CFTC and Market Surveillance: Dark Pools, Audio Recordings, HFT Tech

The U.S. Commodity Futures Trading Commission (CFTC) and other foreign regulators are ramping up efforts to monitor market activity. The wave of action comes us as regulators move toward implementation of established rules and regulations.

Gensler, Implementation, and Technology

In a recent interview with the New York Times, CFTC chairman Gary Gensler referred to the coming year in regulation as one focused on implementation.

“Next year is about one word: implementation. We’ve gone from a general law to the specific rules to the superspecific rollout,” Gensler said.

It now seems that the regulatory “rollout” will require technological changes on the part of firms and regulators alike.

CFTC and Audio Recording

Yesterday the CFTC issued a new rule that requires derivatives traders to keep audio records of commodities transactions. The rule was established by way of private vote.

The rule requires brokers, exchange members, and swap-execution facilities (SEFs) to record “quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a transaction in a commodity interest.” This includes electronic media and cell phone information.

After the rule was announced, chairman Gensler followed with a statement of support:

I support the final rule to amend 1.31 and 1.35(a) of the Commodity Futures Trading Commission’s (CFTC) regulations to conform them to recordkeeping requirements for swap dealers and major swap participants. The rule enhances the Commission’s enforcement program for the futures market to promote market integrity and protect customers.

HFT Tactics in Australia

The uptick in technology-guided market monitoring is not restricted to American regulators. In Australia, for example, the Australian Securities and Investment Commission (ASIC) has partnered with First Derivatives to build a “market surveillance” system that will employ technology used by high-frequency traders.

The new “market surveillance” system will monitor markets so as to avoid “market events” such as Knight Capital’s infamous flash crash on August 1, 2012. Ideally, the First Derivatives surveillance system would allow its regulatory body to monitor a breadth of products and venues while it rapidly works its way through large quantities of data. This means that the monitoring technology used by regulators is the essentially the same technology that requires monitoring.

Dark Pools

NYSE and Nasdaq are set to recommend that legislators approve the regulation of dark pool trading today. “We’ve seen two markets evolve — the lit, public, regulated and accessible market versus the dark, selective and private non-transparent market,” said Joseph Mecane of NYSE Euronext.

The argument may hinge on whether regulators and industry participants can convince legislators that un-monitored dark pools make markets overly complex and fragmented. Trading is now spread across 13 stock exchanges and roughly 50 dark pools, according to Bloomberg.

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