for many,

 12 many years.

 13 As a result, understanding from a

 14 regulatory perspective what bad actors are doing

 15 or bad practices are, you need to reach beyond

 16 what's happening at the exchanges and into what

 17 the customers are actually thinking about and what

 18 their strategies look like. Those strategies,

 19 when they cut across multiple broker-dealers, as

 20 well as multiple exchanges, creates a level or

 21 complexity that is difficult to get your arms

 22 around.
 106

 1 CAT will bring us much, much further

 2 down the path. It may not be perfect, but there

 3 are many, many advances in CAT that will allow us

 4 to see things across investors in a way that we

 5 can't see today by bringing orders and executions

 6 reports and trade reports back to the ultimate

 7 investor and allow us to root out abusive

 8 strategies.

 9 I'm curious to hear, what's happening

 10 here in the futures marketplace, and are you

 11 thinking that way?

 12 Do you see behaviors in the futures

 13 marketplace where investors reach across multiple

 14 dealers because I assume the points of execution

 15 that the exchanges are talking about, that they

 16 can see, are the dealer activities?

 17 And what about reaching beyond the

 18 dealers, and are there activities being done to

 19 reach beyond that effort in the futures

 20 marketplace?

 21 And we get to the issues you talked

 22 about before in terms of cross-product behaviors.
 107

 1 We can call them many different ways that are

 2 futures and equities and options and bonds. When

 3 we start thinking about regulation in those

 4 worlds, it's even more critical that we think

 5 about what customers are doing.

 6 So I'm just curious to hear what the

 7 futures marketplace is thinking about in terms of

 8 what they're doing there.

 9 MR. DURKIN: I'm not trying to dodge

 10 this question, Steve, but I think if we could hold

 11 that one for the next panel Andrew will be

 12 speaking to the issue.

 13 MR. GORELICK: Thank you. I'm Richard

 14 Gorelick, CEO of RGM Advisors, a principal trading

 15 firm based in Austin, Texas. I appreciate the

 16 opportunity to participate in this dialogue as a

 17 member of the Technology Advisory Committee.

 18 I do want to comment that I've been on

 19 this Committee since Commissioner O'Malia

 20 reconstituted it in 2010, and we've heard a little

 21 bit of this already today.

 22 And I will admit to some surprise that
 108

 1 in 2014 we're still talking about some of the very

 2 issues we talked about at the first meeting and

 3 the second meeting and the third meeting.

 4 The Commission and this Committee have

 5 certainly contributed to improving understanding

 6 by the public and by policymakers of the use of

 7 technology in markets.

 8 I'll limit my comments at this point to

 9 Vince's question a little bit earlier about where

 10 is there an appropriate area for the Commission to

 11 engage in some of these areas. And, while I agree

 12 with a number of the comments made today about

 13 principles-based rules on risk controls, it may be

 14 an appropriate place in the market for these rules

 15 to come and help make sure that there really are

 16 consistent risk controls across exchanges and

 17 across market participants.

 18 I also want to limit my comments at this

 19 point to the fairness topic that this discussion

 20 today relates to in this panel. And, on fairness,

 21 I believe it is paramount that market facilities,

 22 such as co-location and market data feeds, are
 109

 1 offered to the public on fair, reasonable and

 2 nondiscriminatory terms. I believe that to be the

 3 current practice, but I also believe that there is

 4 an important role for the Commission to monitor

 5 and assure the public that this is always the

 6 case.

 7 In addition, transparency is essential.

 8 Recent press reports -- and we've talked about it

 9 a little bit today -- have indicated that the

 10 Commission is interested in the terms of

 11 market-making and liquidity provision programs

 12 offered by exchanges.

 13 In my mind, the conditions and terms of

 14 these programs should be transparently disclosed

 15 to the Commission and to the public, and there

 16 should be no secret pricing deals. To the extent

 17 that that is not the case today, reforms may be

 18 appropriate.

 19 I will reserve some of my thinking on

 20 the surveillance issue for the later panel as

 21 well.

 22 Thank you.
 110

 1 MR. LEVY: Thank you very much. I want

 2 to continue on a little bit with what Larry was

 3 hitting on, which is the point on competition, and

 4 it seems like the debate today is about

 5 competition, which was part of the SEC's intent.

 6 You know, maybe they went a bit too far in

 7 succeeding on fragmenting the market by

 8 Regulations ATS, NMS, et cetera, but that was

 9 their intent, and you know, they should be

 10 applauded on some level for achieving that albeit

 11 it, arguably, had gone too far.

 12 At the other book end, there is an

 13 argument that simplicity is better from a

 14 regulatory perspective and a market surveillance

 15 and safety perspective, which there are definitely

 16 arguments, I think, that support that.

 17 The reality is in life, and probably in

 18 this debate as well, the answer is probably

 19 somewhere in the middle, where hyper-fragmentation

 20 creates many negative unintended consequences and,

 21 on the other end of the spectrum, very limited

 22 alternatives creates other negative unintended
 111

 1 consequences.

 2 So I'll just make that point. And the

 3 SEC, as a commission, did take a view on that. I

 4 think there are elements of what the CFTC has done

 5 in the implementation of Dodd-Frank that lean

 6 toward that, but there maybe could be a bit more

 7 work done around the preferred outcome from a

 8 regulatory perspective of where the right balance

 9 is between simplicity of market structure and

 10 competition.

 11 The other thing I'll draw just a point

 12 on, which hasn't been discussed today, is the

 13 difference between execution and clearing. A lot

 14 of this discussion today on equities --

 15 hyper-fragmented at the execution level and zero at

 16 the settlement and clearing -- and that is just at

 17 least something to think about when we think about

 18 the structure of derivatives/futures versus the

 19 equities markets and the pending markets in the

 20 swaps world. And we've heard about some potential

 21 competition from that angle, but it's not clear

 22 that that's going to really push the market to a
 112

 1 higher standard.

 2 And the final point I'll make is that,

 3 ultimately, this is all about transparency and not

 4 the typical type of transparency I think that

 5 people think about, which is data transparency --

 6 market limit order books, access to information.

 7 It's really about transparency of the market

 8 structure.

 9 There have been a couple of things that

 10 have come out recently. I think Goldman and

 11 Credit Suisse recently disclosed the workings of

 12 their dark pool, which was always considered very

 13 proprietary, and that is definitely a step in the

 14 right direction in terms of transparency. That

 15 hadn't been mandated, but the market seems to be

 16 taking it on themselves to do it.

 17 We had a particular initiative in Hong

 18 Kong where the regulators demanded that algo firms

 19 submit to a questionnaire that says who they are

 20 and how they do what they do, and that's a version

 21 of what regulators can do to not necessarily

 22 prescribe it in detail but prescribe something.
 113

 1 And we just happened to be the firm that was

 2 selected to run that process, to get the

 3 documentation and the whole system up and running

 4 by the end of the year last year.

 5 And then there are other tools, like

 6 TCA, where it's really tools that allow market

 7 participants not to rely on what people tell them

 8 but to actually know for themselves how their

 9 transactions are being handled in the market,

 10 whether they're moving markets, et cetera. And

 11 those are all tools that the technology firms like

 12 ourselves and others will provide to the markets.

 13 So there are some self-imposed, there

 14 are some that will be imposed by the regulators,

 15 and there are some that the market will just fill

 16 in. But, ultimately, around all of that, the

 17 understanding of how competition should really

 18 fall out in the markets in general is just an

 19 important concept for the room in general and for

 20 the Commission in particular.

 21 MR. SRINIVASAN: A lot of discussion

 22 here has been about market structure issues, and we
 114

 1 economists spend a lot of time thinking about it.

 2 But thinking about operational risk

 3 issues, the concept release that we issued and

 4 sort of received some comments, there are two aspects to 

 5 it. One is market structure issues; the other is 

 6 operational risk issues.

 7 And I was just thinking about the

 8 comment that Bryan and Chuck made in terms of how

 9 you inspect and monitor those with direct market

 10 access.

 11 So, when I read about any glitch in the

 12 market or stoppage if trading, I'm constantly

 13 trying to go to the bottom of the article to see

 14 if there's any mention of a software upgrade that

 15 happened, and 9 times out of 10 a glitch is

 16 typically caused by a software upgrade. You know,

 17 Knight Capital is a classic example, I guess.

 18 And the question is, where is industry

 19 in terms of the exchanges, the FCMs and others, in

 20 terms of how you regulate, how you manage and

 21 mitigate operational risk issues?

 22 So, if the exchange has done a major
 115

 1 software upgrade, then you want the firms to come

 2 and test the systems.

 3 But what if the customers or the firms

 4 have done some changes to the system, at what

 5 point do they have to come and test it with the

 6 exchange, I guess?

 7 COMMISSIONER O'MALIA: Let's ask Rob

 8 that question.

 9 MR. CREAMER: Well, as indicated in the

 10 concept release, of all the principal trading

 11 firms that were surveyed, 100 percent maintain

 12 risk controls that address a lot of the concerns

 13 that were brought up today regarding max order

 14 size and messages to the exchange. Now that's

 15 certainly not the universe of market participants,

 16 but it was a quick study going into that process

 17 of response, and it was refreshing but not

 18 surprising to hear that everyone went down that

 19 path. So I think a lot of participants are

 20 already going down this path.

 21 We, internally, have produced, as a

 22 group, documents regarding best practices which
 116

 1 our member firms follow.

 2 The FCMs do hold all of the firms that

 3 are attaching to the exchange accountable.

 4 There's a vetting and an evaluation of your

 5 process and technologies; you go through that.

 6 But there's no doubt we have to be

 7 vigilant anytime we're addressing technology and

 8 make sure that we're trying to stay on top of

 9 everything that we possibly can.

 10 But there are processes that are in

 11 place on the customer side. I certainly know that

 12 there are processes in place at the exchange level

 13 as well.

 14 MR. VICE: Yeah, I think the biggest

 15 benefit we have in managing operational risk is

 16 that vertical silo.

 17 I mean, if you read about incidents in

 18 the equity markets, yes, it's often a software

 19 upgrade. It's often some interaction of that

 20 software with some third-party software.

 21 I think the fact that we control as much

 22 of the end-to-end as possible -- certainly, there
 117

 1 are ISVs and front ends and parts that we don't --

 2 HFTs, parts that we don't control. But I think

 3 the fact that we have as comprehensive a view as

 4 you can, as the exchange operator and the

 5 clearinghouse operator, allows us to manage that

 6 risk much better than we otherwise could.

 7 I think in terms of just general

 8 practices, you know, we're in the process now with

 9 acquiring the Liffe exchanges. We have a number of

 10 contract migrations going on, moving between

 11 clearinghouses and moving between exchanges, even

 12 across U.S. and U.K. jurisdictions.

 13 You know, what used to be fairly

 14 complicated things we've gotten quite good at.

 15 There are extensive industry dress rehearsals that

 16 go on, on weekends before these types of things

 17 happen. New software upgrades -- software is

 18 available in user acceptance environments for

 19 weeks, if not months, before it goes live. ISVs

 20 and HFTs are very active on their own initiative

 21 in testing in those environments. And, as I said,

 22 for major versions, we go through conformance
 118

 1 again with them as well.

 2 I think our first goal in a software

 3 upgrade is to do no harm. Whatever new feature or

 4 new logic is going in, we want to make sure that

 5 we didn't screw something up by doing that.

 6 So everything that we design is designed

 7 to be off, and so we want to make sure that on day

 8 one just the software upgrade itself didn't create

 9 a problem. And then whether it's a new matching

 10 engine, new network, whatever it might be, then

 11 migrate to that after we know we've got through

 12 the software upgrade.

 13 We make extensive use of beta approach,

 14 whether it's moving a smaller market to a new

 15 matching engine first or even if we have new

 16 market routers, market gateways, in production,

 17 even going through a beta phase with various

 18 groups of customers that will make sure that

 19 that's working properly in production as it

 20 should.

 21 So that gives you a little flavor of

 22 what we do.
 119

 1 MR. MCGONAGLE: I was thinking back to

 2 just earlier this year, that at one of the FIA

 3 conferences the exchange presidents were very

 4 focused on system safeguards, attacks on the

 5 exchanges and the integrated nature of these

 6 market participants and their access to the

 7 exchange and how we guard against that and

 8 thinking about, you know, recent -- or,

 9 opportunities where the systems have shut down and we've 

 10 had to think about alternate trading venues.

 11 And I'm sort of curious as to the

 12 exchanges' perspectives. I know it's a little

 13 off-topic, but related, about the broader issue of

 14 system safeguards as it relates to vicious attacks

 15 on our trading environment.

 16 MR. DURKIN: It's an area that is

 17 continuously on the presence of our mind and

 18 should be. In the context of the level of

 19 sophistication of people that are out there, to

 20 create cyber-attacks or try to penetrate a system.

 21 I can tell you that from our

 22 perspective, you know, we continue to develop and
 120

 1 build upon our very robust global information

 2 security program. I mean, we have capabilities in

 3 place today that, you know, are effectively

 4 preventing people from trying to come into our

 5 markets.

 6 It happens, and you know, we have

 7 effective, I think, protocols to safeguard

 8 ourselves in that regard. However, I don't think

 9 anyone can ever rest on any laurels in any way,

 10 shape or form in terms of the continued

 11 development and investment in the protocols to

 12 safeguard these markets.

 13 You know, part of it is also very much

 14 incumbent on the exchanges and the market

 15 providers to have a comprehensive business

 16 continuity program. And it's something that we

 17 work very -- we strive to test our methodologies

 18 and make sure that we're able to provide that

 19 continuity and have the redundancies in place, if

 20 there is a failure of the system that our backup

 21 facilities effectively take over.

 22 And I know that's a little bit separate
 121

 1 and apart from what you were alluding to, but it's

 2 all related in the same vein.

 3 MR. SALUZZI: Just, I wanted to circle

 4 back -- I'm sorry -- on the fragmentation topic

 5 because, obviously, you guys may be dealing with

 6 this later when it comes to SEFs. Hopefully, you

 7 won't have the same problems we had.

 8 We do have one more proposal which I'd

 9 like to throw out today for the SEC or whomever it

 10 may be. We're calling it a 3-300. Okay?

 11 So exchanges right now -- market

 12 share-wise, there are 5 of them that currently

 13 have more than 3 percent market share.

 14 So we would suggest that if you're

 15 operating your exchange for a certain period of

 16 time -- and I don't know what that may be -- if

 17 you can't maintain 3 percent market share, you

 18 should lose your exchange protected quote status.

 19 On the flipside, when it comes to dark

 20 pools, thanks to the FINRA data, by the way,

 21 yesterday that was reported -- we appreciate that

 22 -- we're now getting insight on dark pool size.
 122

 1 And it was really interesting that only 17 of them

 2 were over 300 shares, average trade size, and

 3 about 25 -- I think the count was, if I was

 4 correct -- that are under 300 shares.

 5 So we would say that if you can't

 6 maintain a dark pool with at least 300 shares,

 7 average trade size, you don't deserve to have a

 8 dark pool, and at that point you lose your ATS

 9 license.

 10 If you were to do those two things, you

 11 would drop the fragmentation down to 5 exchanges

 12 and 17 dark pools. At least we're getting

 13 somewhere. Just a suggestion.

 14 MR. SOLINGER: Thanks. I want to

 15 comment briefly on the discussion about risk

 16 controls, and I think the exchanges have done a

 17 lot of investment in risk controls on their

 18 platforms. And the state of the art has advanced

 19 considerably in the past five years.

 20 But we still see a lot of headline

 21 incidents on issues in many markets. I don't know

 22 that many of them have not been in the headlines
 123

 1 in futures, but because we're in the markets we're

 2 actually aware of numerous incidents involving

 3 electronic trading-generated losses in the futures

 4 market, in the foreign exchange markets and in

 5 other markets that we work in.

 6 Many of those incidents are not captured

 7 effectively by on-exchange risk controls, and

 8 there are gaps that, as an industry, still should be

 9 focused on. A lot of the proprietary

 10 trading firms around the table are very effective

 11 at managing these because of their depth of

 12 experience in these markets. However, as we've

 13 discussed, there are far larger numbers of firms

 14 beginning to use automated execution capabilities

 15 that are less sophisticated and are smaller size,

 16 and we see significant risks.

 17 We've had the unfortunate duty to turn

 18 off trading on about five firms that were just

 19 terminated and a lot of near misses that we've

 20 seen. All of them have involved clients being

 21 within long-short position limits but having

 22 intraday losses that are not well managed on the
 124

 1 individual exchange, or they've involved

 2 participants who are self-clearing and so aren't

 3 employing on-exchange risk controls, or they trade

 4 across so many markets that on-exchange risk

 5 controls don't accurately reflect their exposure

 6 to it.

 7 So it's very common for people to trade

 8 treasuries against treasury futures or foreign

 9 exchange against currency futures. When you have

 10 those correlated trading strategies, those are the

 11 places where a single exchange has a very limited

 12 ability to capture what's going on, and we've seen

 13 -- those are the places where we've often seen the

 14 losses incurred where we've had to terminate

 15 trading activity for automated traders.

 16 Another point of note, this is not a

 17 high-frequency issue. This is an automated

 18 trading issue. A number of the incidents that

 19 we've seen have been people using commercial,

 20 off-the-shelf algos, and they've been directional

 21 -- you know, real money, low risk profile types of

 22 clients that are relying on commercial tools.
 125

 1 So software has defects and will fail

 2 eventually no matter what you do on the weekend

 3 upgrade.

 4 MR. VOGT: I have two questions. I hope

 5 that's okay. It should be fairly quick here.

 6 One is a clarifying question, I think,

 7 for either Bryan or for Julie. I think I heard

 8 the answer earlier, but I just want to clarify

 9 here.

 10 The common ID or static customer ID, or

 11 something similar, that's not shared in any form

 12 in market data; is that correct?

 13 Okay. Thanks. And then the second

 14 question, can somebody explain -- and probably in

 15 simple terms -- why it's believed that co-location

 16 eliminates all of the problems, or many of the

 17 problems, in the futures market?

 18 MR. DURKIN: I'll start, and Julie can

 19 jump on. First of all, I don't know all the

 20 problems that you're referring to, but let's just

 21 talk about co-location and what it has been

 22 designed to do.
 126

 1 Co-location is not in place to cater to

 2 a specific segment of market user, and in fact,

 3 it's utilized by all segments of users that come

 4 into our marketplace.

 5 How do I know that to be the case? Part

 6 of it has been the principles with which the

 7 co-location facility operates.

 8 And so when we designed our procedures

 9 and our policies for becoming a part of, or

 10 utilizing, our facilities, we did it with the idea

 11 of providing a very open and transparent playing

 12 field for people to come in, to be able to have

 13 access, if that is an area of interest to them.

 14 And it's not an area of interest to all market

 15 users.

 16 We work very closely with the CFTC in

 17 developing, you know, our principles in terms of

 18 accessibility, pricing, contractual terms, to make

 19 sure that everybody abides by the same principles

 20 and criteria for coming into the facility.

 21 The access to the platform itself was

 22 designed in such a fashion that no matter where
 127

 1 you're located in the facility your connectivity

 2 to the platform is exactly the same. Exactly the

 3 same, in terms of the connectivity. So there's no

 4 benefits in terms of distance.

 5 In terms of people's general access to

 6 the system, we have a multitude of service

 7 providers that are inside the co-location

 8 facility; we have a multiple of

 9 FCMs/intermediaries that are in there. And so

 10 they're providing that access to the overall

 11 broader client base.

 12 So plenty of times I'm sure that

 13 customers don't even realize they're in

 14 co-location facilities in terms of their orders

 15 and how their orders are being executed.

 16 It takes away a potential inequity by,

 17 in the past, having the closest real estate to an

 18 operator, an exchange operator, or a data center.

 19 Or, in the past, there was a land grab for real

 20 estate in and around data centers because people

 21 viewed that that might give them greater speed or

 22 access to the marketplace.
 128

 1 So, from that perspective, the tenets

 2 that I outlined, you know, we feel very strongly

 3 has leveled any inequities or playing field with

 4 that respect.

 5 Julie?

 6 MR. VICE: Actually, I think it might be

 7 useful to kind of contrast our situation in the

 8 context of co-location.

 9 I mean, we're in a third-party data

 10 center -- ICE is -- both our primary and our DR

 11 sites.

 12 We actually added a co-location suite a

 13 number of years ago because in this third-party

 14 data center it was filling up, and so any of the

 15 HFTs that were trading on our markets then had

 16 their own suites in the data center. And we

 17 became concerned that new market participants

 18 would not -- if they wanted to co-locate, they

 19 wouldn't have that option.

 20 So we took out a space ourselves, began

 21 subleasing to co-lo to HFTs or anyone that wanted

 22 to co-locate -- it's not just HFTs -- and it's
 129

 1 still a pretty small enterprise. I think we have

 2 far more HFTs connecting to us who are not in our

 3 co-lo suite than are in our co-lo suite.

 4 So, again, for us, it was meant to just

 5 make sure that people could get in there if they

 6 wanted to. We don't make a lot of money from it.

 7 It's not a big business for us.

 8 And, again, it's not in our exchange

 9 cage. It's in a separate cage. I want to make

 10 sure that's -- you know, people have this kind of,

 11 you know, uninformed illusion that somehow these

 12 guys are in the same rack with our matching

 13 agents, and it's certainly not the case.

 14 COMMISSIONER O'MALIA: I think certain

 15 authors said they were in the exchange.

 16 MR. VICE: Yeah, in the exchange.

 17 They're not in the exchange.

 18 COMMISSIONER O'MALIA: There's an issue

 19 regarding whether it's spread network or microwave

 20 between equity markets and CME, in fact.

 21 The microwave -- that gets dumped into

 22 the co-lo facility, or does that go directly into
 130

 1 the exchange? So does it get that spooling?

 2 MS. HOLZRICHTER: Yeah, people have

 3 obviously several options of how they want to

 4 transmit data, and microwave is just -- it's not

 5 even the newest anymore because there are even

 6 newer technologies out there.

 7 But microwave goes to Aurora, which is

 8 the CME data center, and it goes to Sirmac, which

 9 is the data center that ICE is located in -- the

 10 third-party data center. But what it doesn't do

 11 is go into our facility.

 12 So you can beam the information through

 13 microwave towers across state lines, but the way

 14 that you get into our co-lo facility is through

 15 fiber, so the same way everybody else has to get

 16 into our co-lo facility.

 17 Once you're in our co-lo facility

 18 through fiber, it runs exactly the same way that

 19 it would for anybody who's in that facility. And

 20 it is spooled.

 21 And the other point I want to make about

 22 our co-lo offerings is that we don't allow that to
 131

 1 go -- I mean, it goes into our data center, and

 2 then it can get to our match engine through a

 3 normal fiber feed.

 4 So I think people thought that the

 5 microwave went directly to match engines; they

 6 don't. They go to -- in our case, they go to a

 7 fiber feed that then goes into co-lo that then

 8 gets routed through the normal means.

 9 COMMISSIONER O'MALIA: Great. Thank

 10 you. Greg?

 11 MR. WOOD: Thank you very much,

 12 Commissioner O'Malia.

 13 I'm Greg Wood. I work for the FCM

 14 business at Deutsche Bank Securities in New

 15 York. I'm also the President of the FIA Market

 16 Technology Division, and I was very honored to be

 17 invited to be part of the Subcommittee for the

 18 CFTC TAC on automated trading and high-frequency

 19 trading.

 20 I wanted just to comment on a couple of

 21 things, general themes, in the conversation so far

 22 today.
 132

 1 Firstly, I have to compliment the CFTC

 2 in being so open in these discussions and

 3 particularly with the release of the concept

 4 release back in September. That was a great

 5 opportunity for many of us within the industry to

 6 provide feedback on various points that have been

 7 touched on today, in particular, around principles

 8 around quality management of software development

 9 and deployment that apply to all participants, not

 10 just principal traders but also FCMs and

 11 third-party vendors who provide various tools that

 12 allow a multitude of participants now to interact

 13 with the futures markets in an automated manner.

 14 And that includes corporates. That

 15 includes pension funds, asset managers, et cetera.

 16 The automated trading is very well utilized across

 17 the futures industry now by all participants.

 18 Also, the concept release, yeah, touched

 19 on risk management, and it's worth highlighting

 20 that I've sat at this table previously with

 21 regards to CFTC Regulation 1.73 that actually

 22 mandates that FCMs have to put risk management
 133

 1 controls in place.

 2 Now those risk management controls

 3 consider various levels, and we do utilize

 4 exchange controls. As Bryan says, they're

 5 mandatory. But we would use them definitely for

 6 participants. And, again, there's a variety of

 7 participants that would access the market

 8 directly.

 9 And we rely on exchange controls to

 10 provide that level of risk management but also

 11 then feed back into the holistic risk management

 12 controls that we have at the FCM.

 13 One of the other points that was brought

 14 up in the concept release that goes back to our

 15 very first involvement with this Committee was the

 16 definition of high-frequency trading, and we came

 17 up with a definition that was very mechanical in

 18 the way that we talked about various aspects of

 19 high-frequency trading because most of us within

 20 the group, with some obvious dissensions, felt

 21 that high-frequency trading is a tool and is not

 22 necessarily a categorization of a type of
 134

 1 participant.

 2 And I think it's -- we've had some

 3 criticism over that definition, but I think it's

 4 good now that we put that out there because it

 5 doesn't mean that there is a type of participant

 6 that is labeled as high-frequency trading that is

 7 a performing a certain type of activity. I think

 8 it has helped with the discussion that there are

 9 many types of participants who use automated

 10 trading, who can interact with the market in

 11 various ways.

 12 And one of the things that we wanted to

 13 emphasize when we came out with that definition is

 14 moving away from trying to look at types of

 15 participants and categorizing participants but

 16 looking then at types of activities that may be

 17 abusive or disruptive.

 18 And it is very good to see the next

 19 panel after this one will be based on surveillance

 20 because that's where we really felt that the

 21 emphasis should be and that surveillance systems

 22 should keep up with the speed of the markets and
 135

 1 the amount of data that is generated.

