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Comment for Proposed Rule 80 FR 78824

  • From: Peter Schwartz

    Comment No: 60577
    Date: 1/5/2016

    Comment Text:

    January 1, 2016

    Commodity Futures Trading Commission
    Three Lafayette Centre
    1155 21st Street, NW
    Washington, DC 20581
    Attention: CFTC Technical Advisory Committee Member

    Regarding: The Clear Alternative to CFTC Regulation AT

    Dear CFTC TAC Member ______________________________________,

    The November 24, 2015 statement of CFTC Commissioner J. Christopher Giancarlo Notice of Proposed Rule making on Regulation Automated Trading states the commissioner's “serious doubts” on the proposed rule making due to his “areas of concern”:

    “Costs to hire additional employees to develop and implement policies and procedures for the development, testing, monitoring and compliance of their Algorithmic Trading systems”
    “Overlapping Requirements and Duplicative Costs”
    “Source Code Repository and Commission Regulation”

    There are actually preexisting rules at the CFTC and SEC which if complied with would eliminate the need for Regulation AT and the “ areas of concern.”. SEA Rule 15c3-1 which CFTC Rule 1.17 insure that broker-dealers are solvent all of the time. If a sufficient level of broker-dealer net capital is intact, then the market remains stable. Algorithmic Trading Firms will be required to use robust real-time haircut systems like those used for portfolio margin accounts for nearly a decade now.

    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 liquidity can be sent to a designated contract markets (DCM) or an exchange to block trading in real-time for the deficient market participant.

    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 number of algorithms. 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.

    Fortunate for the CFTC and SEC I am in a unique position to calculate the effect of trading positions on regulatory capital in real-time per Patent # 6,144,947. SEA Rule 15c3-1 which requires Broker-dealers must have at all times sufficient net capital is enabled by the system. Monitor just the one system which assures net capital is intact, and the greater market is intact as well.

    A centralized system which alleviates the broker-dealer of net capital enhances control of the regulator and adds value by providing service to market participants. It satisfies the objectives of both broker-dealer solvency and market stability. Regulation AT would not just create excessive costs for market participants but would add to the already strained budget of the CFTC . Even if all of the growing number of algorithms could be examined, an algorithm can always be is hacked into before or after the examination. These technical examiners cannot monitor every algorithm all the time.

    Also a “kill switch” triggered on spikes in volumes alone, and neglects regulatory capital requirements, may at times obstruct the firm's natural right to profit when the algorithm may be capitalizing on the extraordinary set of circumstances which would maximize profits for the HFT investor. Has it been documented how those investors will be made whole if an algorithm is turned off due to a spike in profitable trading?

    The irony is the CFTC and SEC which are set up to protect the capital of investors would be depleting the capital of investors who provide capital to High Frequency Trading Firms. Regulation AT resembles Relegation of the market participants rather than regulation of the market. The participants which should be serviced by our compensated regulators would become servants of Regulation AT.

    The alternative is clear: The CFTC and SEC would have always have access and control over the one system all the time free of charge. An electronic transmission to the exchanges, clearinghouses, compliance and regulators would be sent with immediacy and free of charge.

    Per the Charter of the Technical Advisory Committee on the CFTC website: “The T AC will provide advice to the Commission on the appropriate level of investment in technology at the Commission to meet its surveillance and enforcement responsibilities.” Free of charge control and
    electronic transmission to maintain market stability is clearly appropriate and necessary.

    Regulation AT whose costs deplete investor capital, recommends a kill switch when investors profits may be maximized, and tests the privacy of proprietary source code is clearly inappropriate to meet CFTC surveillance and enforcement responsibilities. Those who provide HFT capital are investors too.

    The Technical Advisory Committee must now favor the one standardized system which enables to the CFTC to protect the investor in real-time while minimizing examination costs. SEC Rule 15c3-1 has served adequately for broker-dealer solvency for decades. It is now at age to mature from monthly reporting to real-time centralized control to counter today's risk of algorithms. Our regulators must follow the fine example of the regulated, and capitalize on today's technology to do the hard work.

    Happy New Year !!!!

    Peter Schwartz