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Comment for Proposed Rule 80 FR 78824

  • From: Peter Schwartz

    Comment No: 60576
    Date: 1/5/2016

    Comment Text:

    December 19, 2015

    Commodity Futures Trading Commission
    Three Lafayette Centre
    1155 21st Street, NW
    Washington, DC 20581
    Attention Commissioner J. Christopher Giancarlo

    RE: CFTC Rule 1.17, Regulation AT or Relegation AT ?

    Dear Commissioner Giancarlo,

    In your November 24 testimony on Automated Trading you stated:

    “Regulation AT would add numerous costs to small market participants and raise barriers to entry. Small market participants may be less likely to employ risk controls consistent with Regulation AT so they would incur costs to develop or purchase such risk controls. They would also incur costs to hire additional employees to develop and implement policies and procedures for the development, testing, monitoring and compliance of their Algorithmic Trading systems. Small market participants would have to hire additional employees to continuously monitor their Algorithmic Trading systems on a real-time basis.”

    The composition of these smaller entities thus changes: There would be a lesser percentage of employees which generate revenue. The rule itself sound more like “relegation” which is defined as:

    “To put (someone or something) in a lower or less important position, rank, etc”
    “To give (something, such as a job or responsibility) to another person or group”

    Regulation is defined as:
    “ To control or maintain the rate or speed of (a machine or process) so that it operates properly”

    Indeed “Market participants have every economic incentive to implement effective risk controls to prevent the loss of their capital and being forced out of business.”

    “Appropriate risk controls” have already been established by CFTC Rule 1.17. It mandates firms have sufficient regulatory capital to meet its obligations to the street insuring there is no risk to the markets. As long as regulatory capital is sufficient, it serves as a buffer to the broader market.

    If net-capital can be calculated in real-time through an automated system, then it is possible that an electronic transmission of a deficiency in regulatory capital can be sent to a designated contract markets (DCM) or an exchange to block trading in real-time. Now that is real control.

    Broker-dealers simply send standardized data in real-time to one centralized system which under the control of the regulator which will calculate the effect on regulatory capital on a real-time basis. The regulator thus needs to maintain vigilance of one system instead of sending a finite number of technicians and examiners review the growing trend of trading. It is simply more effective and efficient to send data to the regulator in real-time than to send the regulators to the offices of every broker-dealer months after reporting.

    The contrast is thus clear. Regulation or control is heightened when data is sent from participants to a centralized system in real-time for processing so that information can be acted upon with immediacy to insure safety of customers, investors or the broader market. Conversely when the responsibility is relegated to a dispersed of market participants who would prefer to naturally to act just as agents or principals, the data needs to be then examined by agencies on a historical basis, and cannot be acted upon with immediacy.

    The month end 15c3-1 Computation of Net Capital of Knight Clearing Corp of August, 2012 failed to circumvent the algorithms which almost wiped all the net-capital on August 1, 2012. Monthly reporting of net-capital simply does not suffice to protect against the speed of algorithms.

    The services of the CFTC and SEC are of greater value when “control” is not shifted back to the market participants who are paying the fees and taxes for service. High frequency traders have realized greater value by capitalizing on modern technology. The CFTC and SEC can increase their value as well by following the fine example of HFT traders, and capitalize on modern technology.

    Regulation AT or Relegation AT is simply unnecessary as long as CFTC Rule 1.17 or SEC Rule 15c3-1 are being complied by market participants. The “dozens of issues” brought to the attention of the Division of Market Oversight are thus non-issues if the CFTC were focused on its historical natural mandate of insuring participant solvency. Insure all participants with access to the exchanges are solvent “all of the time” as prescribed by SEA 15c3-1, and there is no impact for the broader market.

    Merry Christmas and Happy New Year !!!


    Peter Schwartz