 2 Thank you.

 3 MR. MCGONAGLE: So just to touch briefly

 4 on the concept release, we've taken in all the

 5 comments at the last TAC. Was it the last TAC? I

 6 think so -- where we had reopened for receipt of

 7 additional comments, and we've taken all those in

 8 as well.

 9 We're currently working at the staff

 10 levels -- Sebastian and Rachel are back here in

 11 the corner -- talking to the other divisions to

 12 come up with a recommendation.

 13 So we would bring forth to the

 14 Commission an evaluation summary of the comments

 15 that we've received and a recommendation about

 16 whether or what further steps we should take

 17 broadly in the categories of these pre-trade risk

 18 controls that we are talking about.

 19 Whether or how there should be some

 20 registration component required or suggested, the

 21 system safeguards and increased level of reporting

 22 obligations -- is that something that we should
 136

 1 also take on or require the markets to do?

 2 There were certainly a lot of comments

 3 about using principles versus prescriptive.

 4 And recently, I was called to testify

 5 before the Senate to sort of talk about those

 6 differences.

 7 But we are getting closer, at least

 8 internally at the staff level, on a recommendation

 9 that we'd like to discuss with the Commission.

 10 MR. CONCANNON: Yeah, real quick --

 11 well, first, for the record, I just realized no

 12 one wants to sit next to me, and I think it might

 13 be my HFT label on my panel.

 14 Just on risk controls, again, there was

 15 some discussion around system changes, and I think

 16 that's a critical topic because obviously the

 17 evidence does reflect that many of the problems

 18 that we've had in our market do involve some

 19 system change or system enhancement.

 20 The PTG group did put out a fantastic

 21 paper on best practices. That's something that

 22 everyone should take a look at.
 137

 1 But I think in topics of risk controls,

 2 if you're properly writing rules around risk

 3 controls and pre-trade controls, it should be

 4 built to assume those breaks because software

 5 isn't the only thing that breaks. Hardware breaks

 6 as well, and you can't predict what happens when

 7 hardware breaks. So risk controls are designed to

 8 capture not only bad software, bad algos, bad

 9 behaviors, but they're also designed to capture

 10 system outage or system issues that create that

 11 kind of activity.

 12 So, when you design risk controls, you

 13 should have in your mind that you're going to have

 14 software issues and hardware issues, and that's

 15 part of the element of these pre-trade controls

 16 that should be considered.

 17 One thought I had in terms of a testing

 18 and testing environments is the exchanges do a

 19 fantastic job of providing a test environment

 20 where participants go in and test, whether they

 21 have new code or the exchanges introduce new code.

 22 Something that was introduced, I hate to
 138

 1 say, in the equity world -- we could actually

 2 learn something from that world -- is the concept

 3 of a test contract or a test symbol where the

 4 exchanges would introduce a contract that is not a

 5 real contract, sits in its production system, and

 6 participants can test that contract on a

 7 production system because the one flaw in testing

 8 in a test environment is just that; it's a test

 9 environment.

 10 You still have to reconnect to your

 11 production gateways, your production connectivity,

 12 and it's not a perfect test, so to speak.

 13 And so there's an additional element

 14 where people have introduced testing contracts or

 15 testing symbols that are sitting on the production

 16 system, protected from hyperactivity around

 17 testing, but it does give you a wonderful

 18 production test without a real contract or a real

 19 market.

 20 COMMISSIONER O'MALIA: I have one more

 21 question regarding -- to separate kind of this

 22 discussion on maker-taker and some of these fees.
 139

 1 I'd like to get a better sense of how the

 2 exchanges, the futures exchanges, deal with either

 3 participant fees or rebates.

 4 And I would note that in 2010 there were

 5 a total of 56 market-maker and incentive programs

 6 filed with the Commission. In 2013, that total

 7 had gone to 341 programs. I'm kind of wondering

 8 what the factors are that have contributed to this

 9 increase and how do exchanges determine whether to

 10 implement a market-maker program, for what

 11 product, and how do you define a successful

 12 market-maker and incentive program, and what might

 13 lead to its termination?

 14 So help me understand the thinking of

 15 these programs, why we go from 56 to 340, and how

 16 do we ensure that they're good developments for

 17 the market.

 18 MR. DURKIN: First of all, Commissioner,

 19 I'm not, you know, totally sure in terms of the

 20 numbers that you just outlined, okay, but I can

 21 say this; I mean, in the context of filing, I know

 22 that those are not all new programs. They're
 140

 1 modifications that were made to existing programs.

 2 And I'm imagining the same holds true

 3 for ICE. So there are new programs and

 4 modifications to existing programs. As to my

 5 earlier comments, just to reiterate, let's just

 6 level-set there's a distinctive difference between

 7 what we've heard in the equity markets and what

 8 occurs in the futures market. I just need to

 9 reiterate that.

 10 However, in the context of how we decide

 11 to employ programs, it is really in the context of

 12 developing markets and building liquidity in

 13 markets. So there's maybe a need in the context,

 14 or there is a need, when we're developing a new

 15 product and bringing in a new product into the

 16 marketplace.

 17 It is not a stock. It doesn't exist

 18 somewhere else.

 19 It's conceived through the intellect and

 20 the development of our research people meeting a

 21 risk management need that we find in the

 22 marketplace. Going to market with that is very
 141

 1 part and parcel to working with the trading

 2 community, ensuring that we have a product to go

 3 to market with and have capabilities to build

 4 markets for other market participants to come to a

 5 centralized pool of liquidity, to be able to

 6 trade.

 7 And so in building up that liquidity, we

 8 have found it very effective to have programs in

 9 place in which we have market-makers as a portion

 10 of that, to be there and provide markets

 11 throughout the trading session, continuously

 12 providing bids and offers, and have a

 13 responsibility to abide by criteria that we set

 14 out in the context of depth of market, the size of

 15 the bid-offer, the spread, and giving them

 16 incentives in the context of reduction in fees,

 17 volume, incentives to build up a marketplace once

 18 that essential base of liquidity has been

 19 developed, continuing to build upon that and have

 20 that continuity of, again, deep liquid markets for

 21 participants to be able to come and rely on around

 22 the clock.
 142

 1 You know, we look at these programs

 2 continuously. You, obviously, see that we make

 3 changes to programs and we file those programs to

 4 the CFTC. CFTC will have questions from time to

 5 time. We respond to those questions. And then we

 6 go forth in adopting the programs.

 7 The programs themselves have very

 8 specific criteria in order to be able to be a

 9 participant. That criteria on the programs

 10 themselves are not only filed with the Commission,

 11 but they're also posted on our web site.

 12 When we look at programs and

 13 participants, we certainly look at it in a context

 14 of:

 15 Is it achieving the end result and the

 16 goal of building up liquid and vibrant markets?

 17 You know, are the criteria themselves

 18 well defined? Yes.

 19 You know, do people have the opportunity

 20 to participate in these? Can they look at a venue

 21 in terms of our web site, in terms of what might

 22 be available there and what product base and for
 143

 1 what purpose? Yes.

 2 And then as we go along we certainly

 3 monitor the efficacy of the programs, and at times

 4 we eliminate them. Or, if parties to the

 5 arrangements are not fulfilling their obligations,

 6 yes, then we remove them from the programs.

 7 MR. VICE: Yeah, I was just going to say

 8 -- and I think somebody alluded to it earlier --

 9 we're both for-profit companies. So I can assure

 10 you neither ICE nor CME have any program or any

 11 fee discount that it doesn't think is absolutely

 12 necessary to either build or maintain a market.

 13 And like Bryan said, we're constantly

 14 reviewing these and reviewing the participants in

 15 these programs:

 16 Are they meeting the obligations?

 17 Should they be removed from the program? Should

 18 the program itself be moved or changed? I didn't

 19 catch the timeframe of your two comparisons, we

 20 did -- as you recall, ICE had a large over-

 21 the-counter swaps market that became futures.

 22 There may have been a slug of incentive programs
 144

 1 that came across with that. I don't know.

 2 But I think in addition to things like

 3 starting a new market, building the options in a

 4 market, focusing on the front three months,

 5 focusing on the back months -- you know, there's a

 6 healthy amount of trying to compete with a

 7 comparable CME product, which I think is good for

 8 the marketplace.

 9 As CME, we have to file each of these

 10 programs with the CFTC. They're on your web site.

 11 They have start dates and end dates. At

 12 the end date, we may renew it. We may discontinue

 13 it. We may change it.

 14 And the profit motive keeps us very

 15 interested and on top of those programs so that

 16 we're not paying someone to do something that

 17 either they're not doing it or it's just not

 18 effective.

 19 COMMISSIONER O'MALIA: All right. We've

 20 reached the end of Panel I discussion. Are there

 21 any final words or comments anybody would like to

 22 make? Anybody on the telephone?
 145

 1 (No response.)

 2 COMMISSIONER O'MALIA: All right. With

 3 that, we'll take a break.

 4 What time are we coming back? 1:30.

 5 All the TAC, all the people seated at the table

 6 and our witnesses are invited to join us for lunch

 7 upstairs on the 9th floor. We'll have staff take

 8 you up there.

 9 Thank you.

 10 (Whereupon, at 12:22 p.m., a

 11 luncheon recess was taken.)

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
 146

 1 A F T E R N O O N S E S S I O N

 2 (1:34 p.m.)

 3 COMMISSIONER O'MALIA: Okay, this is

 4 Panel II: Developing a 21st Century Surveillance

 5 Program.

 6 Now we've asked Jorge Herrada, the

 7 Associate Director of our Office of Data and

 8 Technology, who works with John, the Chief of our

 9 Office of Data and Technology, to put together a

 10 first-of-a-kind analysis of the Commission's data.

 11 I have never seen a document that looks

 12 like this. And we just kind of intended to pull

 13 together everything we're looking at and to size

 14 it kind of appropriately and to really focus on

 15 some of the resources that are used to support

 16 this, and we'll look at some of our enforcement data,

 17 look at some of our new market data.

 18 And this, I think, just an opportunity

 19 to provide everybody some perspective on kind of

 20 what we're dealing with and really the

 21 opportunities that we have with the data.

 22 And I want people who have dealt with
 147

 1 this type of data before, and these are certainly

 2 the exchange leaders that have these

 3 responsibilities. We've got Trabue and others to

 4 contribute to this.

 5 So Jorge is going to set us off, kind of

 6 showing what's possible or kind of what we have

 7 today. And then, obviously, I want to think about

 8 what is optimal.

 9 This is not to defend the current

 10 practice. This is not to be constrained by the

 11 current practice. This is really intended to be

 12 an opportunity with a fresh sheet of paper to

 13 design that 21st Century surveillance system and

 14 think about the key tools that the Commission

 15 should have in place.

 16 I was encouraged by the first panel that

 17 said it's interesting what we're talking about

 18 today, but let's talk about the next panel and how

 19 we are really going to enforce it.

 20 A couple points were made that you're

 21 going to have technology in the markets. It's not

 22 something -- a genie you can't put back in the
 148

 1 bottle. And so we're going to need to deal with

 2 it. And, in dealing with it, how do we establish

 3 that surveillance program?

 4 So let me turn it over to Jorge. He'll

 5 be followed by Andrew Vrabel with CME. And then

 6 we'll go to Steve Joachim over here with FINRA to

 7 have FINRA help us think about some of the

 8 innovative ideas that they have cooking in the

 9 equities markets because, clearly, we can't stop

 10 talking about equities today.

 11 Anybody at the SEC, don't tell the

 12 Chairman, will you? It was all about futures

 13 today.

 14 He will be followed by Rob Creamer,

 15 obviously, to provide his input with the PTG and

 16 proprietary traders about what they think would be

 17 an optimal 21st Century.

 18 And then Dave Lauer will contribute his

 19 ideas as a former trader and his thoughts.

 20 And we'll wrap it up with Trabue Bland

 21 with ICE to provide some closing comments.

 22 So we'll book-end the exchanges and add
 149

 1 some other color in between.

 2 So, Jorge, it's all yours.

 3 MR. HERRADA: All right. Thank you,

 4 Commissioner O'Malia.

 5 So this is the part about data, and I

 6 have to tell you I'm a little anxious about this

 7 presentation. The challenge is we've just all had

 8 lunch. You know, everybody is kind of settling

 9 in. And I don't know if there's anything less

 10 interesting than data, but we're going to try our

 11 best to make it at least somewhat interesting.

 12 COMMISSIONER O'MALIA: We could spend

 13 the entire day talking about equity market

 14 structure. (Laughter.)

 15 MR. HERRADA: There you go. My hope is

 16 that at least most of you will stay awake during

 17 this. I will consider it a victory if that's

 18 where we end up.

 19 So, ultimately, what I want to do is

 20 talk about the data at CFTC.

 21 We'll talk a little bit about the daily

 22 data volumes. I am a bit nervous about that
 150

 1 particular slide.

 2 I spent a lot of time putting together a

 3 slide on volumes because ordinarily I would do

 4 this presentation internally and no one would

 5 check my numbers all that closely. But since I'm

 6 right next to Trabue he'll probably kick me and

 7 go: What? That number doesn't sound right. We

 8 send you way more than that on a daily basis.

 9 MR. BLAND: Let's call it equal so you

 10 don't kick me on my part of the presentation and I

 11 won't kick you on your part.

 12 MR. HERRADA: Perfect. All right, we've

 13 got a truce going on here.

 14 But, no, actually, we shouldn't that or

 15 we'll get ourselves in some trouble for collusion.

 16 Anyways, the idea here is we'll talk

 17 about daily data volumes. Hopefully, we're close.

 18 Nine categories of data. So what we try

 19 to do is take the data that we have and say, could

 20 we categorize it? And there are many ways you

 21 could categorize the data, but we came up with

 22 these nine categories of data.
 151

 1 Then we'll talk about some details of

 2 the data categories as we break down those nine

 3 categories into further detail, some information

 4 about the data-loading challenges that we have,

 5 some trends in data volume, and then, ultimately,

 6 we'll finish up with one slide on SDR data

 7 harmonization just to get you up to date with

 8 what's happening there.

 9 Okay. So this is my big slide. You

 10 know, this is really difficult because what I

 11 wanted to do was try to find a way to show all the

 12 data that we have at CFTC in one diagram, and

 13 that's not particularly easy to do.

 14 And then I put the ambitious thing that

 15 I was going to try to come up with a scaling

 16 mechanism of 2.5 million records per inch.

 17 And then we ran into a little problem,

 18 right. Time and sales threw it off, right. Two

 19 hundred and forty million records are coming in.

 20 It's sort of the top of the order book. Every

 21 time a record -- there's a change at the top of

 22 the order book, we have the best bid and the best
 152

 1 ask. So there are two records there.

 2 So it's not to full scale because the

 3 time and sales data would be eight feet across.

 4 Now I was thinking that it would be kind

 5 of -- to try to keep you guys awake after lunch,

 6 it would be interesting if we rolled in an

 7 eight-foot wide ball right there.

 8 That's true; it probably is to scale on

 9 that screen. There you go, right.

 10 So, if we had an eight-foot sized ball,

 11 that would be to scale because at 2.5 million

 12 records per inch.

 13 So that's one piece of the data that we

 14 have. Another big one -- and, by the way, I will

 15 confess; anybody that I've shown this to

 16 internally has said, well, you're comparing apples

 17 to oranges.

 18 And I will say the enforcement data is a

 19 little apples to oranges because everything is an

 20 approximate number of the millions of records per

 21 day that we're loading at CFTC, but the

 22 enforcement data doesn't really come in as
 153

 1 records; it's unstructured data. It's audio

 2 tapes. It's e-mail records. It's a whole bunch

 3 of things that get subpoenaed.

 4 There is some structured data in there.

 5 So I chose to use a 0.2:1 terabytes of data a week

 6 that we're ingesting, and again, that would be

 7 about 10 feet.

 8 And the reason I did that is I said,

 9 well, what you'll see later is the amount of

 10 enforcement data we have on disc is roughly equal

 11 to the amount of data we have in the structured

 12 data side. So they're about equal.

 13 So I made that one about a 10-foot wide

 14 ball. Compared to all the other things combined

 15 together, it's about similar.

 16 We have futures and swaps position data

 17 -- you know, roughly about 2 million futures

 18 coming in a day, about 14 million on the swaps.

 19 But remember -- and we'll get to it shortly --

 20 that we're not ingesting all the swaps data; we're

 21 only ingesting a subset.

 22 So this is the swaps data that we pull
 154

 1 in. We have Steve Reich here from FERC. So,

 2 Steve, this is for you. We have the FERC data.

 3 We're sending data to FERC. This is part of our

 4 MOU that was signed in January, and we're sending

 5 over about a third of a million records a day.

 6 And so it's position data, market data, that sort

 7 of thing that helps them with the natural gas and

 8 particularly the electricity markets, to use that

 9 data to allow FERC to have a better view of the

 10 entire market as a whole.

 11 So we have that information there. And

 12 then, on this other end here, another big piece of

 13 data is our futures intraday trade data. So,

 14 again, that's CME, ICE and the other exchanges.

 15 It's all your intraday trades, and that comes out

 16 to about 10 million records a day.

 17 And we talked about -- and I think,

 18 Commissioner O'Malia, we'll get there when we're

 19 going to discuss -- the idea if we were to ingest

 20 the message data, right. If we pull that message

 21 data in, what would that be like?

 22 And we've done some approximations.
 155

 1 We've made some calls. We've looked around.

 2 We've looked at sample data. And we're looking at

 3 that being two, three, four hundred million

 4 records a day.

 5 Of course, obviously, that would take

 6 that bubble and -- phew! You know, blow it up

 7 pretty significantly.

 8 So that is -- again, that was our

 9 position data. That's our intraday trade data.

 10 We've got our enforcement stuff.

 11 Now we'll get into some more of the

 12 details. Market data. Again, it seems small, but

 13 it is there. It's 0.2 million records a day of

 14 market data, and we have a lot of stuff.

 15 These three bubbles here -- margin and

 16 collateral evaluation stress test and financial

 17 statement capitalization -- these are all part of

 18 our risk surveillance program, and that program

 19 has really grown significantly over the last two

 20 years. And so we're getting more and more

 21 sophisticated ways to measure and do risk

 22 surveillance of the market.
 156

 1 So that's all that information coming in

 2 toward there.

 3 And then, finally, we have organization

 4 product data. You know, that's your Form 40s,

 5 your Form 102, any information we have on

 6 organizations -- LEI information, that sort of

 7 thing.

 8 And then, of course, this is completely

 9 not to scale, for our SDRs here. I know we have

 10 Marisol here and others. So we have -- this is --

 11 I've made this more like a cloud because,

 12 basically, it's a reference to these data that are

 13 off-site that we're tapping into now and looking

 14 at for the swaps data repository.

 15 All right. So that's that' slide.

 16 We'll go into a little bit more detail. Again,

 17 this is just the nine categories. I won't go

 18 through them, but it's the same that we saw before

 19 -- intraday trades, time and sales, position data,

 20 market data, margin and collateral evaluation

 21 stress test, financial statement capitalization

 22 org and product data and enforcement data.
 157

 1 So the idea here -- I put this slide in

 2 here, and, again, you all have the handouts. This

 3 is, I believe, going to be available

 4 electronically. And it will give you some details

 5 as to what we were including in those nine

 6 categories.

 7 And, again, I would say that three of

 8 those categories are very risk-oriented -- the

 9 margin and collateral data evaluation stress test

 10 and financial statement capitalization.

 11 So a natural question would always be,

 12 all right, so we've got these data, but how does

 13 -- you know, what fits in those categories?

 14 Again, I won't go and bore you with all

 15 the details, but I wanted to put this slide in

 16 here so that you could see. And this is

 17 color-coded back to my bubble diagram. So it's

 18 using the same colors there as here, and so you

 19 can start to see all the different pieces that

 20 come in, for example, between the swaps and the

 21 futures side.

 22 So, for example, when you look at the
 158

 1 event data, we're pulling in some event data, Part

 2 45 data from DDR at this point, but that's DDR

 3 sending us an FTP of that data, and so that data

 4 we are ingesting.

 5 These little funny arrows here indicate

 6 that we're streaming data. We're going out to get

 7 that data from, say, SDR portals or getting data

 8 from market or from ICE-cleared credit margin API,

 9 NFA daily seg. funds, that sort of thing. So

 10 there are references to data that we're not

 11 necessarily storing at CFTC, but we're referencing

 12 that data outside.

 13 And then this funny little symbol here

 14 is toward the idea of data that we export out. So

 15 FERC is the only place that we export data out on

 16 a regular basis, and we're sending out that FERC,

 17 large trader and market export data.

 18 But, otherwise, this just shows you

 19 where we're getting the data, and it shows you the

 20 various sources for that information, whether it

 21 be Reuters, FutureSource, Bloomberg, Markit or

 22 large trader data, Part 17, Part 16, Part 20, all
 159

 1 that sort of thing.

 2 So, anyways, that's a slide for you to

 3 look at, at a future date, but it gives you an

 4 idea of where we're getting our basis for our

 5 information.

 6 We tried to -- this is my attempt at

 7 trying to draw out some discs. You know, in the

 8 old days, it was floppy disks. There's no good

 9 image of a hard drive. So, anyways, this is my

 10 attempt to try and lay out where we're using our

 11 storage.

 12 And what we find here is that we break

 13 our storage and our servers into four main

 14 categories -- enterprise, infrastructure.

 15 All the firms, you have servers and data

 16 storage for your e-mail and for your voice mail

 17 and for your intrusion detection software and all

 18 that kind of thing. So you've got lots of that

 19 sort of thing.

 20 Ultimately, though, when it comes to

 21 storage, the vast majority of what we store is for

 22 the eLaw program and for our structured market
 160

 1 data.

 2 So, again, this is the production side

 3 of our data, and we're looking at -- you know,

 4 this is in terabytes. It's not huge, but it's

 5 significant enough that there is some serious

 6 crunching going on -- you know, 160 terabytes,

 7 roughly. About 39 percent of all the data stored

 8 is enforcement related; 38 percent is structured.

 9 Again, that structured stuff is very

 10 compact. So you've got to understand that is a

 11 ton of records.

 12 If you were going to match the amount of

 13 storage that eLaw -- because if you think about

 14 what a voice record is, a voice record takes up a

 15 huge amount of space or any sort of data, like

 16 that video voice. And so when your structured

 17 data matches that, that's representing a heck of a

 18 lot of structured data that we have on disc.

 19 But we move on to the idea of servers.

 20 So this is my stack of servers here.

 21 And this number seems a little low, but

 22 I'll talk you through it a little bit. In fact,
 161

 1 I'll refer to one of my notes here so I can speak

 2 to it more clearly.

 3 So what we have here is the servers by

 4 these different four categories.

 5 Now, if you think about your own

 6 enterprise, you do need lots of servers that are

 7 very specific, right -- an intrusion detection

 8 system, a BlackBerry server, you know, a voice

 9 mail server, an e-mail server, and all those kinds

 10 of things.

 11 So each one of those -- it's not

 12 surprising that we have 120, 130 of those servers.

 13 This, by the way, is production servers.

 14 It is very important to know the distinction

 15 because when I looked at these number I thought,

 16 well, they seem low. You know, people here

 17 running major exchanges will say, well, that's a

 18 very small number of servers.

 19 But this is our production servers that

 20 we're running. So you could triple this because

 21 you put in your test and development servers, and

 22 you get those numbers.
 162

 1 But eLaw tends to have more, and then we

 2 have our structured data.

 3 So the structured data, by the way, are

 4 things for our data ingestion applications, our

 5 SAS servers, our large trader servers, our trade

 6 servers, all those kinds of buckets of data we're

 7 looking at of that type.

 8 Enterprise applications are more your

 9 generic servers, like time sheets and basic things

 10 like that. You know, your enterprise management

 11 of documents.

 12 All of Commissioner O'Malia's speeches,

 13 I think that represents -- I think going back to

 14 this slide, I should have showed that taking a

 15 third of the available disc storage space, but

 16 there you go. There is a clear legacy that

 17 Commissioner O'Malia is going to leave us here.

 18 So there we go. Now that is the

 19 servers. So I wanted to answer the question, when

 20 you look at this and you see eLaw and you go,

 21 well, why so many servers?

 22 This is our little diagram of servers.
 163

 1 And we sort of sized these based on, well, maybe

 2 their significance, but there are things here.

 3 We originally laid out where it showed

 4 the brand -- you know, the actual software that we

 5 use. But then we thought, well, let's just make

 6 it more generic.

 7 So the types of software we're using

 8 here -- FOIA tracking, eDiscovery, digital

 9 forensics, legacy eDiscovery, eDiscovery Review,

 10 audio search, trial presentation and so on. So

 11 it's a very full-blown set of applications.

 12 The key thing to keep in mind, though,

 13 when we're talking about data-loading, which is

 14 the next couple slides, is to understand that this

 15 is a highly standardized data, business functions

 16 and software product. This is an assembly line

 17 that's been set up.

 18 And if you think about it, it's pretty

 19 -- again, no offense to the eLaw people that are

 20 here, but it is a standardized approach that we go

 21 through from an IT perspective.

 22 Obviously, from a lawyer's perspective,
 164

 1 every one of those cases is going to be quite

 2 different.

 3 But from an IT perspective, we have

 4 these applications. The assembly line is set up.

 5 When we go to do a subpoena and we ask for more

 6 information, it goes into the machine. The

 7 machine is set up to take that sort of data.

 8 But this explains why so many servers is

 9 because we have so many applications on the eLaw

 10 or the enforcement side.

 11 So here's a little about our eLaw

 12 staffing and data trends, and then we're going to

 13 talk about our structured data trends.

 14 This shows you at the bottom the number

 15 of FTEs and then the number of contractors. It's

 16 been fairly steady over the last couple years,

 17 from 2009 through 2013. But what you see is the

 18 amount of gigabytes processed per month continues

 19 to grow. So, as time goes, we're continuing to

 20 keep pace.

 21 It doesn't mean that we don't need more

 22 resources. I want to be clear that this is not a
 165

 1 "oh, we're happy with our resources" or anything

 2 like that.

 3 You know, if somebody asked me the

 4 question, does CFTC need further resources, I will

 5 give a resounding yes, we certainly could use more

 6 resources.

 7 But this shows, again, the ramping up of

 8 our staffing rests relatively flat, but the amount

 9 of data we're ingesting continues to grow

 10 significantly.

 11 So, on the other side of it -- and I'll

 12 try to run through this one a little slower

 13 because there's a punch point here -- is this is a

 14 status of our structured data-loading at CFTC.

 15 So what we have is a continually

 16 increasing scope and complexity of the structured

 17 data files. Again, this is the non-eLaw stuff.

 18 In 2013, we added 65 new types of data.

 19 Prior to 2013, we only had 51 in total. So what

 20 has happened is that since 2010 to 2014 we've had

 21 a huge jump from 20-some to over 120-some

 22 different types of loaders.
 166

 1 And we were trying to -- when John

 2 Rogers and I were talking about this, we were

 3 trying to come up with a metaphor. It's not a

 4 perfect metaphor, but it hopefully will help you

 5 guys to understand.

 6 And I'm sure you feel the same way, any

 7 of you that are subject to our regulations, that

 8 to try to produce this data is also as

 9 challenging as it is for us to ingest it.

 10 Obviously, there's lots of stuff there.

 11 So each new data set requires data

 12 standardization, data architecture, custom

 13 loaders, data quality checks, monitoring feedback.

 14 You know, it's all sorts of working with you guys

 15 to come up with those standards.

 16 We try to adopt standards like FIXML and

 17 FpML, but unlike eLaw, each new data set is a

 18 major project unto itself. It's analogous to

 19 standing up a new factory production line.

 20 So we have the eLaw factory production

 21 line operational, but now we need to put in this

 22 other type of production line every time we --
 167

 1 part 45 or Part 39. Anytime we put new parts

 2 online, we have to do a major ramp-up to do that.

 3 And data standardization and

 4 harmonization is critical. Again, I know that --

 5 I almost feel like I'm preaching to the choir on

 6 this one because I know that you guys on your end

 7 have to -- you know, Marisol is giving me that

 8 knowing look. Yes, exactly, the challenge also is

 9 that you have to meet that standard as well.

 10 So we're there to receive it, but you

 11 have to produce it, and we recognize that there

 12 are some challenges to meeting it.

 13 But, again, here's a case where we've

 14 really been resource-constrained. The number of

 15 resources on this end has been dropping. Ed

 16 Wehner, who's sitting in the back there, is doing

 17 a great job of managing this particular group but

 18 with the limited resources.

 19 And this is one of those "it takes a

 20 village" sort of thing because it's not just the

 21 data ingest team, but it's throughout. The entire

 22 Commission has to get involved when we stand up a
 168

 1 new data standard.

 2 So that is one of the challenges that we

 3 face, but I think, again, Ed is doing a great job

 4 of rising to that challenge.

 5 So this is kind of Ed's world here,

 6 right? I should have labeled this "Ed's World"

 7 instead of "Challenges."

 8 Ed is running a 24-hour shop here, and

 9 this shows the times that the data comes in and

 10 the processing. Right here in the middle is 8:00

 11 to 5:00, when the CFTC analysts are looking at the

 12 data, but the data is coming in all throughout the

 13 day. And certain things take hours to load; some

 14 things take minutes to load, whatever it is.

 15 But this is his day, monitoring all this

 16 stuff, making sure it all works. And so this is

 17 just part of the setup for the day. It's a

 18 challenge to keep it all running, but again, Ed is

 19 doing a great job doing that.

 20 So, anyways, that is the last slide on data

 21 and what we're doing with that, just to give you a

 22 flavor of the type of data we have and all the
 169

 1 pieces.

 2 And then -- oh, did you want to ask a

 3 question?

 4 MR. BLAND: Yeah.

 5 MR. HERRADA: Yes, please.

 6 MR. BLAND: I was going to ask a quick

 7 question.

 8 MR. HERRADA: Sure.

 9 MR. BLAND: I mean because this informs

 10 the rest of what we're going to be talking about.

 11 How do you -- I mean, when you bring in

 12 the data, I mean, does market surveillance have

 13 access to all of these bubbles in the first slide?

 14 I mean, is there anyone who looks across

 15 all these pools of data?

 16 MR. HERRADA: Right. So does market

 17 surveillance have access to all this data? Yes.

 18 I mean it's market surveillance or risk

 19 surveillance. Each one, of course, has their own

 20 focus area, but the data is available.

 21 Now I think what Commissioner O'Malia

 22 will sort of get to is how are we integrating
 170

 1 this? How are we looking across all that data?

 2 That's really the $64,000 question.

 3 But, yes, absolutely, this data. All

 4 this data that we're loading. None of the data we

 5 are loading for our own -- you know, just for fun.

 6 You know.

 7 But, no, any data we get we're loading,

 8 and it's all becoming available.

 9 But, yeah, I think that the challenge we

 10 always have is the integration of that data,

 11 particularly -- and I think the LEI is a huge step

 12 toward that because now, with the LEI, we can try

 13 to see positions across all these different asset

 14 classes.

 15 But we still have a while to go. We

 16 have the OCR rule that's helping toward that, but

 17 the challenge is taking these data sets and trying

 18 to merge them together in a meaningful way.

 19 All right. Well, let me hit the last

 20 slide, and then we'll let the other panelists have

 21 their chance to speak.

 22 Harmonization update. Again, this is
 171

 1 just a quick one-pager just to say the phase one

 2 harmonization is in process at the SDRs, and our

 3 focus is on the credit asset class. Phase two,

 4 again, with a credit focus, is in the final stages

 5 of ODT review.

 6 We've scheduled -- we do these bilateral

 7 meetings. So we get to meet CME and DDR and all

 8 the other SDRs.

 9 So we have these meetings. We're

 10 working on harmonization.

 11 Actually, I should say that somebody

 12 said, well, make sure you tell -- I mean, I assume

 13 everybody knows what harmonization is all about,

 14 but one of the people I was doing this for this

 15 morning said, make sure you slow yourself down and

 16 tell them what harmonization is.

 17 Okay. So the point is, just so we're

 18 all there, the idea of this is harmonizing SDR

 19 data. And the challenge we have is unless the data

 20 are harmonized, if we have data coming to us from

 21 different data sets and we can't take those data

 22 sets and be able to trace, say, a swap as it moves
 172

 1 from one SDR to another, or if we can't have

 2 things using the same standard language, if we

 3 can't agree to what a report date is, if we can't

 4 agree to -- we were talking about this today at

 5 lunch -- what an execution timestamp is.

 6 You know, is an execution timestamp the

 7 time that the trade is executed, or is it at the

 8 time -- or do you keep -- but when there's a

 9 change, innovation, modification, do you keep the

 10 same execution timestamp from the beginning date

 11 or do you let that execution timestamp be every

 12 time there's a change to the actual swap?

 13 So what happens is there are so many

 14 inconsistencies -- not inconsistencies, but

 15 different ways you can interpret the most basic

 16 field. That's what gets me when I think about

 17 harmonization.

 18 I look at these things and I say, it can

 19 only -- you know, this is so obvious. I don't

 20 know what the big deal is.

 21 But then when you talk to the SDRs and

 22 you talk to people that use this data, you
 173

 1 realize, oh, my gosh, quite legitimately, there

 2 are five different definitions for the most

 3 obvious field.

 4 And so this is the challenge with

 5 harmonization. But the harmonization benefit

 6 really is to benefit the industry as a whole and

 7 also to benefit CFTC with the ability for us to

 8 aggregate the data, to look across all the data

 9 all at once, again, toward that idea of the LEIs

 10 and other things, to be able to see a portfolio

 11 across a range of SDRs.

 12 So that is, again, a little background

 13 on harmonization.

 14 So we do have these bilateral meetings.

 15 We are doing independent data quality analyses.

 16 Some of you may have seen some of that if you've

 17 been in our meetings -- in those bilateral

 18 meetings.

 19 Discuss -- so we're doing exception

 20 reporting with the SDRs, talking about them, about

 21 exception reporting from the SDRs to the data

 22 submitters themselves.
 174

 1 We've got meetings -- we're working on

 2 planning a joint meeting with the SDRs this summer

 3 about phase two harmonization.

 4 And we are -- there's not anybody here

 5 from OFR, I hope, because I

 6 misspelled OFR.

 7 So I notice that is the worst thing

 8 about quality checks. Clearly, even CFTC has some

 9 data quality issues, and this would be one of

 10 mine.

 11 So, anyways, somebody said I should

 12 refer to it. We were using the French name when I

 13 put the OFR down there, but anyways, it is OFR,

 14 not ORF.

 15 So we are having a joint effort with

 16 OFR. They've been very helpful, and they're

 17 assisting with the harmonizing of the IRS asset

 18 classes. OFR is going to be working with Sayee

 19 and others within the Office of Chief Economist

 20 with some IRS research, and the IRS research

 21 includes swaps and futures data.

 22 So, anyways, that is the update on my
 175

 1 end, and I will turn it over to others, and then

 2 we can take questions.

 3 But, hopefully -- my goal for all this

 4 stuff really, if anything, is probably this slide

 5 here. And it's just to say -- to try to give you

 6 a sense of our data landscape when we look at what

 7 we have because we're going to talk in this

 8 presentation about what does the surveillance

 9 system of the 21st Century look like, and so this

 10 gives you a sense of the levers.

 11 This are the data that we have to play

 12 with, and so we can talk about playing within this

 13 data set. And I think it's a pretty broad data

 14 set. Yes, there are some things that are missing.

 15 I certainly -- you know, the SDR data are in its

 16 infancy, let's say. And then there is, obviously,

 17 a lot of message data that we could incorporate.

 18 But I think that we've got the raw

 19 materials for a great surveillance program, but

 20 there is still, obviously, lots of work to do.

 21 COMMISSIONER O'MALIA: Great. Thank you

 22 very much, Jorge.
 176

 1 Maybe some of our SDR friends could

 2 reflect -- where are you going, Jorge?

 3 MR. HERRADA: Oh, I was going to slide

 4 over there so that the next person can speak, but

 5 I'll stay. I like the buffer between me and the

 6 rest of the panel.

 7 COMMISSIONER O'MALIA: Maybe, Marisol,

 8 you can give some thought to what we need to think

 9 about in terms of how we size that cloud at some

 10 point, but while you think about that we're going

 11 to move on to Andrew's presentation from CME, to

 12 give us some context about how we can work with

 13 CME to expand our surveillance capabilities.

 14 MR. VRABEL: Thank you, Commissioner

 15 O'Malia and members of TAC, for inviting CME on

 16 this panel.

 17 I do think that there are some missing

 18 levers in terms of what Jorge just presented in

 19 what it takes to have a 21st Century surveillance

 20 system.

 21 COMMISSIONER O'MALIA: Can you just pull

 22 that a little closer -- that microphone?
 177

 1 MR. VRABEL: Of course. So from our

 2 perspective as front-line regulators, the CME

 3 Group Market Regulation Department investigators

 4 and analysts, have at their disposal a suite of

 5 highly sophisticated tools that they use to

 6 monitor and survey and preserve the

 7 integrity of CME Group's markets, and we have a

 8 level of proficiency with regard to identifying

 9 and investigating the types of activity that draw

 10 a lot of attention these days, namely, disruptive

 11 trading practices.

 12 So it's from our experiences there that

 13 we can offer these three unsurprising factors that

 14 are essential to a 21st Century surveillance

 15 system: First, you need experienced investigative

 16 staff. Second, you need systems that sit on top

 17 of highly granular and enriched messaging and

 18 trade information. And, third, you need

 19 significant IT support.

 20 I am very proud to lead a large team of

 21 investigators and analysts at CME. And, while

 22 Jorge may have said that the data isn't all that
 178

 1 exciting to the people who are here, I can tell

 2 you that my investigators find data very exciting.

 3 It's different than it was in the past,

 4 where we were looking at trading infractions that

 5 occurred during the course of 15-minute brackets.

 6 Our investigators today are looking at fractions

 7 upon fractions of seconds.

 8 Our team that primarily investigates

 9 messaging practices -- spoofing, flickering,

 10 layering, other types of yet-to-be-defined

 11 disruptive activity -- are commonly looking at

 12 data sets with hundreds of thousands of rows of

 13 messaging information in single investigations,

 14 performing analyses, restructuring the data in

 15 order to identify whether there was any disruptive

 16 effect in the marketplace and summarizing that

 17 data in a manner that's meaningful to

 18 non-investigators and others who have to make

 19 decisions based on that data.

 20 The important thing about having

 21 experienced investigative staff is that they are

 22 integral to the development of technology. Our
 179

 1 investigative staff works very closely with our IT

 2 department and other technical business systems

 3 analysts to refine and make better the regulatory

 4 systems that we have at our disposal.

 5 The interesting thing is that our

 6 investigators would be fairly ineffective these

 7 days if they didn't have that second requirement,

 8 and that's having systems that sit on top of

 9 highly granular and enriched messaging and trade

 10 information.

 11 In 2012, Dean Payton described in fairly

 12 granular detail the systems that are employed at

 13 CME to monitor automated trading. And I don't

 14 want to re-present what we presented in the past,

 15 but it's important to recap some of our

 16 surveillance systems because it will contribute to

 17 the discussions today.

 18 Our investigators have at their

 19 fingertips a regulatory tool that we call ARMADA

 20 that provides them with order book information --

 21 highly detailed order book information that can be

 22 viewed either statically at given points in time
 180

 1 or that can be replayed to the investigator, to

 2 observe order entry practices and how those order

 3 entry practices impact the market.

 4 Our investigators also use a tool called

 5 SMART, which is an analytical tool that uses

 6 highly enriched cleared trade data, so T+1, which

 7 has several functionalities and user interfaces

 8 that allow investigators to run predetermined

 9 exception reports for identifying activity that

 10 hits certain trading practice parameters.

 11 Since 2012, when we last presented on

 12 this, the modifications that we've made to SMART

 13 include adding 30 percent more data fields that

 14 our investigators can look at.

 15 Similarly, our investigators use a tool

 16 that's called RAPID, which is an in-memory

 17 database of all messaging activity that occurs on

 18 Globex. The RAPID tool has capabilities of

 19 reading and aggregating over a billion messages

 20 per second. This tool is used by our

 21 investigative staff particularly with regard to

 22 disruptive trading practices where we are
 181

 1 literally looking at message-by-message

 2 information, hundreds of thousands of rows of data

 3 in order to ascertain whether a participant

 4 intended to cause disruption in the marketplace.

 5 Through the use of our RAPID tool,

 6 investigators are not only able to see messaging

 7 activity that comes through single Tag 50s, but

 8 they're able to see execution firm IDs, clearing

 9 firm IDs, the session through which those orders

 10 were generated. As Bryan indicated earlier, they

 11 can see whether the order was submitted by a Tag

 12 50 that generally submits orders, automated or

 13 through manual means, in addition to several other

 14 data fields that are available to our

 15 investigative staff.

 16 I mentioned that in SMART we have added

 17 over 30 percent more data fields. In RAPID, since

 18 2012, we have increased the number of data fields

 19 that our investigators can use by over 60 percent.

 20 The key to those numbers is that in

 21 order to have an effective surveillance system

 22 today it has to be adaptable to the changing
 182

 1 evolution in the marketplace. It has to have

 2 input as to what type of information is important

 3 for investigative staff and the type of

 4 information that's relied on by enforcement staff

 5 in taking disciplinary actions.

 6 The third component relates to the

 7 having superior technology support. So our RAPID

 8 system alone pulls in 250 to 300 million inbound

 9 order messages on a daily basis. Again, going

 10 back to the prior presentation, the bubble would

 11 have to be blown out significantly more if the

 12 CFTC intends to collect messaging data not just

 13 from CME but from other marketplaces.

 14 I read recently that the SEC's MIDAS

 15 system takes in over a billion messages per day,

 16 and that represents just a fraction of the overall

 17 activity in equities markets.

 18 So the scale of a system to be deployed

 19 across multiple markets is going to be enormous,

 20 and that enormity of the system needs to have

 21 tools on top of it that can effectively and

 22 efficiently pull the data so that people can
 183

 1 analyze it in an effective way.

 2 The other one final point that I noted

 3 before is on having a system that's adaptable to

 4 change. It's extremely important from our

 5 perspective, from my perspective as a regulator,

 6 and that's having the ability to take an idea

 7 generated by our investigators and turn that idea

 8 into some sort of operational component of our

 9 investigative practices. That takes IT support

 10 and often a lot of it.

 11 So it's that combination of different

 12 things -- having experienced staff, having very

 13 sophisticated systems that sit on top of highly

 14 enriched and granular data, and finally, having

 15 superior IT support. From our perspective, those

 16 are the three very basic, and not too surprising,

 17 elements that the Commission needs in order to

 18 have that 21st Century surveillance system.

 19 Thank you.

 20 COMMISSIONER O'MALIA: Thank you. We're

 21 going to go Steve from FINRA.

 22 MR. JOACHIM: Sure. Thank you very
 184

 1 much, Commissioner O'Malia.

 2 I think everybody is speaking from a

 3 slightly different angle here, and I think it's

 4 going to be an interesting -- this is an

 5 interesting panel as a result.

 6 I'm going to take a much more long view

 7 in terms of kind of where we're going.

 8 When we start to think about what

 9 regulation is all about, at its foundation,

 10 regulation is really designed to ensure market

 11 integrity and to protect investors.

 12 I'm not a lawyer, and I like to think in

 13 simpler terms, and I think about really stopping

 14 bad actors and bad practices. At the core, that's

 15 really what we're trying to do.

 16 And today we do a pretty good job of

 17 that, but there are some real challenges, I think,

 18 that we confront every single day as we think

 19 about what can be done and what needs to be done

 20 in the future.

 21 This morning, we talked about market

 22 structure differences and micromarket structure
 185

 1 differences. Each product we talked about has

 2 unique characteristics and a unique history that

 3 got it to where it was, and they have led to many,

 4 many different market structure differences. And

 5 that presents some pretty interesting regulatory

 6 challenges.

 7 There really is, in my view, only one

 8 financial market. Most investors and industry

 9 participants come to market across products,

 10 across markets, and participate in those markets

 11 in very different ways.

 12 Frankly, today, our regulatory community

 13 does not treat the marketplace on a broad scale in

 14 one view, but there are some fundamental

 15 similarities to the challenges we all face as

 16 regulators.

 17 Rules are largely driven in response to

 18 issues that we identify. Unfortunately, a lot of

 19 those issues are identified, like looking in the

 20 rearview mirror of a car, on the past. They

 21 happen, they take place, and we respond to those.

 22 The rule environment and fraud
 186

 1 protection are really driven by the best

 2 information that's available. That tends to be

 3 samples and partial views, not universal views.

 4 As a result, the process of enforcement

 5 of rules and behavior, and the catching and

 6 enforcement of behaviors, is long. It requires

 7 investigations. It requires looking into many,

 8 many, many days and hours of interviewing

 9 candidates to piece together all the activities

 10 that take place.

 11 The efforts are constrained totally on

 12 the regulatory side by cost and cost effectiveness

 13 issues. Data is difficult and costly to obtain.

 14 I think CFTC has found some of these challenges as

 15 they try to harmonize SDR data and some of the

 16 difficulties in making it happen.

 17 But it's also been difficult to use as

 18 we bring it together. Many of the people that we

 19 use in the regulatory community to enforce rules

 20 and regulations have limited information at their

 21 fingertips as they go and do their investigations.

 22 Regulatory data, in its approach, is
 187

 1 largely segregated by product and sometimes by

 2 market. When you think about bad actors, many of

 3 them come to the marketplace -- or bad practices

 4 -- across products, which means the views are

 5 narrow, but the practices are broad.

 6 The great news is that emerging

 7 technologies are really changing the game. What

 8 is possible today in our regulatory thinking is

 9 very different than was possible even three or

 10 four, even five, years ago. And, as we start to

 11 envision what the future looks like for FINRA in

 12 what's called the cash markets, to a large extent,

 13 we think that there is a revolution underway that

 14 will change the nature of what regulation can be

 15 done and how we can interact with, and stop, bad

 16 behaviors and bad actors.

 17 We think that the new technologies allow

 18 us to much more efficiently collect, store and

 19 analyze data. You've read about all of these

 20 technologies. We've talked about cloud

 21 technology. There are new other kinds of

 22 technology that have come to the marketplace that
 188

 1 allow us to filter, and we're just on the cusp of

 2 what will be possible as we move forward in the

 3 future.

 4 We hope to be able to look at the

 5 universe of activity from a regulatory perspective

 6 rather than samples of data. And, by seeing the

 7 universe, we can see broader and much more in

 8 depth the activities that are taking place and

 9 identify anomalies in the marketplace, integrity

 10 issues that we can't see today, and be able to

 11 stop them much more quickly.

 12 We can be much more targeted from a risk

 13 perspective and observation-focused effort so that

 14 we can be much more efficient, not just from a

 15 regulatory perspective but from the broker-dealer

 16 perspective and all the participants in the

 17 markets' perspective, because our questions will

 18 be more targeted; we'll be more informed when we

 19 walk in the door, and we'll be able to have a much

 20 more fulsome conversation about what the issues

 21 are and be able to resolve those issues.

 22 Twelve years ago, we launched TRACE, our
 189

 1 fixed-income transparency vehicle. We've talked

 2 about it here a number of times.

 3 Prior to the launch of TRACE, there

 4 really wasn't much transparency in the

 5 fixed-income marketplace, and regulators had very

 6 little information about what was going on in the

 7 fixed-income markets except on a sample basis.

 8 When we talked to industry participants,

 9 industry participants predicted a marketplace that

 10 was about a third as big as it turned out to be when we

 11 had the facts and that had about a quarter of the

 12 number of participants that were trading in the

 13 marketplace as turned out to be reality.

 14 They predicted that retail customers

 15 were not players in the marketplace, and 65

 16 percent of the trades in the corporate buyer

 17 marketplace turned out to be retail-size

 18 transactions.

 19 The difference between operating with

 20 knowledge and operating with extrapolations are

 21 very different.

 22 By the way, I don't think anybody in
 190

 1 industry tried to deceive us when we thought about

 2 that. I think that each industry and market

 3 participant saw the market as they operate in the

 4 marketplace and extrapolated that across the

 5 marketplace and couldn't see all the facts. It's

 6 a much more powerful place from a regulatory

 7 perspective, in terms of making policy and

 8 understanding dynamic situations, when you can see

 9 the universe of activities.

 10 And because of the existence of TRACE,

 11 as we talk about some of the important issues that

 12 confront the fixed-income markets, like best

 13 execution and mark-up issues, those issues we can

 14 deal with and analyze with factual information at

 15 our fingertips, with historical data, that will

 16 allow us to make a much more informed approach as

 17 we go forward.

 18 Today, the seeds have been sown for some

 19 of the future vision, and I say the seeds because

 20 I think we're just beginning a very long process.

 21 The SEC has proposed -- and we talked a

 22 little bit about this, this morning -- the
 191

 1 consolidated audit trail, or CAT, and FINRA has

 2 proposed what we conceive of as a companion

 3 project that we call CARDS, to leverage some of

 4 these technology capabilities and to provide a

 5 universal view of activities in the marketplace,

 6 not just from markets but from books and records

 7 perspectives. We think this is going to allow us

 8 to look across a broad range of products in a way

 9 we can't see today.

 10 We know that CAT, for example, will

 11 cover all fixed-income as well as equity and

 12 options products, ultimately.

 13 But CARDS will also provide access to

 14 information that will go beyond the cash and

 15 securities-based products. It will give us a view

 16 of many other products that are treated by retail

 17 customers, in particular, packaged products and

 18 other things that we don't see in the marketplace

 19 today, that are also potential areas for bad

 20 actors and bad behaviors.

 21 Second is that we'll be able to target

 22 our regulatory resources where we think they can
 192

 1 be most productive. By looking at the universe,

 2 we'll be able to identify anomalies in behavior,

 3 compare across broker-dealers, compare across

 4 markets, and see anomalistic behavior in ways that

 5 we just can't see today.

 6 Third is that we think we're going to be

 7 able to speed problem identification dramatically

 8 because we'll be able to see things quicker,

 9 identify problems quickly, and we'll be better

 10 informed. We'll be much more nimble in terms of

 11 our approach to resolving problems in the

 12 marketplace.

 13 And fourth is we'll be much more informed

 14 in terms of our policymaking and rulemaking.

 15 We'll be able to have much more knowledge when we

 16 challenge and see issues. We'll be able to

 17 respond with facts and figures that are much more

 18 difficult to ascertain today, and much more

 19 complex, and this will put us in a much more

 20 powerful position than we are today in terms of

 21 making sure that we have informed and thoughtful

 22 policy and rulemaking activity.
 193

 1 The CAT approach is essentially to

 2 collect all orders linked to executions in their

 3 various stages and ultimately link that to

 4 customer information.

 5 I asked the question earlier this

 6 morning about, can we view customer strategies

 7 across broker-dealers markets? And, quite

 8 frankly, we need to be able to reach in and be

 9 able to see which customers and which activities

 10 are operating, not just on a market-by-market

 11 basis but across products, on venues and

 12 broker-dealers in ways that we can identify those

 13 behaviors that in one market may look fine, but

 14 when you look across multiple venues may look

 15 different.

 16 We've had a little snippet of that just

 17 as we've consolidated equity regulatory activity

 18 across the exchange markets. We call it

 19 cross-markets surveillance in FINRA, where we can

 20 now look across all of the exchange -- most of the

 21 exchange markets, not every single one, but 99

 22 percent of the markets, including them and the
 194

 1 over-the-counter marketplace, and see anomalistic

 2 behaviors. For the first time, we're starting to

 3 capture things and see things that we couldn't see

 4 before. It's a much more effective and efficient

 5 way to do regulation.

 6 CAT will take that to another level by

 7 providing information that will not just link

 8 activities across markets but will link it to

 9 customers ultimately, so we can see information

 10 and cut across fixed-income and equity products

 11 from order through execution reports. It will

 12 literally change the landscape in terms of what

 13 happens on the cash side of the business.

 14 CARDS, which is newer and is a

 15 FINRA-based proposal today, not an SEC proposal,

 16 will gather information across books and records.

 17 The intention is to have a universal view of the

 18 essential activities that are happening at a

 19 broker-dealer -- being able to look at position

 20 data and margin data, being able to look at

 21 customer activity levels, being able to look at

 22 things like churning of accounts.
 195

 1 On a systematic basis, it will allow us

 2 to have much more effective enforcement than we

 3 have today, not that we don't do well. I think

 4 that there is -- but there is room for improvement

 5 here.

 6 To give you an example, we've done some

 7 proof of concepts here. We had one broker-dealer

 8 who had about a 100,000 accounts, not a ton of

 9 accounts from a broker-dealer perspective, but

 10 100,000 accounts. We identified 13 accounts

 11 during an examination that we needed to focus on,

 12 by looking at the universe of accounts.

 13 Tremendously effective. Tremendously

 14 focused discussions.

 15 On a more macro basis, when the Puerto

 16 Rican bond issues came up as an issue in terms of risk 

 17 and vulnerability and who held that, we were able to

 18 look across a variety of broker-dealers and very,

 19 very quickly and very efficiently identify who

 20 held and who had concentrations of Puerto Rican

 21 bonds in their portfolios. It allowed us to have

 22 much more efficient, targeted conversations with
 196

 1 those participants.

 2 Very, very powerful. Much more

 3 effective than we could have been and much quicker

 4 than we could have been in the past.

 5 So what does the future look like? What

 6 could it be?

 7 So we see a world where regulators can

 8 analyze areas of greatest yield by analyzing the

 9 universe of activities across products -- the way

 10 that the industry participants and investors

 11 approach the marketplace.

 12 So, for the first time, when we have all

 13 of this information in place, we'll be able to see

 14 data the way the participants come to the

 15 marketplace. And that means cash, ultimately, we

 16 hope derivatives in the future, exchanges over the

 17 counter, broker-dealers, other actors, in a

 18 harmonized fashion.

 19 We think that the key to this is not

 20 just having regulators have access to the data but

 21 to have the legal and compliance community and the

 22 firms also be engaged in that.
 197

 1 And we think that the firm staff can

 2 become the first line of defense, much like we

 3 think about community patrols in the police

 4 departments. Right? They incorporate local

 5 people to bring -- to identify problem sets.

 6 We think that by empowering the firms

 7 and ensuring on a consistent basis -- now

 8 remember, we have over 4,000 broker-dealers that

 9 we have to deal with in terms of our FINRA

 10 jurisdiction.

 11 We want to empower them with information

 12 that will allow them to identify those bad actors

 13 and bad practices even faster than we can because

 14 nothing is better than having them knock on the

 15 door and say, stop, and cease and desist on the

 16 spot, in ways that we can't possibly do when we

 17 start police 700,000 registered representatives

 18 and 4,000 broker-dealers. But the firms can do it

 19 if we give them the right tools.

 20 So we're reconceiving in the future what

 21 that looks like in the balance of information, and

 22 we want to use that information to be able to
 198

 1 empower them in ways they probably can't do today.

 2 Bigger firms probably have all that day to day,

 3 but some of the medium-sized and small firms don't

 4 today.

 5 We think that our inquiries will be much

 6 more targeted, much more focused, which will

 7 reduce the time on extraneous issues, and much

 8 more efficient in terms of not just from a

 9 regulatory perspective, from the firms'

 10 perspective.

 11 The firms will have much more targeted

 12 inquiries, and we think that each of those

 13 inquiries will have higher yields because we'll

 14 have much better information before we start the

 15 process.

 16 Plus, the faster response. As we talked

 17 about before, the local compliance really will

 18 help stop problems before they become problems, we

 19 think.

 20 Policymaking. As we said before, having

 21 the universe of activities and being able to see

 22 across the marketplace will allow us to be able to
 199

 1 make policies based on facts and figures, to

 2 support our efforts to understand better the

 3 impacts of those things and make sure that the

 4 impacts of our policies and rulemaking are

 5 effective and efficient.

 6 This is not smooth sailing. There are

 7 many challenges to accomplishing what we're

 8 talking about today.

 9 First is there's a privacy issue. We've

 10 heard it before. We know it's privacy issue going

 11 forward, and we believe that this data can be

 12 protected, that we don't need PII, taxpayer names

 13 and addresses and tax IDs to do the kind of

 14 analysis we talk about. Ultimately, you may need

 15 it during an investigation, but you don't need it

 16 during the analysis and data collection in a

 17 central database to a large extent.

 18 We think that there are many things that

 19 can be done which will help us be much more

 20 comprehensive as we go forward.

 21 We know that as we implement something

 22 like this and the model-building takes place there
 200

 1 are going to be false positives. We have to tune

 2 models. There are times to make this more

 3 efficient, and there's an investment that we're

 4 all going to make to do that. So it's going to

 5 take time, and there will be new development as we

 6 go forward.

 7 Third is that melding this analysis with

 8 boots on the ground -- and Andrew just talked

 9 about the need to have examiners and people

 10 engaged in this process. There are not just

 11 analysts who will do it, but there will need to

 12 still be people who will go visit broker-dealers

 13 and go visit exchanges and talk about what's

 14 happening and talk to participants, to understand

 15 and investigate issues. And striking the right

 16 balance of what the mix of staff is going to be an

 17 interesting challenge for us, to know where those

 18 levels are.

 19 And, fourth -- and I don't want to

 20 de-emphasize it because it's all built on this --

 21 is harmonizing data. Data definitions, data

 22 cleaning, ensuring that the information is
 201

 1 complete and accurate is a critical element of

 2 making all of this work. So we need to make sure

 3 that we invest the right time and effort to ensure

 4 that we have the proper foundations because if we

 5 don't it's the old adage of "garbage in and

 6 garbage out."

 7 So you need to be sure that you invest

 8 the time to think through the issues, harmonize

 9 definitions, ensure the data are comparable, and

 10 you know what you're dealing with and how it's put

 11 together over time.

 12 Last, and certainly least, is the

 13 investment level. And I think that the

 14 investments that regulators will make will be

 15 small compared to the investments that the

 16 industry will make to ensure that they can deliver

 17 this data efficiently and effectively. That's a

 18 process that needs to go underway, and we need to

 19 be respectful of all of the investment that's got

 20 to be made as we trade off time and investment and

 21 performance as we go forward.

 22 But, in the end, we believe the results
 202

 1 are going to be dramatic. We think that they're

 2 going to be critical for helping to restore

 3 investor confidence as we go forward. Regulation

 4 will create policies and rules that are more

 5 comprehensive and timely. Bad behaviors will be

 6 identified more quickly and correctly and more

 7 efficiently. And examinations and enforcement

 8 actions will be dramatically more efficient for

 9 regulators and industry participants overall.

 10 In the end, we think that this is going

 11 to change the landscape of what regulation is, and

 12 we're only at the very, very beginning of this

 13 revolution because we're really at the very

 14 beginning of what technology can do, efficiently

 15 and effectively, for us.

 16 Thanks.

 17 COMMISSIONER O'MALIA: Thank you. Did I

 18 read an article, and was it correct, that was

 19 contemplating the CARDS system and that said it

 20 would be the second largest only to the NSA

 21 computers?

 22 MR. JOACHIM: The article CAT was, or
 203

 1 CAT/CARDS.

 2 COMMISSIONER O'MALIA: Okay.

 3 MR. JOACHIM: Yeah. I mean, giving you

 4 order of magnitude numbers, just a

 5 back-of-the-envelope size of the data that will be

 6 in CAT, just in equity and options, our estimate is

 7 north of 7 petabytes of data for storage. And

 8 that's north of that.

 9 So we were talking about hundreds of

 10 millions of -- how many? It's 140 terabytes of

 11 data that we were saying. And it's 1,000

 12 terabytes in a petabyte.

 13 So, orders of magnitude, just on the CAT

 14 side. For CARDS, probably our estimate now is

 15 about a petabyte of data. So, together, we're

 16 talking about tremendous amounts of data. And

 17 we're talking about, when we talk about ingestion

 18 of data, billions of rows of data every day.

 19 We know the technology is there to do this,

 20 and the technology today to do it efficiently is a

 21 tiny fraction. I'll just give you a sense.

 22 When we did OATS, originally, OATS,
 204

 1 three or four years ago, would have about 2 to 3

 2 petabytes of data in storage. Just OATS as the

 3 order audit trail for equities was about 2 to 3

 4 petabytes of data and ingesting a billion rows of

 5 data a day.

 6 But the cost of doing that in the cloud

 7 today is a tiny fraction of what we were spending

 8 then to store data.

 9 COMMISSIONER O'MALIA: So a petabyte is

 10 1,000 trillion bytes.

 11 MR. JOACHIM: It's 1,000 terabytes.

 12 COMMISSIONER O'MALIA: Or, a million

 13 billion, either way, it's a bunch of zeroes.

 14 MR. JOACHIM: Yeah, it's a lot. It is a

 15 lot of data.

 16 COMMISSIONER O'MALIA: All right, next

 17 is Rob Creamer.

 18 MR. CREAMER: Once again, I'm Rob

 19 Creamer, CEO of Geneva Trading and the Chairman of

 20 the FIA Principal Traders Group. I'm grateful for

 21 the invitation to speak with you today on behalf

 22 of the FIA PTG.
 205

 1 The FIA PTG appreciates the opportunity

 2 to speak here today on the subject of market

 3 surveillance. This is an extremely important

 4 issue, and the ability to accurately identify

 5 instances of abuse and disruptive trading

 6 practices in a timely manner is essential to the

 7 welfare of our markets.

 8 The FIA PTG has urged the industry, its

 9 critics, the media and, most importantly,

 10 regulators to rely on data and empirical analysis

 11 before making claims about the health of the

 12 industry or any of its participants. Only with

 13 data should a conclusion about the fairness of

 14 markets be reached. Only with data should the

 15 course of action be prescribed, and only with data

 16 can the results of these actions be monitored.

 17 As markets continue to evolve and

 18 mature, we feel that the Commission must be able

 19 to maintain its ability to distinguish facts from

 20 hyperbole in order to maintain the trust and

 21 confidence that our markets deserve.

 22 Before I make any suggestions or take
 206

 1 any questions from this Committee, I want to make

 2 it clear that until the presentation today I knew

 3 very little about the Commission's current

 4 surveillance capabilities or practices, nor did I

 5 understand the specific challenges that it must

 6 overcome.

 7 With that said the Commission should

 8 take advantage of the work that has been done in

 9 the industry thus far to address this very similar

 10 need. For instance, the SEC has successfully

 11 delivered a cost-effective solution for capturing

 12 trade data in its MIDAS platform. This should

 13 serve as a template or road map for the

 14 development of a solution to address market data

 15 for futures and swaps.

 16 When it comes to audit trail-level data,

 17 fortunately, much of the work in the futures

 18 industry has been done by the SROs which have

 19 developed systems to monitor, scrutinize and

 20 enforce the market on its participants.

 21 The Commission should leverage this work

 22 rather than recreating it. It should focus its
 207

 1 efforts on developing a platform to accurately

 2 harmonize data across venues and acquire, or

 3 build, tools to identify and analyze patterns of

 4 interest.

 5 This should be done in a manner that

 6 preserves the integrity of the data between SROs;

 7 allows for rigorous, efficient and flexible

 8 analysis; and respects the confidentiality of the

 9 participants whose activity is represented in this

 10 data.

 11 We commend Commissioner O'Malia and this

 12 Committee's efforts to assess the Commission's

 13 ability to surveil today's markets and strongly

 14 support the efforts to make improvements where

 15 necessary. We welcome the opportunity to assist

 16 the Commission in this worthy endeavor.

 17 I want to make a point that was a

 18 follow-on as well from the previous panel. It was

 19 in a topic of conversation surrounding the

 20 movement of trading activity from the floor to an

 21 electronic world, and the topic was now it's all 

 22 happening out in these servers out in cyberspace.
 208

 1 And I think a lot of people in the

 2 industry, certainly not on this Committee or

 3 dealing with this all the time, but in general,

 4 don't recognize or give credit to the fact that in

 5 an electronic world all of the activity of the

 6 participants is recorded and kept and archived.

 7 And that never happened before. A day after

 8 trading, much of that information was lost.

 9 Conversations that were had -- it's gone forever.

 10 And there's never been a more effective

 11 time at getting this right and being able to do a

 12 proper job in surveilling our markets.

 13 I'll also point out -- and Bryan Durkin

 14 mentioned, at least with the Globex platform, a

 15 lot of the tags and data that is captured in the

 16 system -- many people fail to recognize or

 17 appreciate the level of data that's already being

 18 captured by market participants like Geneva

 19 Trading and the principal trading firms that are

 20 members of our group. It drills down on a very

 21 granular level and provides an enormous amount of

 22 detail.
 209

 1 So we strongly support this effort. We

 2 hope that we can provide assistance. We look

 3 forward to the years to come and improving this

 4 process.

 5 COMMISSIONER O'MALIA: Thank you. Dave?

 6 MR. LAUER: Thank you, Commissioner

 7 O'Malia, for inviting me to testify here, and

 8 thank you to the Committee for listening and

 9 considering these ideas.

 10 My name is Dave Lauer. I'm here with

 11 KOR Group and also the Healthy Markets Initiative.

 12 KOR is a market structure research and

 13 consulting and advocacy firm. Healthy Markets is

 14 a coalition of firms that we're helping to put

 15 together to advocate for market structure changes

 16 primarily in the equities market.

 17 My background is in technology and

 18 trading. I spent eight years designing, building

 19 and operating low latency trading systems, working

 20 very hard on latency minimization, measurement and

 21 quantitative analysis of market data and trading.

 22 Some of that experience was at Allston
 210

 1 Trading, which is one of the larger futures

 2 trading firms out there -- an HFT. Although my

 3 focus was always primarily equities, I do have

 4 some futures trading experience.

 5 I apologize ahead of time. I will

 6 mention equities from time to time. I know that's

 7 beaten a bit.

 8 I will also say silly things like I

 9 think the SEC and CFTC need to work together and

 10 stuff like that.

 11 So today, I'm going to talk about from a

 12 technologist's point of view what I think the

 13 shortcomings are of current approaches to

 14 surveillance.

 15 And I have the advantage of not having

 16 to deal with institutional resistance, cultural

 17 issues, political problems. So I can sort of

 18 speak from scratch -- if I were going to do it,

 19 here's how I would do it.

 20 That may not be practical. In fact,

 21 that's obviously not practical, but I will also

 22 talk about what I think can be done today to
 211

 1 enhance surveillance capabilities and also how we

 2 can get to where I think we should go for the

 3 ultimate 21st Century surveillance system.

 4 I think that part of that is going to

 5 revolve around what I've called technology-centric

 6 regulation and surveillance.

 7 And I can't overstate this enough, and

 8 I'll get into it a bit in my presentation, but

 9 it's a fundamental shift in how technology is used

 10 and the way that technology transforms regulatory

 11 operations and an approach to surveillance. It's

 12 something that many firms in the industry have

 13 adopted in terms of how they operate, and ones

 14 that haven't have generally fallen by the wayside.

 15 I'll then describe the surveillance

 16 system. I would like to start out by saying it is

 17 not meant to reproduce CAT. CAT is something

 18 different. CAT is important. I don't mean to

 19 denigrate CAT. I think that's where we ultimately

 20 need to go.

 21 But I'm concerned that CAT is far away,

 22 and I think that there are issues that can be
 212

 1 dealt with now and that we should be focused on

 2 dealing with those as quickly as possible, again,

 3 as many have stated here, to help with investor

 4 confidence issues, to show that regulators are on

 5 top of things, that SROs are on top of things, to

 6 become -- I think it can be stated to be

 7 effective, advanced and intimidating with our

 8 surveillance capabilities and to be visible,

 9 frequent, regular and transparent.

 10 And I think transparency is a theme

 11 throughout this presentation.

 12 I want to start with a quote from the

 13 director of market surveillance technology for an

 14 international regulator. I thought this was just

 15 a very important idea.

 16 "Regulators that are serious about

 17 improving compliance and protecting investors must

 18 embrace technology and adapt their organizations

 19 to the realities of 21st Century trading. This

 20 will require courageous leadership, a tectonic

 21 shift in thinking and a radical reallocation of

 22 budget and staff resources."
 213

 1 So what are the shortcomings in our

 2 current surveillance systems?

 3 I think that we have technology

 4 shortcomings, and fundamentally, one of those is

 5 an issue of timestamp synchronization and

 6 resolution. I know that this was identified in

 7 previous TAC working groups.

 8 Certainly, synchronization across market

 9 centers is much more of an issue in equities

 10 markets. That doesn't mean it's not an issue

 11 here.

 12 We are the point, technologically, that

 13 we can synchronize to the microsecond. I think we

 14 were there a couple years ago. I certainly always

 15 worked on systems that were synchronized to the

 16 microsecond, at least post about 2009.

 17 But that technology is there. It's

 18 readily available. It's not expensive.

 19 This is something that needs to happen

 20 right away if we can ever hope to be able to do

 21 effective cross-market surveillance and, as I'm

 22 going to argue, cross-asset class surveillance as
 214

 1 well.

 2 I think that along those lines the

 3 analytics that are being used are certainly

 4 effective for some of the things that they're

 5 looking for -- layering, spoofing, these types of

 6 things -- but there are more advanced analytics.

 7 I recently did a consulting project

 8 designing intelligent, adaptive kill switches

 9 using predictive analytics, using concepts like

 10 normality modeling, anomaly detection,

 11 dimensionality reduction, unsupervised learning

 12 techniques.

 13 These are all techniques that are well

 14 understood in data science and predictive

 15 analytics that don't appear to be used actively in

 16 the surveillance market right now. I know there

 17 are some vendor products that are heading in that

 18 direction.

 19 And I'll continue to push that not only

 20 should we look to SROs, who have excellent

 21 surveillance capabilities because they've been

 22 spending so much time doing that, but we should
 215

 1 look to the vendor community as well. There are now

 2 companies that dedicate themselves just to

 3 surveillance and surveillance analytics, bringing

 4 machine learning in for parameter optimization --

 5 the things that were talked about by FINRA.

 6 In terms of how do you optimize and tune

 7 these models, well, there are systems for doing

 8 that in an automated way that are far superior to

 9 attempting to do that manually and by humans.

 10 I think that we should all recognize

 11 that there are conflicts of interest inherent with

 12 publically traded SROs, and the general perception

 13 in the industry is that leads to poor enforcement,

 14 especially with their biggest and best customers,

 15 which is why I will advocate for a centralized

 16 surveillance platform operated by regulators

 17 though still accessible for SROs as way to

 18 centralize all of the operations and reduce

 19 duplication across SROs, which could ultimately be a

 20 cost reduction for them as well.

 21 I think we should all be concerned that

 22 there's a complete lack of cross-asset class
 216

 1 automated analysis occurring right now. It

 2 doesn't mean that the data are not there, but it's

 3 generally tip-driven rather than algorithmically

 4 monitored. And I think that's a concern, and it's

 5 almost impossible to monitor it anyway given the

 6 issues around timestamp synchronization and

 7 resolution.

 8 I think if the CFTC and regulators want

 9 to catch up to the industry, which is an

 10 oft-stated goal, the way to do that is by engaging

 11 the industry in a deeper and more meaningful way

 12 than has been done before.

 13 I think the Technology Advisory

 14 Committee is fantastic, and I absolutely commend

 15 the CFTC for doing this and the TAC members for

 16 spending their time here. I think that it's an

 17 excellent model for how you engage the industry in

 18 one way, and I think the same should be done for

 19 understanding manipulation.

 20 And I think the industry has a deeper

 21 view of manipulation beyond just your standard

 22 layering and spoofing activities. For example,
 217

 1 it's industry practitioners that might be able to

 2 explain the math behind how someone would

 3 manipulate interest rates across the yield curve

 4 -- for example, across assets, across products.

 5 That's a level of understanding that's

 6 in the industry, and that can be tapped and is

 7 readily available, especially with proper

 8 incentives. And I'll spend a little time on that

 9 in a bit.

 10 Another issue to highlight is that some

 11 practices do make it difficult for brokers to

 12 properly watch their customers. One example is

 13 that some futures exchanges don't provide drop

 14 copies to what are called parent participants of

 15 sponsored direct access customers. So there's

 16 something specific that could easily be changed.

 17 I think that the biggest issue for the

 18 CFTC and for regulators is institutional

 19 resistance. Certainly, the size of the problem

 20 and where to start is an overwhelming issue.

 21 Money and budget is a serious hindrance.

 22 As Commissioner O'Malia said, the CFTC's
 218

 1 biggest problem is big data. I think that falls

 2 into a shortage of the right technology skills and

 3 knowledge and a resistance to a technology-centric

 4 approach.

 5 And I'll get into what I mean by

 6 technology-centric approaches, but the core of it

 7 is that technology is not simply a tool that makes

 8 existing processes more efficient. It's something

 9 that creates new capabilities, new processes, and

 10 revolutionizes existing ones or eliminates them.

 11 I think the political frictions within,

 12 and across, agencies is a huge hindrance to a

 13 proper surveillance system, and surveillance is a

 14 perfect example of something where the SEC, CFTC

 15 and SROs should all be working intimately together

 16 on a shared platform.

 17 And then, of course, as I said before, I

 18 think there are conflicts inherent in the

 19 publically traded SRO structure, where you would

 20 find a lot more investor confidence, a return of

 21 investor confidence, if the regulator were able to

 22 be on top of things as well.
 219

 1 So, as I said before, technology is a

 2 tool, but it's much more important than that, and

 3 this is why we need a new approach to

 4 surveillance.

 5 Technology has become part of the

 6 culture across this industry. The

 7 technology-centric approach is critical for

 8 success in financial services. There's no way

 9 around it anymore.

 10 And participants in financial services

 11 don't see individual assets. They don't see

 12 individual products. They see the market.

 13 They don't trade in the futures market,

 14 in general. There certainly are some that do.

 15 But they trade across markets.

 16 I think we all understand this, and

 17 certainly most of the people who trade in this

 18 room -- that's true for them.

 19 And it can't be stated enough that you

 20 can't do this with attorneys, and that's no

 21 offense to GS-13 and 14 people in the room.

 22 You need experts. That's what these
 220

 1 firms have. That's where they're unleashing huge

 2 amounts of money. The best programmers in the

 3 world, the best traders, the best engineers, the

 4 best DevOps, the best surveillance and compliance

 5 technology experts -- that's what you're facing.

 6 So that's why I said earlier that a

 7 radical reallocation of budget and staff resources

 8 is necessary. This is what regulation is going to

 9 be in the 21st Century. It's a different world.

 10 It's not the world of 15, 20 years ago that,

 11 obviously, I wasn't participating in.

 12 And I think that never has the need for

 13 expertise been greater or the resource gap been

 14 wider.

 15 So what does this next generation

 16 surveillance platform look like?

 17 It's got full cross-asset class

 18 coverage, and I think that that's the important

 19 first step and one that has been missing,

 20 unfortunately, even from CAT although we say that

 21 eventually it should have derivatives in it.

 22 To me, that's a foundational element,
 221

 1 and part of that might be a bias from my

 2 experience. You know, I've spent time at firms

 3 where futures to equities arbitrage was a primary

 4 strategy, and so I understand that market better

 5 than just siloed trading strategies within the

 6 futures market.

 7 But there are other considerations as

 8 well aside from high-frequency trading. There's

 9 broker front-running. It's certainly not

 10 unreasonable to expect that you will find

 11 instances of cross-asset class front-running when

 12 that is not being looked at right now.

 13 Obviously, this system is

 14 high-performance. It's able to do real-time

 15 analysis. It has what I've called a strategy, or

 16 a trader registration and identification system.

 17 And that's a problem that has been confronted by

 18 many people at many times.

 19 How do you identify people? How do you

 20 identify traders across asset classes? The large

 21 entity identifier is going to do that.

 22 But right now, if you want to do that,
 222

 1 you can have people register, submit all of the

 2 identifiers they're using, get back a unique

 3 identifier that they use for trading across market

 4 centers and have that propagated down in a fixed

 5 feed from the market centers to regulators. And

 6 that's the same thing that I proposed two years

 7 ago before the U.S. Senate in my testimony on

 8 electronic trading.

 9 The next step is best-of-breed

 10 analytics. And I have no doubt that SROs have

 11 incredible analytics that they are using right

 12 now. There are also analytics that have been

 13 developed by vendors. There are practitioners who

 14 want to help regulators with their analytics

 15 systems.

 16 But we don't have a framework for what I

 17 called pluggable analytics. That's a standard

 18 pattern in computer science, and it's one that

 19 needs to be adopted so that people can design

 20 analytics who are not a regulator.

 21 The public could be designing these

 22 analytics. We can be designing contests. You can
 223

 1 have people find the best market manipulation

 2 algorithm, find the best cross-asset class

 3 manipulation algorithm; you get a million-dollar

 4 prize.

 5 You would get tens of millions of

 6 dollars of effort for that million-dollar prize.

 7 That's, again, a standard model being used in

 8 other industries and even in other government

 9 regulators.

 10 SROs could use this platform to leverage

 11 this platform and reduce and eliminate

 12 duplication. It doesn't make sense to have so

 13 much surveillance technology.

 14 I think it makes sense to have lots of

 15 surveillance groups at every point in the chain,

 16 from the firm, the broker, the SRO and the

 17 regulator. You need people looking at everything,

 18 every step of the way; I totally agree with that.

 19 But you don't necessarily need this

 20 duplication of technology. By centralizing

 21 resources, the cost savings is significant.

 22 Again, you need advanced machine
 224

 1 learning and parameter optimization, and I'd argue

 2 that this is the perfect platform that you can use

 3 to engage academics and the public.

 4 I think there's a data crisis in this

 5 industry. There's a crisis in academic research.

 6 Every academic that I speak with will echo this,

 7 and in fact, it was just recently written about by

 8 Maureen O'Hara and Robert Batallio, whose quote is

 9 in my written testimony as well.

 10 We have a serious problem in studying

 11 markets and getting access to the right data, and

 12 this is the perfect example of something that if

 13 you open up this platform -- and I don't mean

 14 access to raw data. I don't want people to think

 15 that I'm saying people can download orders with

 16 participant identifiers and reverse-engineer

 17 strategies.

 18 I think there are technological ways of

 19 providing APIs and examining data in and data out

 20 to ensure that nothing is going across the border

 21 that has any concerns around confidentiality but

 22 that can still be leveraged as a platform for
 225

 1 doing advanced studies by the public, academics

 2 and practitioners.

 3 Now this is another joke, of course, to

 4 talk about how long it would take to build

 5 something like this, but private firms could have

 6 this operational by the end of the year. If they

 7 started today, it would be up and running by the

 8 end of the year. That's all I know.

 9 I've never worked in government. I

 10 don't know how long these things take. But, if it

 11 was me and I was running this project, it would be

 12 up and running by the end of the year.

 13 And this is just a broad overview

 14 showing that you have market centers sending

 15 privilege fixed feeds with participant identifiers

 16 into a cloud-based computational resource, and you

 17 have algorithmic analytics, machine learning,

 18 trending and alerting.

 19 And another important thing is advanced

 20 data visualization. I'd love to see what the CME

 21 has done on this. I think everybody has done

 22 different things with visualization, and this is a
 226

 1 world in technology that has become revolutionized

 2 over the last few years.

 3 Visualization of big data has made

 4 tremendous strides, and it's something that

 5 regulators should be investing substantial

 6 resources in.

 7 I keep talking about big data. I just

 8 want to take a step back.

 9 I know with CAT we talked about 7

 10 petabytes of data and how that's an overwhelming

 11 amount of data. I hate to say it, but people in

 12 other industries do laugh at that.

 13 NASA deals with exabytes. That's 1,000

 14 petabytes, ten to the 3rd petabytes.

 15 You know, other industries -- Google,

 16 Facebook. I mean, you have people using open

 17 source platforms to manage order of magnitude more

 18 data than we have in financial services.

 19 So I know that the data issues are

 20 intimidating, but these are problems that have

 21 been solved.

 22 So what can we do today? Again, I would
 227

 1 urge the industry and SROs and regulators to adopt

 2 a technology-centric approach. I think that

 3 engagement with the industry in a serious and

 4 meaningful way is a critical first step to the

 5 CFTC being able to catch up to the industry and

 6 maintain pace, and that's what I think the focus

 7 should be, as well as making a definitive data set

 8 available across asset classes with high

 9 resolution, clock-synchronized timestamps, first,

 10 studied by academics and the public.

 11 And I think that what we're doing here

 12 and looking at what data is currently available is

 13 also a critical step.

 14 I think over time regulators should

 15 become the primary surveillance group and that

 16 that can happen with this next generation

 17 surveillance platform, and this is how regulators

 18 can catch up and can leapfrog the industry.

 19 Thank you.

 20 COMMISSIONER O'MALIA: Thank you, Dave.

 21 Trabue, wrap it up.

 22 MR. BLAND: Thanks. We're almost an
 228

 1 hour and a half into this. So there are a couple

 2 things I just want to say, very quick points.

 3 First of all, that's an excellent

 4 presentation. I would like to say that the CFTC

 5 actually already does a lot of this. I've

 6 actually sat in with Matt Hunter's group before,

 7 and a lot of this cross-asset analysis, a lot of

 8 the tools, and the flexible tools, are being built

 9 in-house right now at CFTC with very limited

 10 resources.

 11 Another point I'd like to make is that

 12 you have the data. I was going to bring up the

 13 data slide. That's one of the best slides I've

 14 seen and one that I'd like to copy at some point.

 15 But you're bringing in a lot of data,

 16 and you've got the staff. You've got a lot of the

 17 analytical tools.

 18 My question is, are the right questions

 19 being asked?

 20 When I talk to our market surveillance

 21 groups, I ask them; I mean, what are you looking

 22 for?
 229

 1 I mean, we can build reports, and we can

 2 build hundreds and hundreds of reports to look for

 3 discrete things. But we want them to focus on

 4 like two or three areas where they want -- you

 5 know.

 6 And all of it really kind of goes to is

 7 the market performing well; is the market healthy?

 8 And, you know, that's what I -- the one

 9 recommendation I have for the CFTC is just to make

 10 sure and don't get lost in the data.

 11 I mean, you could actually be like

 12 Russell Crowe in a Beautiful Mind. You're staring

 13 at all the newspapers up on the wall, and you're

 14 trying to figure out some kind of crazy pattern

 15 over there.

 16 You don't want to do that. You want to

 17 make sure that you have a clear process of how

 18 you're going to analyze this and questions you

 19 want to answer.

 20 With that, I'll throw it out to

 21 questions.

 22 COMMISSIONER O'MALIA: Anybody have any
 230

 1 questions?

 2 (No response.)

 3 COMMISSIONER O'MALIA: But some of the

 4 things that I'm trying to think about here:

 5 Jorge's slide, massive amount of data we

 6 already have.

 7 Opportunities to do cross-asset,

 8 cross-market. How do we bring this all together?

 9 Should there be a coordinating structure? Who

 10 should really lead this kind of effort? We speak

 11 a lot to the SEC. We speak to FINRA.

 12 But we're clearly not doing enough to

 13 leverage this as opposed to trying to replicate,

 14 and I think Dave's slides kind of caught on this.

 15 It seems it would be extraordinarily

 16 expensive if each of us tried to have our own data

 17 set and exclusively tried to do our own

 18 surveillance and solve all the same problems that

 19 each other have already had.

 20 So how should we think about this in

 21 terms of priorities?

 22 Should we have it all? How do we work
 231

 1 with the SROs that do serve as the front-line

 2 regulators and who rely on that? Another question

 3 I have -- and for you, Rob -- is with the order

 4 message data. Is it something moving to the next

 5 level of order message manipulation? What do we

 6 need to think about in that area?

 7 But those are the couple observations I

 8 have. I see there might be a slide or two coming

 9 up. Is it -- who's down there? I can't -- is

 10 that Jeff, or is it -- who's got --

 11 Oh, both of you guys. Adam has got a

 12 tag up.

 13 MR. ADAM LITKE: So I have a question

 14 actually along the lines -- some of what you were

 15 just saying, along the lines of cross-agency

 16 cooperation.

 17 When Dodd-Frank was written, it was

 18 envisaged, although it didn't -- it started out

 19 with the idea that there would be something called

 20 the National Institute of Finance, which kind of

 21 morphed into the OFR but without the full vision

 22 that was behind the National Institute of Finance,
 232

 1 and they were supposed to be a systemic risk

 2 agency collecting data and doing research on

 3 systemic risk in the markets.

 4 You have about three organizations or

 5 four organizations here that are all collecting

 6 data based on surveillance, to some extent, and

 7 market manipulation rather than systemic risk.

 8 But, as you said, you're all interested

 9 to some extent in the same data, not to mention

 10 whatever you would do in a cross-border

 11 cooperation.

 12 So I guess the question is, is it

 13 possible, politically -- and I'm sort of going to

 14 ask Bill because he's the one stuck at the OFR.

 15 Is it actually possible, politically, for these

 16 groups to get together and share?

 17 MR. NICHOLS: It's not possible,

 18 politically, for me to answer that question.

 19 (Laughter.)

 20 MR. ATKIN: Jorge, I just have a

 21 procedural -- process question for you. How are

 22 you conducting the harmonization process, and are
 233

 1 you going backwards to the sources of data, back

 2 to the participants?

 3 And then my second question along that

 4 line is, can you help me understand the

 5 definitional problem that you're facing? Is it a

 6 nomenclature problem, or is it alignment to

 7 meaning problem?

 8 It seems to me that all these data

 9 attributes are contractual. They are defined in

 10 the terms of the agreement. And I'm just

 11 wondering what the nature of that definitional

 12 challenge is.

 13 MR. HERRADA: Sure. Well, I'm actually

 14 going to throw this over to John Rogers who's been

 15 overseeing the harmonization process. So John is

 16 our CIO.

 17 MR. ROGERS: So that was a good question

 18 one. Jorge promised me that he was going to do

 19 this. So let's see. I think that it's really not

 20 so much a nomenclature, you know, issue. It is

 21 really -- I forget the other choice I had in

 22 answering your question.
 234

 1 Meaning. It is really a meaning

 2 question. And it's not so much -- it's really

 3 about how each of the SDRs are populating this

 4 data, which, of course, is data that they're

 5 getting from the submitting parties, and does it

 6 actually mean the same thing across the board, you

 7 know, across each of the SDRs.

 8 So the harmonization is to make sure

 9 that there's harmony in meaning.

 10 While there are rules that talk about

 11 what each attribute means, each field means, there

 12 are interpretations of those rules because people,

 13 as we all know, read words and derive different

 14 meanings from words.

 15 So harmonization, first and foremost, is

 16 about the SDRs and CFTC getting together and

 17 making sure that we all have a common

 18 understanding of the meaning from our perspective

 19 so that when we pull the information together

 20 we're expecting to see things that mean the same

 21 thing.

 22 It doesn't mean that one interpretation
 235

 1 was more correct than the other. It just means

 2 that now we have a common understanding. So that

 3 is a lot of what this is about.

 4 As far as who is interacted with, the

 5 focus of our harmonization effort has been on our

 6 interaction with the SDRs, but we know that in

 7 many cases this information is filtering back to

 8 the people that are submitting the data.

 9 And there is an interest generally, or

 10 probably largely, in making sure that the

 11 consistency starts at the source. But our focus

 12 has been, at least to this point, on the

 13 information that we are looking at from the CFTC

 14 and making sure that there is an understanding of a

 15 common meaning across all of the SDRs.

 16 COMMISSIONER O'MALIA: You know, there

 17 are also efforts that we should be undertaking

 18 with regard to harmonizing internationally.

 19 Europeans have had reporting since early February.

 20 Other jurisdictions are bringing on their SDRs.

 21 Something that we're not moving quickly

 22 enough on is setting up international agreements
 236

 1 to share that data. There's no agreement required

 2 today if we wanted to begin harmonization efforts

 3 across jurisdictions. That would be a worthwhile

 4 effort, to at least make sure that when we do get

 5 to a sharing arrangement that we're comparing

 6 apples to apples.

 7 Steve and then Walter.

 8 MR. JOACHIM: A couple of things.

 9 First, let me correct a couple of data points I

 10 put out there for you, or clarify them.

 11 Actually, while we were eating, I had

 12 somebody actually pull out the CAT RFP to see what

 13 was required at year five of CAT. It's 21

 14 petabytes of data required for storage for the CAT

 15 RFP and the ability to process 95 billion rows of

 16 data per day. So the plans are large.

 17 And I would say to you, Dave, we have

 18 actually talked with every major technology vendor

 19 and many minor technology vendors about the

 20 problems that we're dealing with, and quite

 21 frankly, they all think that we are on the very

 22 cutting edge of what technology does and close to
 237

 1 the bleeding edge in terms of some of the

 2 challenges that are in terms of processing and

 3 doing data.

 4 So it's not just about ingesting the

 5 data and storage, and we use those things as

 6 relative measures for people, but it's how you've

 7 got to match the data, bring it in play so you can

 8 use it and leverage it that becomes tremendously

 9 complex -- and do it on the fly, where if you have

 10 one problem any day your back-up becomes an

 11 enormous task.

 12 So the nonstop processing of that

 13 becomes a problem also.

 14 Let me try to address the issue of

 15 working together. I think the thing we have to be

 16 very cautious about -- and I think I can say this

 17 from an SRO perspective; it's hard to say from a

 18 government perspective, I think -- is that we've

 19 got to be careful not to try to boil the ocean, or

 20 what I call boil the ocean, when you start to

 21 harmonize data and get standard approaches.

 22 I think we have to look at what our
 238

 1 purpose is in regulation and make sure we're

 2 thinking about those purposes. And, as we

 3 harmonize those efforts, we have to harmonize them

 4 certainly first across what the markets'

 5 regulatory -- or the financial services'

 6 regulatory -- community needs first because if

 7 we're not careful, at least in my experience, both

 8 on the industry side and now on the regulatory

 9 side, many people will look at data and define it

 10 differently. The same field could be defined for

 11 different purposes.

 12 And the more you try to satisfy

 13 everybody's need, the less likely you satisfy

 14 anybody's need. So we have to keep in mind what

 15 our purposes are. It's one of the barriers to

 16 moving quickly sometimes -- is everybody agreeing.

 17 And, quite frankly, we've got to

 18 remember that when we do collect the data the

 19 industry has an enormous problem delivering it

 20 also because they've not compared across firms.

 21 So much of the data that we use are data

 22 that we gather from broker-dealers, not just from
 239

 1 exchanges. And when you do that, every

 2 broker-dealer gathers the data for their own

 3 purposes and not for our purposes. Going back and

 4 getting them to modify that in a way that is

 5 consistent is really what slows the process down,

 6 much more than what we might think of as

 7 bureaucratic action, because getting all the data

 8 in a place that we can use and leverage is a

 9 critical element of making this work.

 10 So you can't underestimate the

 11 challenges to ensure that everybody can deliver

 12 the information you need, understands it and then

 13 actually executes properly around that. It is a

 14 daunting task when you start the process, and the

 15 broader we get, the more we cut across markets,

 16 the more complex that becomes.

 17 MR. HAMSCHER: I think Steve actually at

 18 some level touched on what I was going to say.

 19 I was going to start off with the

 20 smart-alecky remark that if you can't even agree

 21 on timestamps, you're a long way from agreeing on

 22 the terminology of contracts and sort of straddle
 240

 1 swaps and what not and trying to standardize on

 2 that.

 3 And what I'd like to know first of all

 4 is, from what Dave said, is it true these markets

 5 do not even have a consistent clock?

 6 If that's true, what's the obstacle to

 7 them having a consistent clock, and is that in

 8 fact part of or one of the first things you'd want

 9 to do in harmonization?

 10 It seems to me, as Steve was saying,

 11 don't boil the ocean. You know, start with

 12 something that is very tangible.

 13 I know that when we did the Flash Crash

 14 study, one of our problems -- many issues -- was

 15 simply that not only did we not know what the

 16 timestamps necessarily represented but different

 17 exchanges had different interpretations and ways

 18 of representing data about when a hold was placed

 19 on trading.

 20 So there are some very basic things

 21 about timestamps and events at timestamps that

 22 seem to me would help a lot and seem quite
 241

 1 tractable, but you're not going to get everywhere

 2 at once.

 3 And so, once again, I'm just directing

 4 this kind of at John. Is there something you can

 5 do in the short term to get started on this?

 6 COMMISSIONER O'MALIA: Maybe on the

 7 timestamp issue, we could ask somebody who's got

 8 some skin in the game, maybe Chris or Rob, how you

 9 deal with timestamping. Do you do your own

 10 timestamping, or do you accept the exchange

 11 timestamping?

 12 MR. LORENZEN: As far as we do it, we

 13 look at each exchange, and obviously, everybody is

 14 reporting times that are different, and we try to

 15 normalize them ourselves. And it helps in looking

 16 at trades in a post-trade analysis way.

 17 But, yeah, I think it's extremely

 18 important from a regulator standpoint that you're

 19 able to take a look at trades that are going to

 20 match up with one timestamp.

 21 COMMISSIONER O'MALIA: As I saw flags go

 22 up, I think it was Keith, Chris Concannon, John
 242

 1 Lothian, Marisol and Richard.

 2 Am I missing anybody?

 3 (No response.)

 4 COMMISSIONER O'MALIA: So, Keith, you

 5 want to make your comments?

 6 MR. FISHE: Sure. I have two comments.

 7 You had mentioned timestamps, and I think, Dave,

 8 you might have been referring to the working group

 9 that Chris, myself and Jorge were in. We

 10 presented the first kind of alert on timestamp

 11 issue.

 12 And it's not that you can't synchronize

 13 server clocks. It's that they drift after you

 14 synchronize them. So you can get actually

 15 deviations in milliseconds, not microseconds.

 16 MR. LAUER: Just to speak to that, I

 17 mean, there are technology solutions, and they

 18 have been around actually for quite some time.

 19 MR. FISHE: Well, you can sync them, but

 20 then the clocks themselves drift.

 21 MR. LAUER: They absolutely do.

 22 MR. FISHE: And they drift at different
 243

 1 rates.

 2 MR. LAUER: But if you have -- I mean,

 3 this is a well -- it's a problem that's been

 4 solved, and everywhere that I've operated at has

 5 been able to solve the problem.

 6 MR. FISHE: All I can do is alert you to

 7 the issue.

 8 But the other comment, excuse me, is the

 9 issue in terms of data and data meaning, which

 10 I'll throw back to Jorge, and whether you ever

 11 anticipate coming to a conclusion with data

 12 meaning or whether it will just go on and on.

 13 MR. HERRADA: All right. So, as far as

 14 data meaning, John -- I pointed to John, and John

 15 pointed back to me. So I guess I have to take

 16 this question.

 17 Anyways, you know, I think the clever

 18 way that the folks in ODT have been sort of facing

 19 this question and how we've been dealing with it

 20 is -- the whole idea of the phased harmonization

 21 process I think is a good one because, yeah, we

 22 don't want to boil the ocean. There are so many
 244

 1 different fields that one could go after.

 2 So the idea with the phased

 3 harmonization is we picked -- you know, I forget

 4 whether it was 20 or 30 fields in phase 1 and then

 5 another 20 or 30 fields in phase 2, and then

 6 there's phase 3 and phase 4.

 7 But the idea is focusing on the most

 8 important fields first and focusing on those and

 9 trying to get standardization.

 10 Will we get harmonization completely, on

 11 every field? You know, there are always going to

 12 be new fields that are going to be invented.

 13 There's always going to be innovation when it

 14 comes to the financial industry.

 15 So you'll never get -- you're never

 16 going to be done, but the key is to try to get the

 17 most critical fields harmonized so that we can

 18 have agreed-upon ideas.

 19 And, John, you like you're about to say

 20 something, so go ahead.

 21 MR. ROGERS: Well, I just wanted to add,

 22 in harmonization, we are looking at things like
 245

 1 clocks, not necessarily millisecond drift but

 2 standardization as much as we can. In some cases,

 3 there are questions about milliseconds and

 4 microseconds and those sorts of things, but those

 5 are the kinds of things that is just one example

 6 when we're talking about timestamps that we're

 7 focusing on.

 8 MR. FISHE: And I had one more comment,

 9 something that Steve had said, on the issue of

 10 false positives.

 11 I realize that these programs of trying

 12 to collect all this data are really going to be

 13 quite costly to all the different regulators. And

 14 I'm sure that you're going to really look at the

 15 expected benefits before the large investments,

 16 but I wonder if you're going to look at the cost

 17 to firms of dealing with false positives.

 18 MR. JOACHIM: Yeah, very quickly, the

 19 answer is absolutely, we need to think about that,

 20 and we are thinking about it constantly.

 21 And, as we bring the data in, we have to

 22 be very careful that we minimize the disruption to
 246

 1 firms, but we have to work together.

 2 The concept is -- and I think Dave or

 3 one of the participants talked about how important

 4 it was for the industry to work in cooperation

 5 with us because if we do it together we're much

 6 more likely to minimize the disruption and

 7 minimizes the false positives as well as false

 8 negatives, of course, to be sure that we're

 9 getting an effective tool.

 10 So, yeah, I think, absolutely, we're

 11 sensitive to that. Absolutely, we have to

 12 consider that. Absolutely, we need to work

 13 together to be sure that we minimize that process.

 14 COMMISSIONER O'MALIA: Chris Concannon.

 15 MR. CONCANNON: Thanks. Just quickly,

 16 there was a recent book out on a claim that the

 17 exchanges didn't have subsecond data on activity.

 18 I'm just curious. It sounds like you

 19 actually do have subsecond information?

 20 MR. VRABEL: Subsecond meaning less than

 21 a second?

 22 MR. CONCANNON: Yes.
 247

 1 MR. VRABEL: Yes. So our regulatory

 2 systems maintain data down to the millisecond, and

 3 within milliseconds, we are able to sequence

 4 events so we can tell which event occurred in

 5 priority.

 6 So it gives us microsecond-level

 7 sequencing with millisecond timing.

 8 MR. BLAND: We do the same, and we use a

 9 visualization tool called SMART that we can look

 10 down and see how trading is done, right down to

 11 trade-by-trade or by whatever other elements.

 12 MR. CONCANNON: I guess the author

 13 didn't actually speak to anyone in the industry

 14 about his claim.

 15 A second question is just with regard to

 16 the CME and bond futures, where you do all your

 17 surveillance, obviously, on the treasury futures

 18 -- the bonds.

 19 Correct me if I'm wrong, Steve, but

 20 TRACE doesn't actually collect information on

 21 treasury trades, cash treasury trades; is that --

 22 (No audible response).
 248

 1 MR. CONCANNON: They don't. So does

 2 anyone surveil the treasury market today, other

 3 than the bond market?

 4 (No response.)

 5 MR. CONCANNON: It's one of the biggest

 6 asset classes on the planet. I'm just curious if

 7 anyone surveils it.

 8 (No response.)

 9 MR. CONCANNON: Okay. Yeah, I don't

 10 know. A lot of people trade it. Maybe retail is

 11 involved. I'm just curious. That's all. Thank

 12 you.

 13 COMMISSIONER O'MALIA: Mr. Lothian.

 14 MR. LOTHIAN: Steve, we heard about, or

 15 you talked a little bit about, some of the

 16 problems of adding in data as you're getting it

 17 and reassembling the data.

 18 I wanted to ask you, one, where are you

 19 guys at in terms of looking at day-to-day data,

 20 okay?

 21 Sometime back, a couple of years ago, I

 22 was told that you were somewhere -- and this was
 249

 1 probably 2012 -- that you were somewhere in 2007

 2 in terms of looking at the data day to day.

 3 The other question I have is the Flash

 4 Crash. How long did it take for you guys to

 5 assemble a complete set of data that you could,

 6 say, deliver to the SEC or share with other

 7 parties comparable to what we heard with Bryan

 8 with the futures markets?

 9 MR. JOACHIM: Sure. Actually, I'm not

 10 sure where you got the 2007 number from, and I'm

 11 not really sure what that refers to.

 12 We ingest data every single day. If we

 13 fall behind, we can't ever catch up. So we are

 14 current in the data we bring in every day.

 15 There have been segments of markets that

 16 have had difficulty submitting data to us from

 17 time to time, that we work through those problems,

 18 and sometimes certain segments fall behind, and

 19 ultimately, we can catch up with them.

 20 But if we had an overall market problem,

 21 where we couldn't ingest data quickly, it would be

 22 a problem.
 250

 1 From an analytical perspective, some of

 2 our patterns are relatively current, meaning day

 3 to day.

 4 Some of our patterns look at historical

 5 behaviors that run across multiple days or

 6 multiple months and time series. So they're

 7 looking at data over time. So they don't look at

 8 every single data every single day.

 9 So different patterns have different

 10 kinds of timeframes and periods in which they

 11 work, and we look at those appropriately based on

 12 which behaviors we are trying to catch and what

 13 data we need to put together.

 14 So we, in general, think we're pretty

 15 current and try to maintain currency with our

 16 ingesting.

 17 When you're saying we, I assume you mean

 18 FINRA, in terms of what we're talking about.

 19 Right.

 20 And keep in mind that what we're talking

 21 about is the markets that we surveil for.

 22 Does that answer your question?
 251

 1 MR. LOTHIAN: Right. There was a

 2 question about May 6, 2010, how long it took to

 3 get a complete set of data to be analyzed.

 4 MR. JOACHIM: Yeah, I don't know the

 5 answer to that specifically. I can't answer that.

 6 I can probably get you the answer to

 7 that question.

 8 The question really starts with, what

 9 was it that people were looking for in that point

 10 in time, and I don't know the answer because I

 11 wasn't directly engaged in that. I just don't

 12 know.

 13 MR. LOTHIAN: Okay.

 14 COMMISSIONER O'MALIA: Marshall.

 15 MR. TERRY: Just a quick question, and

 16 this may be naive, but the question was asked

 17 about working across the different agencies.

 18 I don't know why you folks, you know,

 19 Commissioner O'Malia or Acting Chairman Wetjen,

 20 like the question wasn't posed to you.

 21 I'd be curious as to what -- I don't

 22 know the answer to the question, what's the road
 252

 1 block to -- or is it happening or what your

 2 thoughts are because I think, Dave, I understood

 3 about half of what you said, but I think he was as

 4 much a solution-driver as he was, hey, here's the

 5 problem.

 6 I thought a lot of what you said was

 7 let's go get the solution, and so I struggled a

 8 little bit, trying to figure out if we have some

 9 of the actors in the room, why can't we get an

 10 answer as to why we can't get this cross-agency?

 11 I mean, I work for a small hedge fund.

 12 I can't run multiple silos. It just doesn't work.

 13 My data has to be put in a world of

 14 regulatory reality. If I don't use a common data

 15 set, my regulatory risk is exponential, meaning

 16 that if I drive a different data set for marketing

 17 or if I drive a different data set for regulatory

 18 purposes and I can't explain that difference, it's

 19 career-ending.

 20 So I think, Dave, you were spot-on in a

 21 lot of what you're talking about. Again, I don't

 22 understand all the high level or the granular
 253

 1 stuff.

 2 But just back to the point, why is there

 3 -- can you speak, either one of you, to if there's

 4 resistance?

 5 Is it possible because it just seems so

 6 intuitively correct to align the interests?

 7 CHAIRMAN WETJEN: In my somewhat limited

 8 experience with this, there is -- we've entered

 9 into a number of information-sharing or

 10 data-sharing agreements even since the beginning

 11 of the year. I think the observation made over

 12 here on this side of the table has been accurate

 13 in the sense that it tends to work more easily and

 14 comes together more quickly if it's rather

 15 targeted in nature.

 16 I don't think it's a political issue.

 17 The obstacles we run into are legal ones. And

 18 that's true on the international front, too.

 19 But we have Section 8 requirements under

 20 the Commodity Exchange Act that requires us to

 21 protect and keep confidential any information or

 22 data that we have here at the agency, and so that
 254

 1 places limits on how and when and what we can

 2 share with other domestic regulators. And the

 3 same is true on the international stage as well.

 4 And, to further complicate it, there's a

 5 variety of jurisdictions in Europe, some of which

 6 have even more stringent global, if you will,

 7 privacy protections that make it rather difficult

 8 to enter into these types of arrangements.

 9 So I don't think it's politics; I really

 10 don't. It, quite literally, is legal impediments

 11 that have be managed and worked through. And, as

 12 I said, we've done it. We have arrangements with

 13 FERC in place, a couple of them, and we're working

 14 on another with a different regulator.

 15 So it's possible. It's been done. It's

 16 not always terribly easy, but it certainly can be

 17 done.

 18 COMMISSIONER O'MALIA: I would kind of

 19 go back to the Flash Crash as a good example where

 20 a crisis did catalyze action, and we shouldn't

 21 have to have a crisis to do this.

 22 We probably -- if they are legal
 255

 1 challenges, what are they?

 2 Let's put them on the table. Let's

 3 start to work through them.

 4 I think we're leaving a lot on the table

 5 right now if we stick to our little silo and at

 6 least not think about what the other options are

 7 going to be.

 8 And I know we do have some creative

 9 surveillance people that are trying to look at

 10 cash markets, look at alternative markets and

 11 things like that, but I don't think we've done

 12 enough in this area.

 13 MR. TERRY: I mean, just as a small --

 14 again, I work for a small hedge fund.

 15 I mean, the regulatory cost is

 16 extraordinary. And having to sit with multiple

 17 regulators and answer the same questions but not

 18 have it centralized, it's amazing to me, and I

 19 think there would be huge pickup for multiple

 20 reasons.

 21 So I would -- just as a TAC member, if

 22 there's any way to solve some of these legal
 256

 1 issues, I think it would go a long ways to

 2 creating a very efficient, more robust process.

 3 I think that's about all I have to say,

 4 but again, Dave, I thought you were spot-on.

 5 MR. LAUER: Can I just say, thank you

 6 for that? And, you know, like I said, I have the

 7 advantage of kind of coming at this fresh and more

 8 from a technology perspective than a legal one,

 9 but I do know from what I've heard that the joint

 10 advisory committee was a very effective vehicle

 11 for working together. And I hope that might form

 12 the blueprint or the framework for, as you've

 13 said, Commissioner O'Malia, instead of it being an

 14 ad hoc thing and for crisis response, to being an

 15 ongoing effort, and that might be the right way to

 16 approach it.

 17 MR. HERRADA: I wanted to add one more

 18 thing. Steve, it might be worthwhile -- Steve

 19 Reich, sorry, yes -- if you want to talk for just

 20 a minute quickly about the interaction between

 21 CFTC and FERC and how that's worked in the last

 22 couple months.
 257

 1 MR. REICH: Yeah, I guess this is since

 2 the last -- what is it? The end of March. We've

 3 been getting a regular data feed.

 4 As you can see, it's not a large portion

 5 of what the CFTC has, but it's vital to us in

 6 terms of putting together our surveillance

 7 process. And it's essentially become a keystone

 8 in terms of what we've needed to be able to build

 9 out our surveillance process in kind of our little

 10 corner of the markets, which is much more limited

 11 than most of everyone is talking about here, but I

 12 think we're a lot more thorough because of it.

 13 And I think Commissioner O'Malia and the

 14 Chairman and Jorge and John have been very helpful

 15 in working with us in getting something up and

 16 running. So now it's extremely smooth and useful.

 17 COMMISSIONER O'MALIA: That's good to

 18 hear. Let me go back to the order: Marisol,

 19 Richard Gorelick, Pierre and then Brad Levy.

 20 MS. COLLAZO: So thank you for

 21 facilitating this discussion.

 22 I think the harmonization and the data
 258

 1 quality and completeness are key as a swap data

 2 repository, we've certainly been engaged with the

 3 Commission and with the industry.

 4 I actually do have to compliment. I

 5 think we've had some meetings most recently where

 6 the Commission -- Jorge did some amazing

 7 presentations around data, and I think it does

 8 highlight a few things that we need to be thinking

 9 about.

 10 What I would first start with -- it's

 11 not just the Commission's problem. It's not just

 12 the SDRs' problem. It's not just the industry's

 13 problem. You know, we have to have much more of a

 14 collaborative approach here, where there is a view

 15 of the data set and what are the challenges.

 16 So, Mike, you asked the question, is it

 17 a data meaning problem? Is it a content -- you

 18 know, is it a format problem?

 19 I actually think it's a combination of

 20 those things.

 21 I think, one, we have to deal with the

 22 interpretations, and in some cases,
 259

 1 interpretations vary.

 2 An execution timestamp is a very good

 3 example, and I understand that's a high priority.

 4 We find edge cases or certain cases where you go,

 5 well, what do you do in these scenarios?

 6 So how do we tackle that, collectively,

 7 between the industry, the SDRs and the Commission?

 8 You know, the other is around the

 9 completeness of data, and those are more things

 10 that you can do around the validation, but again,

 11 it's easier said than done because you can always

 12 find examples of where those challenges exist.

 13 So, you know, I guess my comments are

 14 really not to go into all the details that

 15 underline that, but there's really a few themes

 16 around it.

 17 And what I think is important, and

 18 perhaps taking a page from the large trader

 19 reporting, is there was active engagement by the

 20 CFTC with the industry. I think it would go a

 21 long way to have that active engagement once again

 22 between the SDRs, the CFTC, as well as the
 260

 1 industry, to go through those key data elements

 2 and understand.

 3 And, again, you know, it's sort of the

 4 keep-it-simple principle. I'll save the last

 5 aspect.

 6 But it's really about, you know, let's

 7 focus on a set of key fields. We've started with

 8 credit. We're looking at the harmonization fields

 9 there. Let's look at what other fields, engage

 10 the industry.

 11 I mean, the industry is known to rise to

 12 the challenge where the data fields are understood

 13 as to where is it not going well, where are the

 14 issues occurring. If the analysis proves out some

 15 of those conditions, then you can actually start

 16 to get real engagement, understanding of meaning,

 17 right, so you have a clarity across the industry

 18 as to what the challenges are there.

 19 Recognition of market structure. And

 20 I'm going to go back to market structure quite a

 21 bit in that these things just don't magically

 22 happen, right? It does take time for that meaning
 261

 1 to translate into what is the right market

 2 structure that exists for making sure that data

 3 come through in a clean and accurate way.

 4 And, with that, it's recognizing the

 5 process flow. I know that we have just sort of --

 6 the Commission has received many responses on the

 7 concept paper regarding trade reporting, but I

 8 think process flow -- looking at cradle to grave,

 9 the audit trail.

 10 And I think there's a key consideration

 11 that the Commission needs to give some thought to

 12 in terms of surveillance, bringing this back to

 13 the surveillance piece, which is there are two

 14 approaches of efficiency and cost.

 15 One is if you deal with the process and

 16 the market structure, you can deal with the

 17 efficiency and cost from the perspective of, how

 18 is it that the SDRs are able to have that full

 19 audit trail for a trade ID from cradle to grave?

 20 And if you focus on that objective, then

 21 what you're doing is you're really placing much

 22 more of that effort on the SDR itself.
 262

 1 So I would say look at -- when you're

 2 looking at the efficiencies, that's a particular

 3 area to look at balanced against the cost.

 4 So -- I mean, I'll conclude there. And

 5 one other thing I would add is I think considering

 6 the work on the data standards is key because I

 7 would say another challenge is now with Europe we

 8 have a different version of trade IDs, and that

 9 just, again, kind of adds to the complexity of

 10 reporting from the market participants.

 11 COMMISSIONER O'MALIA: Thank you,

 12 Marisol. I know we're a little over time, so I'm

 13 going to hit Richard, Pierre and Brad. I don't

 14 know if, Brad, you still want to make a comment.

 15 If you can just keep them tight here.

 16 MR. GORELICK: Okay. Thank you. As

 17 Andrew mentioned and recapped, at previous

 18 meetings of this Technology Advisory Committee,

 19 the exchanges have detailed their extensive

 20 surveillance programs.

 21 In the interest of time and cost, I

 22 would urge the Commission not to reinvent the
 263

 1 wheel with redundant, built-from-scratch,

 2 in-house, you know, boil-the-ocean audit trail

 3 systems.

 4 Instead, I would urge the Commission to

 5 work with the exchanges to figure out how to

 6 improve the Commission's access to the tools

 7 available at the exchanges today and the

 8 Commission's understanding of how they can be

 9 used.

 10 One related topic that's been raised

 11 repeatedly is whether there should be a new

 12 registration requirement for high-frequency

 13 traders, presumably, in part, to help the

 14 Commission with its surveillance efforts. We've

 15 talked here at some length about the significant

 16 definitional challenges and the potential for that

 17 approach to create inconsistencies and loopholes.

 18 My view has always been that

 19 surveillance should, instead, be broad-based and

 20 focused on questionable behaviors at any

 21 frequency.

 22 We should ask simply -- and I think this
 264

 1 Committee is a good place to do that -- what

 2 specific information does the CFTC lack today that

 3 would be helpful to its surveillance programs?

 4 I believe that most of the information

 5 that the CFTC requires is available to it today in

 6 current audit trails and in exchange membership

 7 files. If there are other types of information

 8 that would be helpful, let's figure out how best

 9 to get that information quickly and at a

 10 reasonable cost to the Commission.

 11 It would be a shame for the Commission

 12 to spend several years and many millions of

 13 dollars to create a new regulatory framework and

 14 to build costly processes and systems when it

 15 could be appropriately surveilling the markets

 16 today with a better understanding of the tools

 17 already available.

 18 Thank you.

 19 MR. LAMY: Thank you. I will be brief.

 20 When I look at this slide from Jorge, which is

 21 very interesting -- thank you -- the question that

 22 comes to mind is, do you have all the information
 265

 1 that you need because you are collecting a lot of

 2 information?

 3 But the key question, seems to me, is,

 4 are you missing data points, or is the only issue

 5 harmonization of the data and having the tools to

 6 analyze the data?

 7 Are you collecting all the data that you

 8 need? That's question one. The second question,

 9 which still relates also to the question of what

 10 do you need exactly, is on the CDS activity, which

 11 has been just looking at these data for quite some

 12 time, and it seems to be focused on meaning.

 13 Could it be that it might be useful to

 14 engage market participants in terms of what do you

 15 need exactly?

 16 And then market participants would be

 17 able to work together to say, well, based on what

 18 you need exactly, this is the set of data and

 19 depending on the use cases in which we could

 20 provide you the exact data points that you need

 21 because there could have been in the past some

 22 ambiguity in terms of I need the data points.
 266

 1 But if you're not crystal clear as to

 2 what the need exactly is, it could be that there

 3 could have been a different interpretation as to

 4 what should have been provided.

 5 MR. HERRADA: Great. I think you've

 6 raised two good points, Pierre.

 7 I mean, do we have all the data we need?

 8 We have a lot of the data we need, but we

 9 certainly need more. I mean, we have

 10 talked about the fact that we don't ingest the

 11 message data currently.

 12 And I would venture to say that you've

 13 sort of nailed it on the second point, which is to

 14 say, we're in the infancy of the swaps data.

 15 We're pulling it in, and we still have

 16 harmonization issues. So I think that that's an

 17 area where there's a lot of growth in terms of

 18 data that we need to pull in.

 19 And I completely -- this is my opinion,

 20 certainly not the CFTC's opinion. So I'm just

 21 speaking for myself, but I'd say, yeah,

 22 absolutely, industry engagement is critical.
 267

 1 I mean, you guys live and breathe this

 2 stuff, and we can -- you know, a collaborative

 3 thing will certainly benefit with that.

 4 So I like where you're going with that.

 5 MR. LEVY: Sure. Thank you. So there's

 6 been a lot of talk of chasing what is really the

 7 Holy Grail, which is cross-asset global and

 8 cleanly linked to a global LEI. That is the

 9 perfect.

 10 And the reality is the perfect is

 11 definitely getting in the way of the good.

 12 We ourselves have done a bunch of

 13 analysis, number one, because we run a risk

 14 platform, but we've also just done some generic

 15 analysis on the systemic risk side and built some

 16 tools around that.

 17 So our view would be -- and this is where I

 18 think the false positive issue can turn into a net

 19 positive, which is start to impose that on people.

 20 Use the data you have. Go out there. Don't

 21 arrest, sanction, you know, really go after

 22 people, but start to try to use the data. That
 268

 1 will be a very effective, self-cleansing.

 2 When you start to talk to people about

 3 the limited data that you have as one regulator --

 4 the OFR is clearly, at least for me, the entity

 5 that is designed to be the systemic regulator

 6 above it all.

 7 But in terms of surveillance, et cetera,

 8 just start to use it. People will push back.

 9 They'll say you don't have the right information.

 10 And then, over time, the data will become

 11 self-cleansing instead of solving for edge cases

 12 and perfect harmonization and standardization.

 13 The reality was in '08 we didn't miss

 14 the edge case; we didn't miss the tail. We missed

 15 the whole body.

 16 And that's pretty much, at least for me,

 17 what we should be solving for, and then over time

 18 you can solve for all those other cases.

 19 But if we're trying to solve for '08,

 20 we're currently solving for something quite

 21 different than '08.

 22 COMMISSIONER O'MALIA: Any other final
 269

 1 words on this?

 2 (No response.)

 3 COMMISSIONER O'MALIA: I just want to

 4 let everybody know that around the technology and

 5 the integration and the data questions I think

 6 this is the beginning of a debate, an important

 7 debate, for the Commission to think about where

 8 we're going to go and how we should think about

 9 integrating with other regulators.

 10 And to continue this debate, we're going

 11 to set up a web site within the TAC web site on

 12 CFTC.gov. Go to the TAC page. There will be a

 13 new link starting today, or I think it's already

 14 up there.

 15 Then we're going to take comments. And

 16 anybody, any vendor, any technology expert, any

 17 data expert that has an idea about how we should

 18 solve this problem, dump it in there.

 19 It's going to be dumped in with

 20 everybody else. So don't put anything proprietary

 21 in there.

 22 But, you know, give us something to work
 270

 1 with. We'll share it, try to share it among the

 2 Commissioners and certainly share it within the

 3 Commission and see if we can work with something

 4 there.

 5 We have -- and I receive on a regular

 6 basis -- many, many good ideas, and I'm just not

 7 in a position as one commissioner to necessarily

 8 adopt it and sign a contract, et cetera. But I

 9 think it's one of these things that today's debate

 10 really kicks off the exercise that we can think

 11 about:

 12 What's possible? What do we need to

 13 think about? What are our priorities? How much

 14 should it cost? Where should we go? Who's got

 15 the expertise? And so, for the next 60 days,

 16 we're going to leave that web site up there. And

 17 if we get any hits and some information, go ahead,

 18 dump it in there.

 19 We'll see what we can work with. We'll

 20 work with all the divisions to see if there's any

 21 interest in it, but hopefully, we'll get some

 22 leads on that.
 271

 1 So let's take a 15-minute break and get

 2 back here at about a quarter of 2:00 and take on

 3 Panel III.

 4 (Recess)

 5 COMMISSIONER O'MALIA: Okay, Panel III.

 6 We're looking at the SEF data and seeing where we

 7 are to date in terms of SEF trading and what it's

 8 going to take to get a little more buy side

 9 participation and, frankly, greater participation

 10 at all levels on swap execution facilities.

 11 And, to kick us off, we have an overview

 12 from Clarus Technology. Tod Skarecky, Senior Vice

 13 President of the Americas, is going to provide

 14 some background on what Clarus has put together in

 15 terms of looking at SEF data, using the real-time

 16 data -- Part 43 data.

 17 And it's been interesting to follow kind

 18 of their blog, which they do a tremendous amount

 19 of work on, and it almost seems to be

 20 crowd-sourced.

 21 And I know they're not the only people

 22 who do it. FIA is doing it and ISDA is doing it.
 272

 1 But it's been interesting to read some of these

 2 blogs as they tackle some of the issues with data

 3 quality, with data integration, cross-market

 4 checking, trading on SEFs, et cetera.

 5 So I suspect we're going to see the

 6 refined research, such as it is, but it is an

 7 interesting process as everybody wrestles with the

 8 real-time data to define trends and to see

 9 participation and look at who's trading.

 10 I'm very sympathetic to data quality

 11 issues and the challenges they have, and I enjoy

 12 kind of learning about it as they learn about it,

 13 first-hand.

 14 So, Tod, why don't you lead us off with

 15 your slides?

 16 MR. SKARECKY: Thanks, Commissioner.

 17 So, again, I'll begin. I'll look at -- again,

 18 this is the public data.

 19 This is the data that everyone out there

 20 has access to go look at. We have no privilege to

 21 go look at Part 45 or more private data.

 22 So who am I, and what's my firm? One
 273

 1 slide just so you can place who we are, right.

 2 So we're a couple years' old firm.

 3 We're 100 percent employee-owned and

 4 employee-funded, and we're delivering technology

 5 in the space of SDRs and SEFs.

 6 Importantly, being employee-funded, we

 7 began off with a services arm and did some

 8 consulting. The goal of our firm is to provide

 9 some cloud-based, credit risk, market risk

 10 technology, but in the past two years we end up

 11 having this world of data fall in our laps, right

 12 -- this world of public data.

 13 And so we began publishing, like the

 14 Commissioner said, some blogs but also a product

 15 that then aggregates and simplifies some of the

 16 collection and presentation of the public data.

 17 So that's what we're going to focus on today and

 18 why I'm here.

 19 So, Data 101. This is the basics, guys,

 20 right? There's the world of the swap market,

 21 right -- the big pie out there. And then,

 22 importantly -- and this does get confused by some
 274

 1 people I speak to, but then there's a smaller

 2 oval, if you will, in this case, an orange oval,

 3 which represents what's reported to the SDRs in

 4 America, right.

 5 So trade repositories across the world

 6 might be getting some of the rest of that pie, but

 7 certainly within America, everything is being

 8 reported through that sort of orange circle. And

 9 then, importantly, a subset of that, of course, is

 10 then SEF data -- what is transacted on SEF.

 11 So what are we looking at when we look

 12 at the data?

 13 So what's available is Part 43 data.

 14 That's the publically disseminated SDR data, and

 15 that's from the four usual suspects that we're

 16 collecting from.

 17 And then there's the equivalent sort of

 18 Part 16, publically available Part 16 data for

 19 SEFs, which are coming from, arguably, 24

 20 different SEFs. Of those 24 that have registered,

 21 22 have been approved, and as many of you know,

 22 16 SEFs have actually done any activity, right, and
 275

 1 produced actual reports.

 2 So it's these sort of 20 different

 3 sources of data that we're getting the information

 4 from.

 5 And then -- you know, so what's the

 6 difference between these two data sources, right?

 7 So the SDR is trade-level data whereas

 8 the SEF data we're collecting from SEFs tends to

 9 be position-based.

 10 The frequency of the data for SDR is

 11 intraday. You'll see it -- you can do a trade,

 12 and you'll see it pop up on a screen a minute

 13 later, whereas SEF data is end-of-day.

 14 The format of the SDR data, you know,

 15 varying between DTTC, Bloomberg and the others --

 16 it's more or less common. I've called it somewhat

 17 common. Whereas, the SEF data -- there's 24 SEFs,

 18 24 formats.

 19 One of the things that people like to

 20 look at the SEF data for, however, is that you can

 21 see full transparency into the size, right. So

 22 you get the full notionals being revealed whereas
 276

 1 on the SDR you see a lot of capped transactions,

 2 which is an attribute of a block trade.

 3 And you can, of course, see what people

 4 want to see, which is what SEF isn't on. The

 5 public data for Part 43 does not tell you what is

 6 SEF. Okay. And there are other things people

 7 want to see.

 8 They want to see: Is it a dealer or

 9 client trade? Is it the dealer paying or

 10 receiving, much like you might see on TRACE?

 11 Then also people want to see: Is that

 12 part of a package?

 13 So, without tricks, you really can't get

 14 to this information right now on the public data.

 15 So then let's jump into the data. So

 16 what does this tell us, right?

 17 For credit, first, we'll look at one of

 18 the MAT products. You know, credit is generally a

 19 happy story. We're looking here at the IG Index

 20 which began, on the very far left, in October.

 21 The SEF participation, if you will, or

 22 percent of on-SEF trading is that green line that
 277

 1 you see began right about, I'm going to say, 40

 2 percent dip-down, and now it stands at about 80 to

 3 probably 85 percent.

 4 In term of trades, it's much the same.

 5 I think that began at about 50 percent, and I

 6 think that's now at 88 percent, for just this one

 7 index.

 8 This is a MAT-able product, and you can

 9 see the sizes and the trade counts there as well.

 10 So that's a general positive story. And

 11 if we -- I won't bore you with the other details

 12 of the other sort of MAT-able trades, but if you

 13 do look at those, this is a summary of those,

 14 right. They're all -- you know, both IG, the

 15 iTRAXX series, they're all that similar kind of up

 16 slope.

 17 I guess the important question is then,

 18 well, hold on; even if it is only 12 percent

 19 that's off-SEF, what is it, right?

 20 So we look at that sort of tail. So

 21 that big blue bar, if you will, that you're

 22 looking at in Number of Trades, the big blue bar
 278

 1 is on. Everything out to the right is off.

 2 I break it down there. We look at --

 3 you know, some of this is block. Some of it is

 4 not five-year. Some of it is not on-the-run or

 5 the most recent on-the-run, right. So, if you go

 6 down that list of criteria of what is MAT-able,

 7 those 12 percent demonstrate at least 1 of those

 8 criteria.

 9 So, in that order, we can see that most

 10 of them are block-size trades.

 11 And, quite frankly, there's stuff you

 12 can't explain, right. And that just, from the

 13 public data, might easily be packages, right,

 14 exemptions, things of that nature.

 15 FX -- one slide here, just because it's

 16 worthy to mention that this is not a required

 17 trade. It is permitted, obviously. It's

 18 available to be cleared but not mandatory cleared.

 19 And you can see just disparate results

 20 on SEF, right. If you look at the Peruvian

 21 currency, that NDF is very, very high on the

 22 ranking of percentage on SEF whereas dollar-mex is
 279

 1 at the very bottom, right.

 2 I'm not going to offer any explanations

 3 for this, but I thought just in the context of

 4 presenting credit and interest rates I thought it

 5 would be worth it to put that up.

 6 So moving on to rates, which is what I

 7 think is more interesting -- you know.

 8 So we'll look at, first, the U.S.

 9 dollar. This is, again, the same kind of chart we

 10 looked at with credit.

 11 And here the sort of up trend is a bit

 12 more gradual, but this began a bit higher; it

 13 began about a 40 percent adoption rate in terms of

 14 trades. And it's slowly grown now to -- I think

 15 the number we're going to look at is about 52

 16 percent of all fixed-float swaps in U.S. dollars

 17 are traded on SEF.

 18 Looking at a similar profile for euros,

 19 I'm not going to offer the explanation, but I

 20 think many people could probably guess why that's

 21 significantly lower.

 22 Sterling, of course, trending much lower
 280

 1 as well. And, out of curiosity, I found yen to be

 2 interesting at a fairly decent percentage, 45

 3 percent or so. So there are the general trends,

 4 dollar being that blue line on the top left and

 5 the bottom right, you know, hovering around 50

 6 percent now.

 7 It's the same question we looked at for

 8 credit. What is that remaining bit, and why isn't

 9 that on SEF, right?

 10 So the color scheme here is the same,

 11 right. On SEF, is blue.

 12 And we're looking at, well, what are

 13 those MAT-able characteristics, right, that these

 14 trades fail to meet, or why aren't these on?

 15 I mean, you can still put permitted

 16 trades on. And we quickly find out that there's a

 17 good chunk that is uncleared. There's a good

 18 chunk that is not MAT-able index. It might be

 19 one-month LIBOR, right, or non-MAT-able tenor; it

 20 might be a forward-start. So that explains a

 21 great portion of this.

 22 However, as I say here, it depends how
 281

 1 you peel the onion, right. So it depends what you

 2 look at first because, again, the off-SEF trades

 3 demonstrate many of these characteristics.

 4 So, if we instead look at the first

 5 attribute being what is a non-MAT-able start date,

 6 so what are the forwards, if you will, right, it

 7 turns out then, if I'm using my mouse now, this

 8 big red bar, right, demonstrates the forward-start

 9 portion of the universe of dollar fixed-float

 10 swaps. And what we find is that accounts for, of

 11 course, a drastic portion of what remains off-SEF.

 12 So on to, I guess, sort of the question,

 13 and I have two anecdotes that I'll wrap up with,

 14 right.

 15 So, the question being talking about buy

 16 side participation, the first anecdote is that

 17 firms are avoiding SEFs by changing the dates on

 18 trades, whether they be changing the

 19 forward-start, doing some kind of change in the

 20 maturity -- 30-year in 1-day swap, right. So is

 21 that backed up by the data?

 22 Again, I refer back to this list of sort
 282

 1 of MAT-able characteristics of swaps, and I look

 2 at the trend from October to May.

 3 In the very first line, we look at, what

 4 is a forward? We know that in May 2014 72 percent

 5 of the off-SEF trades were forward-start. In

 6 October, that was 54 percent. So there has been

 7 an increase, right.

 8 And you can see the change in

 9 non-MAT-able tenors, right. So that could be a

 10 30-year in 1-day, right, arguably.

 11 And, again, a trade can demonstrate one

 12 of each of these characteristics. It can be a

 13 block, uncleared, 3-day forward-starting, 9 and a

 14 half year swap, right, which is why those don't

 15 add up to zero.

 16 But it is interesting to see that a

 17 large percent of it is forward-start.

 18 So, quickly, I guess the answer would be

 19 there is an uptick. There is a change or an

 20 increase in forward-starting swaps. However, we

 21 have to realize that that percentage is against a

 22 denominator, a denominator being the world of
 283

 1 off-SEF, that is shrinking, right.

 2 I will tell you that in actual terms of

 3 trades the number is increasing. There are, in

 4 fact, more. We're observing more forward-starts

 5 occurring, not to accuse anyone because the final

 6 point here is we don't know if this is even client

 7 trades.

 8 This is, again, the universe of trades

 9 on SEF, or in this case, off-SEF, that we're

 10 looking at. And so we don't have that

 11 transparency into dealer or client, but it seems

 12 to support some evidence of that.

 13 The other anecdote is that only 10

 14 percent of the market was client activity. Only

 15 10 percent of the clients, rather, were trading on

 16 SEF as recent as January. And I've heard 10, 15,

 17 20, all about that sort of January/February

 18 timeframe.

 19 And, again, so I guess the question

 20 being, what can we support by looking at the SEF

 21 data?

 22 So now we're turning over to SEF data,
 284

 1 in particular, like pure sort of by individual SEF

 2 name and looking first at credit. The chart on

 3 the top left, if you want to look at that, that's

 4 by individual SEF. And the bottom right is the

 5 more interesting as far as dealer/client

 6 assumption.

 7 Now, granted, we have open access, or

 8 it's certainly law that SEFs have to let everyone

 9 in.

 10 I'm pretty comfortable with the

 11 assumption still, probably for the small time

 12 longer, that you can assume that the Bloombergs of

 13 the world are client SEFs and that the IDBs are

 14 dealers. So this is what I was referring to on

 15 one of the first slides -- is that you can start

 16 to make assumptions with some of this data.

 17 And, if you do assume that the client

 18 SEFs are client activity and the dealer SEFs are

 19 dealer activity, you get this pretty good chart,

 20 right. You can pretty much see that there has

 21 been a very good up trend in adoption of credit on

 22 SEFs.
 285

 1 Doing the same analysis for rates, the

 2 picture is inverted as far as the percentage of

 3 what's being done by dealer and client, but the

 4 trend is still apparent by looking at down below

 5 you can see that the blue bar is being how much

 6 was dealt on client SEFs. So that equates to

 7 really about a four or five-time multiple increase

 8 in client SEF adoption.

 9 I want to pass it on to the panel, but

 10 just in summary, right, there's good adoption for

 11 credit. That's a very securitized market. I

 12 don't think anyone is too surprised to see that.

 13 NDF is showing some high on-SEF rates,

 14 but it's a permitted trade at the moment.

 15 And interest rate, likewise, is showing

 16 -- it is showing an increase of buy side

 17 participation.

 18 However, when you look at what is off,

 19 we're noting that there's a vast amount of

 20 forward-start trades, and quite frankly, that sort

 21 of magnitude of forward-start swaps is just an

 22 attribute of the market at large that is here and
 286

 1 always has been part of the market.

 2 So, with that.

 3 COMMISSIONER O'MALIA: Thank you, Tod.

 4 I'll go to Wendy Yun with Goldman Sachs Asset

 5 Management.

 6 MS. YUN: Thanks, Commissioner O'Malia.

 7 First, I'd like to thank the Commission and the

 8 Committee today for allowing us to participate in

 9 today's discussions regarding SEFs.

 10 This is obviously a very important topic

 11 for the buy side not only because of how the rules

 12 have changed how we've historically traded swaps

 13 but, also, the overarching impact on market

 14 structures, pricing and liquidity generally.

 15 While we generally support the statutory

 16 principles of pre-trade price transparency and

 17 improving market efficiencies such as through

 18 trading through SEFs, we are concerned how these

 19 goals will be met given the compressed timelines

 20 for implementation and some of the regulatory

 21 uncertainties.

 22 From our perspective and speaking with
 287

 1 many of our peers, we think that there are about

 2 four or five different high-level concerns or

 3 threshold issues about SEF trading.

 4 One is the SEF readiness. It is not

 5 enough for a SEF to be able just to list a

 6 product, but also, it needs to consider whether or

 7 not it can actually support the needs of all of

 8 its market participants.

 9 And what I mean by that is, from the

 10 asset manager perspective, we need to make sure

 11 that there's a seamless integration to our order

 12 management systems so that we can get our trades

 13 into the systems in a very systematic and

 14 efficient manner.

 15 It is not a viable solution for us, and

 16 we don't believe a SEF is ready when they're

 17 asking our traders to manually input trade and

 18 allocation details of bunched orders throughout

 19 the day. That can cause additional latency as

 20 well as potentially heighten exposures to trade

 21 errors.

 22 Also, the SEFs have to take into account
 288

 1 whether or not the dealer participants on their

 2 system can actually code to and support providing

 3 automated pricing for the products that they're

 4 offering. We found with some of the packaged

 5 products that have already taken effect that there

 6 were very limited dealers who were willing to

 7 provide pricing not because they were not willing

 8 to but because of the gateways and the interface

 9 that they had to the systems to provide such

 10 pricing had not been fully developed.

 11 The second issue that we are concerned

 12 with are costs associated with trading or

 13 participating in SEFs. Obviously, there are time

 14 and resources dedicated to negotiating rulebooks,

 15 to having to comply, potentially, with the oral

 16 and written record-keeping requirements of 1.35,

 17 as well the technology build and infrastructure to

 18 support monitoring and the connectivity necessary

 19 to be able to effectuate the SEF trades.

 20 The third, I would say, is the need for

 21 global harmonization and regulatory certainty.

 22 Many of us are still trading on behalf of global
 289

 1 client portfolios. So we have different client

 2 bases.

 3 We would not want to be in a situation

 4 where we'd be forced to actually have to bifurcate

 5 our trades to multiple venues and to split up our

 6 trading practices for different types of clients

 7 based on their domicile and to access different

 8 pools of liquidity.

 9 It's also important as we also have

 10 funds that may be domiciled in Europe and subject

 11 to being financial counterparties and subject to

 12 the rules of EMIR for clearing and execution but,

 13 also, based on their principal place of business

 14 are U.S. persons and, therefore, subject to the

 15 rules under Dodd-Frank.

 16 Fourth would be our concerns about

 17 general fragmentation of liquidity and market

 18 dislocations that may result as a result of the

 19 uncertainties that lie with respect to the global

 20 harmonization, some of the interpretive questions

 21 about the SEF rules and the implementation

 22 requirements.
 290

 1 And we would urge that the CFTC consider

 2 all of these different concerns in how they are

 3 implementing the rules to date as it relates to

 4 SEF trading. Taken as a whole, all of these

 5 concerns can have a chilling effect of market

 6 participants from embracing the willingness to

 7 trade on SEFs.

 8 Thank you.

 9 COMMISSIONER O'MALIA: Thank you.

 10 Michael?

 11 MR. O'BRIEN: Thank you. My name is

 12 Michael O'Brien. I'm the Director of Global

 13 Trading at Eaton Vance. Eaton Vance is an asset

 14 manager based in Boston with about $300 billion in

 15 assets under management.

 16 As far as the question of why isn't

 17 there more buy side participation on SEFs, I mean,

 18 I certainly agree with the four points that Wendy

 19 made, and I'd also add a few additional ones.

 20 The building of SEFs wasn't for the buy

 21 side. You know, if you build it, they will come.

 22 It was, and it still is, if you build it
 291

 1 and it's cost-effective and it's efficient to use,

 2 then they will come. We're in the business of

 3 investing our clients' money, and so we're looking

 4 for the most cost-effective way to implement our

 5 trades. And, to the extent that SEFs fit that

 6 definition, that's where the buy side

 7 participation will be.

 8 Now I'm going to go into a few reasons,

 9 at least from our perspective, why there hasn't

 10 been more buy side activity on SEFs, but at least

 11 part of it is the buy side doesn't adopt anything

 12 immediately. Nothing happens overnight. There's

 13 a lot of changes that need to be made internally

 14 that don't happen quickly. So I think to a large

 15 extent a slow pickup in SEF trading, even in an

 16 ideal world, is to be expected.

 17 Just for a little history of what -- of

 18 how we've approached the SEF trading and the

 19 mandates. Before October 2nd, in many of the

 20 MAT-ted or now MAT-ted products, we were nearly

 21 100 percent electronic execution. So interest

 22 rate swaps, to the extent we could do NDFs even
 292

 1 though they don't have a MAT yet, and CDX -- you

 2 know, primarily, we were trading those

 3 electronically.

 4 On October 2nd, once these rules came in

 5 and we became uncomfortable with the rulebooks and

 6 Rule 1.35 and a few others, we stopped trading

 7 electronically basically because we couldn't. We

 8 could no longer trade on these SEFs. So

 9 everything went back to the phone.

 10 Now our planned approach was as the MAT

 11 came on February 18th that we would be a

 12 participant on, say, 3 to 5 different SEFs, we

 13 would have everything ready to go and, in addition

 14 -- and I think this is an important point -- using

 15 an aggregator, which I'll get into detail in a

 16 minute.

 17 So our plan was I can't connect to 17

 18 SEFs. It's either 21, 24 that were mentioned,

 19 whatever the right number is. It's too expensive,

 20 both in terms of explicit costs as well as

 21 resources within the firm and the opportunity cost

 22 of those resources.
 293

 1 So I had a guess of where I thought the

 2 right three to five to pick were, and using an

 3 introducing broker or an aggregator -- I kind of

 4 use those terms interchangeably for this purpose

 5 -- that would pick up the slack. If I made the

 6 wrong decision, if I picked the wrong SEF, if

 7 liquidity wound up somewhere else, I would use

 8 that introducing broker model to allow me access

 9 to the market while I either decided to join those

 10 SEFs or move on.

 11 The current approach I have is that we

 12 haven't signed a single rulebook and have no plans

 13 to do so in the immediate future. What we are

 14 doing is using an introducing broker, and so all

 15 of the trades we've done to date have been through

 16 an introducing broker to keep us, at least we

 17 believe, out of compliance risks associated with

 18 the rulebooks.

 19 The reason that we've gone this way --

 20 there are really, I think, four reasons, the first

 21 one being the rulebooks.

 22 The issue with the rulebooks and signing
 294

 1 them -- I mean, one, it's a challenge just to read

 2 the rulebooks and understand what they are and

 3 match the rulebooks we're most comfortable with,

 4 with where we think the liquidity is going to be

 5 in a given asset.

 6 The other challenge is this has never

 7 really been designed on a buy side firm.

 8 Certainly, internally, for us, we don't have

 9 policies and procedures; we don't have the right

 10 approvals; we haven't had conversations with our

 11 clients, to become a direct participant.

 12 In the equity market and in the future

 13 markets, especially, we're not direct

 14 participants. We use an introducing broker.

 15 That's the way our policies and procedures have

 16 been designed.

 17 It would be a very large undertaking to

 18 change all of that, to become a direct participant

 19 on a SEF. You know, it's not even clear exactly

 20 what we would have to do. We would just have to

 21 start a project to figure out what we wanted to

 22 do.
 295

 1 Given the uncertainty associated with

 2 the rulebooks, with their changing rapidly, we

 3 view -- certainly with all the conversations that

 4 we're having here on various topics -- that there

 5 is regulatory uncertainty for us. Again, this is

 6 not our primary business line. We can't devote

 7 all of our resources to this. So we feel the best

 8 way is to avoid the rulebooks for now and not

 9 become a direct participant on SEFs.

 10 The second issue is Rule 1.35. While we

 11 believe what we are doing is certainly in the

 12 spirit of 1.35, I don't know for certain and I

 13 don't have -- again, I would have to build out the

 14 resources and the procedures and make sure

 15 everything was in place to satisfy the

 16 requirements. I'm not able to do that right now

 17 until I have more certainty on what that rule

 18 means. So, again, that would suggest move away

 19 from the SEFs and use the introducing broker

 20 model.

 21 And the third is cost. As I mentioned

 22 with both of these things, it's very expensive to
 296

 1 change these things. We don't know where the

 2 markets are going to be in a year or two years, or

 3 if we're going to have to reinvest more money if 

 4 something changes. So it's not an efficient use of our

 5 resources right now to delve into this.

 6 And the third is the alternatives

 7 available, and I think we saw that in some of the

 8 data that Tod presented. Especially in rates,

 9 there are a lot of alternatives, many of them

 10 CFTC-regulated in the futures market that can get

 11 us the exposure we need without trading on SEFs.

 12 When I go to trade on a SEF, I need to

 13 make sure that I have in place -- I have the SEF

 14 and the clearinghouse and the introducing broker

 15 and perhaps some middleware, maybe a standby FCM,

 16 a final FCM. There are a lot of moving pieces.

 17 And it's also something I don't have a long

 18 history in dealing with.

 19 In the futures market, we have far fewer

 20 entities to face. We have established methods of

 21 trading. We're comfortable with the compliance

 22 and regulatory issues around these products, and
 297

 1 they're a lot cheaper to trade.

 2 So I think that it's very telling in the

 3 data. I think I wrote down that around 50 percent

 4 of rates trades, I think Tod mentioned, were on

 5 SEF whereas 80 to 90 percent of credit. And I

 6 think a big part of that can be explained by there

 7 are more alternatives in the rates market to trade

 8 off-SEF than there are in a credit market.

 9 And so, for the variety of reasons we've

 10 mentioned, I don't think that -- you know, where

 11 there are more alternatives, it would make sense

 12 that there would be equal trading on SEFs.

 13 The solutions for us in order to get

 14 more comfortable, enough to participate directly

 15 on SEFs, would be clarification of Rule 1.35, or

 16 perhaps even limiting how it impacts asset

 17 managers, and certainly encouraging the

 18 introducing broker model.

 19 I mean, that is something that most buy

 20 side firms are using in the futures market, and I

 21 think also makes a lot of sense to use in the SEF

 22 market, and I think a lot of buy side firms are
 298

 1 starting to come to that realization.

 2 In terms of what to do next, the one

 3 thing I would say is there are a lot of issues

 4 that have been discussed throughout the day,

 5 including on this panel, on SEFs and what the

 6 future of SEFs should be.

 7 I don't think -- and NDFs have come up,

 8 and I think it's very telling that only 1 percent

 9 of that market has gone to SEF.

 10 I don't think NDFs are a very different

 11 market, and they're not the same as rates; they're

 12 not the same as credit. There are a lot of issues

 13 to work out.

 14 I would suggest we shouldn't rush into

 15 moving SEFs into a world where -- or, moving NDFs

 16 into a world where they have a MAT until we

 17 resolve a lot of these issues and see some of this

 18 participation from the buy side pick up.

 19 Thank you.

 20 COMMISSIONER O'MALIA: Thank you very

 21 much. Our final witness for today, Mr.

 22 Fitzpatrick.
 299

 1 MR. FITZPATRICK: Thank you,

 2 Commissioner O'Malia, again, for the opportunity

 3 to represent the WMBA here.

 4 My name is Scott Fitzpatrick. I'm

 5 Chairman of the Wholesale Market Brokers

 6 Association and Executive Director at Tradition.

 7 Tradition is one of the number of

 8 registered SEFs these days, as are my colleagues

 9 in the WMBA. We were historically, as you would

 10 recognize us as, IDB SEF.

 11 Sorry. I've been told to speak up.

 12 We've just heard from Wendy and Michael a

 13 perspective from the buy side and their uptake, or

 14 their interest, in executing onto SEFs. I'll

 15 probably just take a view from the other side of

 16 the fence, if you like.

 17 Up until February the 15th, I guess,

 18 which was a key date for SEFs, well, that was in

 19 effect the first date when you had mandated

 20 execution on platforms that we have built.

 21 Michael made a great point, which is the

 22 build it and they shall come theory.
 300

 1 We have, and if we're having a

 2 conversation specifically about buy side

 3 interaction on the liquidity pools, they haven't.

 4 I think that really probably shouldn't be any

 5 surprise to anyone in this room, quite frankly.

 6 We entered the land of the SEF in

 7 October of last year. There was a huge amount of

 8 lift in terms of technology and infrastructure,

 9 corporate governance, capitalization, resourcing,

 10 just to get to the point where you were not a SEF

 11 to the point where you were a SEF.

 12 Naturally, I think over the first few

 13 months of the introduction of SEFs, what you've

 14 seen is, both in terms of participation, people

 15 focus on their incumbent suppliers of services,

 16 familiarizing themselves with rulebooks that they

 17 were introduced to around October time.

 18 I think it was a gentleman from Barclays

 19 at one of the TAC meetings, who sat right about

 20 here with a stack of paper about 8 inches high,

 21 which represented at that time, I think, the 19

 22 SEF rulebooks that they had to consider as an FCM
 301

 1 for providing risk-based limits for client trading

 2 on SEFs.

 3 I think also, you know, from our side --

 4 and we have -- I mean, you can read our rulebooks

 5 on the various web sites.

 6 In terms of the infrastructure that

 7 we've now established and set up we are fully capable

 8 now of operating on a number of access models,

 9 whether it's direct access as a participant on our

 10 SEF or, as Michael, in the model that they've

 11 chosen to go with, which is not to actually become

 12 a member or a participant on the SEF but, in fact,

 13 to come in through the introducing broker or

 14 sponsor of access or agency access or any number

 15 of the variations of the description that kind of

 16 do the rounds these days. And everyone has got

 17 their own opinion on exactly what each of those

 18 mean.

 19 The establishment of that infrastructure

 20 -- and let's just talk about onboarding for a

 21 second because the theory that you can read a

 22 rulebook, sign off on a rulebook, fill in all the
 302

 1 representations that you need to fill in to be a

 2 part of a SEF these days, whether you're an ECP or

 3 a MSP or a swap dealer, and be appropriately

 4 signed off and papered by the SEF that you want

 5 access to doesn't, by any stretch of the

 6 imagination, mean that at that point you are ready

 7 to conduct active business on that SEF.

 8 From our side, we have infrastructure

 9 that has to be in place. We've got FCM

 10 relationships. There's an infrastructure

 11 requirement from, you know, whether it's GSAM or

 12 Eaton Vance, between them and their IB. There's

 13 infrastructure between us and the IB.

 14 The IBs that Michael was talking about

 15 are choosing to act as effective aggregators of

 16 the SEF community. They all take liquidity from

 17 various SEFs. They'll represent that to their

 18 clients either in a truly aggregated model or just

 19 a pick-and-choose model. And then those clients,

 20 in theory, will be able to transact through those

 21 networks and execute directly onto the SEF behind

 22 the price.
 303

 1 The infrastructure that has to exist

 2 between us and the SEF community and the IB at

 3 that point needs to be established.

 4 You then have the credit hubs and the

 5 FCMs. The FCMs have got to get comfortable with

 6 risk-based limits on each of the platforms so that

 7 we can do our pre-trade credit checks prior to

 8 execution.

 9 We are in certification process with the

 10 likes of Traiana and Markit, but that

 11 infrastructure is not quite there from a push

 12 perspective into central limit order books.

 13 And then the final point I would make is

 14 that there's a sense of -- I mean, I don't know

 15 whether it's just because there are 10 or 15 or 20

 16 SEFs to choose from in the market that people are

 17 going to naturally want to go to every one of

 18 those because there's liquidity that exists in

 19 every one of those SEFs.

 20 SEF liquidity pools are very, very

 21 different in nature. I mean, those guys around

 22 the table, whether it's Tradeweb or whether it's
 304

 1 Bloomberg or whether it's Tradition or whether

 2 it's ICAP or whether truEX -- each of those SEFs

 3 represent very different styles of liquidity and

 4 very different representation by the dealers into

 5 those markets and by the participants on those

 6 markets.

 7 And there's an economic analysis that

 8 has to be done by the individuals that want to

 9 come into those liquidity pools as to whether they

 10 actually want to be there, and they have a right

 11 to choose.

 12 We make ourselves available, and we have

 13 built it, and hopefully, one day, they will come

 14 because it's not been cheap.

 15 On that note, I will pass back to you,

 16 Commissioner, and look forward to the debate.

 17 COMMISSIONER O'MALIA: Thank you. I'd

 18 like to open it up for any questions or debate or

 19 concerns about any of this and thoughts you may

 20 have. We have Mr. Olesky that runs a --

 21 MR. OLESKY: Thank you, Commissioner.

 22 Yeah, well, I think each of the panelists
 305

 1 contributed very relevant information. In our

 2 experience, Tradeweb is somewhat of a unique

 3 animal in that we've got two different

 4 perspectives on SEF. We have one SEF that we call

 5 DW SEF and one SEF that we call TW SEF, and they

 6 each focus on different client segments.

 7 So the DW SEF is an anonymous order book

 8 that is largely inter-dealer in nature, where not

 9 knowing who your counterparty is irrelevant; it

 10 doesn't matter.

 11 TW SEF focuses on a disclosed model.

 12 And the reason I'm hitting these two differences

 13 is we're talking about a wide universe of clients

 14 that are participants in these markets, and I

 15 don't think it's surprising that it's taking this

 16 much time for people to adjust to this.

 17 Our own experience was a year ago, over

 18 a year ago, we had much more volume than we did

 19 pre-February launch. So we actually were up here

 20 in the volume, and as we got closer to the SEF

 21 date we all took a significant dip in terms of

 22 activity as people were preparing for the live
 306

 1 dates.

 2 What we've seen in the last few months

 3 and even in the last few weeks is a slow increase,

 4 a steady but significant increase, so that if I

 5 look at our volumes today they're actually

 6 significantly higher than a year ago.

 7 So I think we're heading in the right

 8 direction, but this is a very complex ecosystem

 9 with a lot of technology issues.

 10 I think Wendy hit on a significant

 11 point, which is integration.

 12 I mean, it's easy to say we're going to

 13 build a SEF, but there's a lot that goes into

 14 connecting up the trader with just the matching

 15 engine that is a SEF. There's a lot of

 16 integration. There are credit checks. There's

 17 hitting risk systems. And you can't just have

 18 people willy-nilly sort of entering things in

 19 separately.

 20 So integration is a massive undertaking

 21 which we've been spending a tremendous amount of

 22 time on for years and years, and we literally have
 307

 1 hundreds of integrations with different customers.

 2 But each customer does not have the same

 3 amount of resources to apply to integration. They

 4 don't have the same amount of resources to apply

 5 to assessing rulebooks. So this is a continuum in

 6 the marketplace of the amount of effort and

 7 capital that firms can invest in adapting to this,

 8 and it's going to take time to see it through.

 9 But I think it's heading in the right

 10 direction, but look, we still have many rules that

 11 are being phased in, in the coming months, you

 12 know, whether it's the package trades that aren't

 13 complete until November. We still have another

 14 date coming up with switches in June, which should

 15 likely trigger more activity.

 16 So, as we get through this process of

 17 adjusting to the rules and the rules become

 18 finalized across the board, I expect we'll

 19 continue to see more and more volume.

 20 But I don't think it's any one thing. I

 21 think it's -- and it's challenging as someone who

 22 is running an electronic operation. You can
 308

 1 become impatient with the speed with which things

 2 are working, but I think we have to be patient,

 3 and we have to get through these rules as quickly

 4 as possible in terms of their implementation.

 5 COMMISSIONER O'MALIA: Can you touch on

 6 kind of the status of the package trades?

 7 You mentioned that you're going to see

 8 volumes going up, but is that going as smoothly

 9 with the phasing as you had hoped?

 10 MR. OLESKY: Yeah.

 11 COMMISSIONER O'MALIA: Maybe the buy

 12 side could also --

 13 MR. OLESKY: Well, I think Wendy

 14 mentioned this. Package trades is not just a

 15 technology solution that needs to be delivered by

 16 the SEF. It needs to be delivered by the

 17 participants that are providing liquidity. So you

 18 have to be able to generate prices across multiple

 19 instruments very, very quickly.

 20 Now that's not something that everybody

 21 has right away. So that's being phased in, and

 22 there's different capability among different
 309

 1 firms.

 2 The other thing is there are still some

 3 significant packages that are not yet required to

 4 be traded on SEFs, and that's happening in the

 5 coming weeks, I guess, and months -- two weeks.

 6 COMMISSIONER O'MALIA: Wendy.

 7 MS. YUN: I would add that on May 15th

 8 we tried doing a MAT-to-MAT swap on a large SEF,

 9 and there was only one liquidity provider

 10 available on the system.

 11 So those are some of the challenges that

 12 you are confronted with when the systems are not

 13 fully baked and people have not had a proper

 14 amount of time to actually build towards

 15 connectivity and providing liquidity.

 16 COMMISSIONER O'MALIA: Nick, do you have

 17 a --

 18 MR. SOLINGER: Thanks, Scott. I wanted

 19 to share some statistics from our view.

 20 I think as many of you know, we operate

 21 on behalf of the FCMs and a large number of buy

 22 side firms as the pre-trade credit check and
 310

 1 compliance tool.

 2 Agree with what Wendy and Michael have

 3 shared and also similar experience, Tod, as you've

 4 shared, in the data.

 5 Just north of 600 firms have been set up

 6 to trade on SEF in our utility, and those firms

 7 obviously manage thousands of funds. Most of

 8 those firms have two to three FCMs and are set up

 9 to trade on two or three SEFs. Less than 50

 10 percent of those firms have executed a single

 11 trade on a SEF since the MAT dates, and of those

 12 that have, very few of them are trading regularly

 13 in SEF.

 14 So, at the end of the tail, they set up

 15 ceremonial trade and gone back and looked to other

 16 markets because of all the technical issues on the

 17 end-to-end flow.

 18 And I think the package trade rollout is

 19 a good example, where the industry was fairly

 20 transparent in the fact that the end-to-end flow

 21 from liquidity provision down through SDRs and

 22 CCPs did not yet support, technically, a robust
 311

 1 process for handing packages. They've rolled out

 2 in advance of that, and the results are as

 3 testified to here.

 4 So I think the buy side is still very

 5 much getting used to new processes, but some of

 6 the new processes don't exist yet, especially when

 7 you get down to some of the more complex products.

 8 MR. FITZPATRICK: I don't know whether

 9 there are any representatives from FCMs in the

 10 room as well, but I think one of the things that

 11 -- certainly, from my experience recently, one of

 12 the things that industry is struggling with is,

 13 where is the allocation and management of credit

 14 across potentially multiple SEFs all executing the

 15 same products, and not necessarily the

 16 distribution of the risk-based limits but how the

 17 limits are consumed on individual SEFs, what

 18 happens to cancelled trades, error trade policies?

 19 And these are all things that factor

 20 into the allocation and distribution of liquidity

 21 across a number of SEFs.

 22 Obviously, firms like Traiana will act
 312

 1 as a sort of centralization point for a lot of

 2 that, but there's still a complex model there to

 3 be understood.

 4 MR. LEVY: Yeah, just to continue on

 5 Nick's point, we sit in the middle of a number of

 6 these flows. We're in the pre-trade credit space,

 7 as Scott alluded to, as well as connecting up to

 8 SDRs and CCPs.

 9 Packages are one item that's coming down

 10 the pike. There's bunched. There's allocations.

 11 There's a lot of incremental features -- workflow,

 12 systems changes.

 13 At least, we have definitely learned by

 14 being in this space for some time that really

 15 nothing happens in months. At best, it takes a

 16 year, and it usually takes a couple of years to

 17 get these things right.

 18 It's not surprising to us at all that

 19 there wasn't some sort of cliff event in terms of

 20 business moving. If people didn't have to, they

 21 wouldn't, and if people couldn't, they wouldn't.

 22 And they're looking to alternatives,
 313

 1 whether it's alternative markets like the futures

 2 markets, maybe not permanently, in the interim. I

 3 think that will be somewhat based on how quickly

 4 the industry can adjust. Hopefully, it's not

 5 years away, but it certainly doesn't seem like

 6 months away.

 7 The packages are coming fast and furious

 8 between June and November -- our estimation based

 9 on sitting in the middle of those flows, not just

 10 what we need to do but what the CCPs need to do to

 11 adjust the SDRs.

 12 Ultimately, the world looks at trades

 13 as single trades that are strung together

 14 from a trading strategy but not strung together

 15 operationally, either pre-trade or post-trade or

 16 anything in between.

 17 So we're acknowledging, at least from

 18 our perspective, that it is early in terms of the

 19 push to require it. It is a page from what I

 20 described before, which is push early and then be

 21 sympathetic to the problems when they occur

 22 because they will occur.
 314

 1 And that's at least a way to get there a

 2 bit sooner than if you waited for everybody to be

 3 completely ready for the flows, including

 4 platforms like ourselves that are not any of the

 5 SDRs, the CCPs, the SEFs themselves, but sit in

 6 the middle of a lot of those marketplaces and

 7 functionalities from a technology perspective.

 8 The other thing that will happen -- the

 9 buy side, you know, does talk about the fact that

 10 they don't have the resources and it is a

 11 challenge.

 12 I think the banks, typically, who have

 13 been more flush, historically -- I'm not sure they

 14 are long resources either these days.

 15 The reality is there will be a lot of

 16 technology firms that come in and fill those voids

 17 that are already out there. If they're

 18 integration firms or connectivity providers,

 19 they're already out there. They tend to be

 20 focused in some of the OTC markets but largely

 21 away.

 22 And we'll start to see some of those
 315

 1 companies provide services in the seams when any

 2 individual firm can't possibly do it on their own.

 3 But if one provider could provide the service to

 4 10, 50, 100 or 1,000 entities, it starts to

 5 present some scale.

 6 But, again, those just take time to

 7 develop. Business models are created on the back

 8 of that.

 9 And the solutions will be there. They

 10 just won't be there and feel very good in 2014 in

 11 our estimation, and in '15 the light will start to

 12 come out, and by '16 it will start to normalize a

 13 bit.

 14 MR. MCGONAGLE: I think from my

 15 perspective in working with the Division, one of

 16 the -- you know, what we've been focused on,

 17 recognizing we have this mandate in front of us

 18 with the made-available-to-trade products, that

 19 they're supposed to be required to be traded on

 20 the facility.

 21 But we've been looking at the fact that

 22 how the executions have been going, and for me,
 316

 1 that has been a driver about determining the

 2 timelines, where we've had some flexibility with

 3 respect to these packages that we know and we see

 4 that these SEFs are able to execute these

 5 transactions and that, operationally, these things

 6 -- you know, trading can happen, and it is

 7 happening on the facility.

 8 So I don't want to pull away from that

 9 momentum by being overly concerned about how other

 10 technologies that I know are in play will catch

 11 up. I know they're going to catch up because they

 12 need to catch up.

 13 We're keeping an eye on the trading

 14 activity, and we're concerned that that activity

 15 occurs without incident. As people trade, are

 16 required to trade, or organically will want to

 17 trade on these products, on these platforms, that

 18 will decide sort of the success of this whole

 19 regulatory structure.

 20 And so that's at least my vantage point

 21 in sort of picking these dates, looking at where

 22 can we get liquidity -- where is the liquidity in
 317

 1 this market?

 2 You know, June 15 is a big date, and I'm

 3 very focused on what happens on June 15. And I

 4 expect, just like on February 14 and just like

 5 before May 1, I'm going to get some letters from

 6 very concerned market participants about whether

 7 and what we should be doing, and I'm going to be

 8 getting comfort from other market participants

 9 that say, you know, stay the course; we need to

 10 work through this time.

 11 And we're working through this time, and

 12 I think in a very effective way.

 13 COMMISSIONER O'MALIA: Ed.

 14 MR. DASSO: Thanks, Scott. So my name

 15 is Ed Dasso. I work at NFA, and one of the

 16 services that we provide is outsourced trade

 17 practice market surveillance to both DCMs and

 18 SEFs. We currently have 17 of the 24 SEFs under

 19 contract.

 20 I think the point that one of the things

 21 that we have the ability to do that maybe, say,

 22 the SDRs don't have is we track every execution by
 318

 1 type. What I mean by that is we know when the

 2 transaction occurs in the CLOB, when it's

 3 electronic or RFQ, when it's a voice RFQ, auction,

 4 any type of block, any type of execution method.

 5 The trend, I think, that we've seen is

 6 obviously a gravitation more towards the central

 7 limit order book on the swap execution facilities

 8 that have liquidity.

 9 When we initially scaled this program,

 10 we had anticipated up to about 150 million

 11 messages a day, and we're not there yet.

 12 I would say back in October up through

 13 February we probably saw almost a 2:1 ratio as far

 14 as executions to trades -- so anywhere from, say,

 15 4,000 trades a day to 8,000 total messages.

 16 Well, as of last week, we saw about 45

 17 million messages across the SEFs that we have

 18 under contract. So there's healthy participation

 19 that we're starting to see or gravitation towards

 20 a CLOB.

 21 And Wendy had mentioned, you know, the

 22 quoting and the difference MAT-to-MAT strategies.
 319

 1 That is definitely something that we've seen much

 2 more automation in the marketplace.

 3 Of course, there could be more. So I

 4 think the anticipation here is over the next

 5 couple months we'll see more participants join the

 6 SEFs and start auto-quote as well.

 7 MR. LEWIS: A couple questions and maybe

 8 a suggestion.

 9 The data that were presented by Clarus

 10 -- very interesting.

 11 I assume that within the Commission you

 12 get similar regular updates. It sort of links

 13 back to the other topic about terabytes and

 14 megabytes and thousands of FTEs and what not.

 15 But, if you don't, that's really scary.

 16 And I think that the NFA data that were just

 17 referred to, I think the Commission would do a

 18 huge service if -- you know, this was what -- one

 19 of the Harvard adages was "Plagiarize, plagiarize,

 20 let no one thoughts evade your eyes."

 21 It's also called -- cutting and pasting

 22 is much easier these days in an electronic venue.
 320

 1 And I think disseminating the progress

 2 or the lack of progress, in terms of uptake in

 3 these markets, would do a big service in terms of

 4 demystifying and making people feel more

 5 comfortable or rightly identifying issues.

 6 So, as I say, I won't ask you to answer

 7 my question as to whether you -- you know, if

 8 you're running a business and just had embarked on

 9 costing everybody billions of dollars, you would

 10 actually keep track of what the effect was.

 11 The other thing that I would ask about,

 12 which maybe the right people aren't here because,

 13 you know, Kim is -- I mean, your empire is large,

 14 but I don't think it includes Kim yet -- is that

 15 -- is what the experience has been on the

 16 clearinghouse side.

 17 And I think from a risk management

 18 perspective this is really kind of where the

 19 rubber really hits the road, which is to say, are

 20 the clearinghouses comfortable with what's going

 21 on?

 22 You know, I know there are separate
 321

 1 clearinghouses.

 2 Has there been -- you know, are they

 3 getting -- you've heard rumors about data and

 4 other issues in terms of trying to construct

 5 things. Are the SEFs really operating well with

 6 the various clearinghouses?

 7 As I say, maybe the right people aren't

 8 here, but I would hope you guys would really be

 9 keeping an eye on that because that's where you

 10 would potentially be creating more problems than

 11 you're solving.

 12 And then the final observation -- and

 13 the only place I've seen data on this is in the

 14 NDF world.

 15 And, as you say, it's early, and you

 16 can't tell quite what's going on. But it would

 17 appear that in the short term one of the

 18 consequences of the partial introduction of the

 19 new regime is on the, in the SEF world,

 20 demonstrably larger bid offer spreads versus

 21 non-SEF world and a shift of business offshore.

 22 Now I'm not real-time on that. I last
 322

 1 looked at this, you know, visiting friends in New

 2 York, looking at screens where you can really see

 3 them side by side.

 4 And I would just -- again, I think the

 5 ultimate test in this is not even volume as much

 6 as what the bid offer situation looks like in

 7 these markets and are the markets getting tighter.

 8 Maybe they're not tighter than they were

 9 previous to the changes, but is the delta at least

 10 positive since the introduction?

 11 And, again, if they're not, you guys

 12 better have a -- you know, you guys better be

 13 thinking about that.

 14 And I think, in fairness, that's part of

 15 the information that the market would find very

 16 interesting and reassuring, to understand what's

 17 going on in a more transparent way because I don't

 18 think you're yet at a point -- and maybe the

 19 market participants can talk about this, whether

 20 there's actually a visible CLOB next to the RFQ

 21 activity for market participants to understand

 22 exactly what the opportunity cost is of their
 323

 1 transaction.

 2 So, questions and a little editorial

 3 comment there, too.

 4 COMMISSIONER O'MALIA: Anybody want to

 5 comment on bid offer?

 6 MR. FITZPATRICK: I mean just very

 7 briefly. I mean, I think that leads to one of the

 8 points I made earlier. You know, when you're in a

 9 situation, whether you're Wendy or Michael, there

 10 are various styles of SEFs out there. There's

 11 your historical RFQ, disclosed models, right

 12 through the gamut to the pre-trade anonymous

 13 central limit order books, the difference being to

 14 talk about bid offer spreads.

 15 Whether they are weighed around or not,

 16 I don't get to see the bid offer spreads away from

 17 where we are, but ours is not too bad in our

 18 central limit order book, I think.

 19 But it's variation in that model, too,

 20 where you're faced with RFQ responses, where you

 21 pick and choose whether you want to trade or not,

 22 versus whether you're looking at a bid offer
 324

 1 spread on a central limit order book. And it's up

 2 to you how you operate within that marketplace and

 3 how you choose to cross the bid offer spread,

 4 whether aggressively or you sit passively, waiting

 5 to be heard.

 6 So, I mean, there are -- there will be

 7 variations and differences, and they may be wider

 8 on some occasions, depending on who the

 9 counterparty is, how big the trade is and who

 10 they're going to talk to.

 11 But, at the end of the day, I think --

 12 and I spoke earlier of -- the economic decisions

 13 that have to be made by participants as they go

 14 into the various SEF communities is they've got to

 15 work out what trading style is right for them and

 16 what SEF is right for them and what kind of

 17 participant they want to be in those markets.

 18 You know, as much as I'd like to think

 19 from the evolution of these markets that a lot of

 20 these guys will come to central limit order books,

 21 the reality is that a lot of them probably won't.

 22 MR. O'BRIEN: I just want to mention
 325

 1 that I want to see the central limit order books

 2 succeed, and I think part of the reason I'm not

 3 seeing the liquidity I would like or I'm not

 4 seeing the type of bid offers I would like yet is

 5 because the buy side doesn't seem to be adopting

 6 it as quickly as I would have thought.

 7 I think in the long run you will see, in

 8 next-year RFQ, a central limit order book or at

 9 least easily be able to observe that. And at that

 10 point I think you'll see more buy side firms adopt

 11 the central limit order books, and banks will,

 12 therefore, have more of an incentive to provide

 13 liquidity there.

 14 But, for a lot of buy side firms that I

 15 talk to, they seem more comfortable with the RFQ

 16 model.

 17 My preference is to be on the order

 18 book, and all the trades I've done, all the MAT

 19 trades I've done through the introducing broker,

 20 have all been on order books.

 21 I think we'll get there, but again, just

 22 like the pick-up in volume for the buy side, it's
 326

 1 going to take a while before we get to the point

 2 where the buy side is trading in the order book

 3 and we have more liquidity providers there.

 4 MR. SRINIVASAN: Can we sort of talk

 5 about data? So the question was, do we see these

 6 things in the data, right? We haven't been

 7 looking at Part 43 because, in theory, Part 45,

 8 the regulatory reports, should give us all the

 9 information.

 10 We've been studying the data when we put

 11 out the weekly swaps report, which was presented

 12 is the previous TAC. The interesting thing we

 13 notice in the Part 45 regulatory reports is that

 14 we can't identify transactions that were executed

 15 on a SEF.

 16 And Marisol has gone and has left for

 17 the day. But that's a challenge we're facing, and

 18 so we're sort of talking to the SDRs, and we're

 19 talking to the market participants.

 20 It appears as if when the trades get

 21 reported, to us at least, the data reports we

 22 receive from a SDR, a critical field has not been
 327

 1 populated. So we can't even see which

 2 transactions were done on a SEF.

 3 In terms of forgetting the quality of

 4 the market, in terms of spreads and other things,

 5 we don't get message data from the SEFs.

 6 And, even if we get message data, it's

 7 important to bear in mind a couple of sort of

 8 facts, and Tod should sort of confirm this.

 9 So a decent chunk of the activity is

 10 happening over voice execution. You know, there

 11 is no electronic audit trail that even if we were

 12 to get message data it's not clear in what form it

 13 will come to us, for us to be able to analyze the

 14 data.

 15 And then in the interest rates swaps

 16 base, close to 50 percent of the transaction

 17 volume is for us, which is the bulk of the risk

 18 mitigation stuff that happens.

 19 And they're not really price-forming

 20 trades, I understand. So I don't even know how to

 21 measure bid-ask spread and even what does it mean

 22 for 50 percent of that to be happening on SEFs.
 328

 1 And the other -- you know, there are

 2 different execution methods that have been

 3 implemented by SEFs.

 4 And based on this anecdotal information

 5 we have, based on what the SEFs have shared with

 6 us, a decent chunk of volume, 60-70 percent of

 7 volume, is happening through what we call midpoint

 8 volume matches, which is not people putting bids

 9 and offers, and the bids and offers matching; it's

 10 the firm coming up with the price and saying,

 11 here's the suggested price, to people who want to

 12 sort of trade at this point.

 13 It's like a midpoint of the existing

 14 market, you know, a lot like the way -- the

 15 crossing of sort of the dark pools that operate in

 16 the liquidity markets.

 17 So there's the midpoint, which is sort

 18 of published, and then people submit their trading

 19 interests, and trades are happening on the SEF.

 20 If all the transactions are happening at

 21 the midpoint, or a decent chunk, that means the

 22 spreads are really tight.
 329

 1 So that's what we know about the

 2 marketplace. We don't have good data, or we don't

 3 have the data, and it's still a market in

 4 evolution and uses execution methods which are

 5 really different from what we are used to seeing

 6 in the futures space.

 7 So, you know, we continue to sort of

 8 talk to market participants and understand it, but

 9 we are some ways away.

 10 The Commission, when we finalized this

 11 swap execution -- the SEF final rules, the

 12 Commission has directed staff to complete a study

 13 for the swap market activity to make an assessment

 14 on how good the rules are and the impact of our

 15 execution method rules on market quality. So we

 16 have four years to sort of complete it, but it's

 17 not clear to me that we have the data.

 18 So we finalized the rules -- pardon?

 19 SPEAKER: (off mic)

 20 MR. SRINIVASAN: No, it's not even the

 21 size. It's just we don't have the data, and the

 22 rules were finalized on May 16th. I think the
 330

 1 effective date was a month or two.

 2 So we talk about -- I know June 2020,

 3 and that's the deadline for us to finish it. My

 4 presumption is that we will be working with DMO to

 5 do it.

 6 The question is, do we have the data to

 7 do it at that point in time?

 8 So, hopefully, we'll be there. But

 9 where we are today, this is the color we have, I

 10 guess, from where we are sitting.

 11 MS. YUN: I just wanted to add that I

 12 would say that the buy side would like to access

 13 liquidity on the central limit order books, but

 14 it's just a matter of timing and the readiness to

 15 get there.

 16 I think right now there's a lot of

 17 competing priorities and goals that we're trying

 18 to achieve right now as it relates just solely to

 19 the RFQ platforms. There are questions about

 20 pre-trade credit checks, on block trades, on

 21 packages.

 22 We just learned today from one of the
 331

 1 SEFs that now the CFTC may be asking that all

 2 block trades can only be treated as a block if all

 3 legs of a package trade exceed the block

 4 thresholds. That's something that was very new to

 5 many of us market participants, to learn of that

 6 today.

 7 To have to build out to those systems,

 8 as well as to consider other types of competing

 9 priorities, such as there are certain liquidity

 10 pools that are only available if you register with

 11 that particular SEF -- so for NDFs, as a result of

 12 Footnote 88, if you want to continue to access

 13 those pools, you also have to sign up despite the

 14 fact that those products are not subject to

 15 clearing or MAT right now.

 16 There's a whole host of issues that

 17 people are grappling with right now, which I think

 18 has kind of impeded the developments to, and

 19 market movement towards, the central limit order

 20 books.

 21 MR. MCGONAGLE: Just on the question or

 22 the comment about blocks, so for multi-leg
 332

 1 transactions, a transaction that has its own USI

 2 would need to satisfy the block-level requirements

 3 set forth in the block rules.

 4 So we don't -- one, if you have a group

 5 of transactions and one satisfies its individual

 6 block, that's not sufficient to pull the other

 7 transactions out into the block.

 8 So that's right; what you heard today is

 9 accurate.

 10 MS. YUN: But would you be able to

 11 execute that one leg subject to the cap size

 12 limits and the real-time delays?

 13 MS. MARKOWITZ: Right. You could

 14 execute it as a block, but will you be subject to

 15 -- if it doesn't meet the notional value, you'd

 16 have to report it real-time and get the delay as

 17 if it was a block.

 18 MS. YUN: So, a cleared leg that does

 19 exceed the thresholds, would that be permitted to

 20 be subject to the block delays and the cap size

 21 limits, or would the whole -- you're saying that

 22 the entire block has to -- the entire package
 333

 1 trade has to meet the block size limits?

 2 MS. MARKOWITZ: The entire package.

 3 COMMISSIONER O'MALIA: We've heard some

 4 questions about position limits on SEFs and how

 5 multiple SEFs may deal with position limits. Do

 6 you have any opinions on that?

 7 MR. MCGONAGLE: Not for today.

 8 (Laughter.)

 9 COMMISSIONER O'MALIA: Well, we heard

 10 policy being made right there with the block rule.

 11 So, thank you very much.

 12 MR. MCGONAGLE: Just on the block rule,

 13 just being consistent with what the block -- with

 14 what the regs already say, with respect to blocks.

 15 COMMISSIONER O'MALIA: I'm sure it is;

 16 hence, the no confusion.

 17 Bryan and then Lee and then I think

 18 we're done.

 19 MR. DURKIN: Just another kind of

 20 contributing, I think, issue or factor is, you

 21 know, we operate in a global organization in terms

 22 of what these markets represent, right.
 334

 1 And so Wendy referred to it a little bit

 2 in her talking points, in terms of not creating a

 3 bifurcation, a sense of liquidity, or creating

 4 situations where there may be uncertainty due to

 5 unresolved issues from a cross-border perspective.

 6 And so it's incumbent upon the CFTC and

 7 the foreign regulators to resolve a myriad of

 8 cross-border issues that are still creating a

 9 great deal of uncertainty, both for the operators

 10 as well as for the client base.

 11 We've always, you know, been very

 12 supportive of mutual recognition, and the CFTC has

 13 taken, I think, a very proactive and flexible

 14 policy in that regard in terms of some of the

 15 actions that it's taken to date.

 16 However, we haven't received reciprocal

 17 treatment from the E.U., and that creates very

 18 serious concerns not only for the swaps business

 19 but as well as the futures business. You know, we

 20 operate in both the U.S. and Europe,

 21 internationally. We have 10 hubs throughout the

 22 world.
 335

 1 And it's incumbent upon the CFTC and the

 2 regulators to consider the broader implications in

 3 terms of these cross-border issues and the impacts

 4 that it may have on the overall efficiency of the

 5 ecosystem that exists today.

 6 We need to eliminate legal uncertainty

 7 that currently exists.

 8 We need to allow cross-border markets to

 9 continue operating without threatened disruption

 10 to both operations and efficiencies to those

 11 markets.

 12 We need to afford U.S.-based and foreign

 13 markets, and market participants, the same degree

 14 -- the same degree -- of flexibility today on an

 15 ongoing basis.

 16 MR. OLESKY: I'll be really quick -- two

 17 points. One is e-order books and rates. They're

 18 not there yet. So that's the real challenge. And

 19 most of that activity is voice that's

 20 inter-dealer. And until there are meaningful

 21 e-order books, you won't be able to do these

 22 comparisons and you won't have a meaningful
 336

 1 liquidity pool for the buy side to tap into.

 2 I imagine that's going to come. We're

 3 not there yet.

 4 The second is the cross-border point I

 5 think that Cliff started. The one place I would

 6 say -- because we operate an MTF in Europe. So we

 7 have a very active swap business in Europe.

 8 And what we've seen with the phasing-in

 9 of the SEF rules is a definite shift in terms of

 10 currency. So there's much more dollar activity in

 11 the U.S. in SEFs, and there's a lot less euro

 12 activity because the euro client base in Europe

 13 does not want to get entangled in SEFs, so they

 14 stay on of MTF.

 15 That's something to watch out for

 16 because I think without mutual recognition we're

 17 scaring away a part of the client base that could

 18 be an active part of the liquidity pool within SEF

 19 because they just don't want to be inside the SEF

 20 regime and they choose to keep their marbles

 21 outside, which means there's less liquidity for

 22 U.S. counterparties in euro, Sterling, yen,
 337

 1 anything outside the U.S. That's a fact; that's

 2 happened.

 3 MR. FITZPATRICK: Can I just say one

 4 thing?

 5 COMMISSIONER O'MALIA: Oh, yes.

 6 MR. FITZPATRICK: I would like to agree

 7 with my colleague over there. We, the QMTF --

 8 that regime -- and there is still an opportunity

 9 to do the right thing there, and I think it would

 10 force the liquidity in U.S. dollar markets

 11 overseas for U.S. participants.

 12 However, I'd like to respectfully

 13 disagree with my wounded colleague over there that

 14 e-order books and rates are there. We operate

 15 one. We've got tremendous depth of liquidity in

 16 our electronic interest rate order book. So I

 17 would argue that we are there in those markets.

 18 Lee and I can take that one offline.

 19 COMMISSIONER O'MALIA: He's wounded. So

 20 be careful.

 21 Well, let me thank everyone. This has

 22 been an extraordinarily helpful day, a very long
 338

 1 day, of course.

 2 I'd like to thank all the new TAC

 3 members for joining and all our witnesses who have

 4 prepared for this and provided some very

 5 compelling testimony today to help us discuss

 6 this. Every panel was terrific, and I'm grateful

 7 for that, and I'm grateful for the time you've

 8 spent there.

 9 I think we're going to continue to focus

 10 on the surveillance tools this Commission needs

 11 and the technology that we have at our disposal

 12 and how we integrate all the data.

 13 I think we're going to continue to

 14 follow the various data reporting elements. I

 15 know Sayee and DMO are struggling to make sense of

 16 our data. And, thankfully, we do also have

 17 organizations like Tod's and ISDA and FIA that

 18 have all worked on providing new data to us to

 19 reflect on the market.

 20 Thanks to the SEFs who have been very

 21 forthcoming with their trading behavior. This is

 22 an issue that we will continue to follow as well.
 339

 1 And a new issue you might want to think

 2 about in the future is this bitcoin. There has

 3 been interest in this, and maybe we'll have to

 4 take that up at a future meeting.

 5 So, thank you very much for --

 6 (Whereupon, at 3:36 p.m., the

 7 PROCEEDINGS were adjourned.)

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 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Carleton J. Anderson, III, notary

 4 public in and for the District of Columbia, do

 5 hereby certify that the forgoing PROCEEDING was

 6 duly recorded and thereafter reduced to print under

 7 my direction; that the witnesses were sworn to tell

 8 the truth under penalty of perjury; that said

 9 transcript is a true record of the testimony given

 10 by witnesses; that I am neither counsel for,

 11 related to, nor employed by any of the parties to

 12 the action in which this proceeding was called;

 13 and, furthermore, that I am not a relative or

 14 employee of any attorney or counsel employed by the

 15 parties hereto, nor financially or otherwise

 16 interested in the outcome of this action.

 17

 18

 19 (Signature and Seal on File)

 20 -----------------------------------

 21 Notary Public, in and for the District of Columbia

 22 My Commission Expires: March 31, 2017