United States: CFTC Proposes Regulation Of Automated Trading

Last Updated: January 18 2016
Article by Julian E. Hammar

On November 24, 2015, the Commodity Futures Trading Commission ("CFTC") approved the issuance of proposed rules to implement a framework of registration, reporting, recordkeeping and other compliance requirements for market participants engaged in algorithmic trading, referred to as Regulation AT. If adopted, the proposed rules would impose requirements on proprietary trading firms, designated contract markets ("DCMs"), clearing member futures commission merchants ("FCMs") and other CFTC registrants that use algorithmic trading systems. It also proposes to require the registration of certain proprietary traders under a new definition of the term "Floor Trader" due to their algorithmic trading through direct electronic access (as defined in the proposed rules) to a DCM. The proposed rules, which were published in the Federal Register on December 17, 2015, are available here, and are open for public comment (including with respect to 164 questions contained in the release) until March 16, 2016.


The CFTC defines the term "Algorithmic Trading" broadly under the proposal as trading in any commodity interest (e.g., futures, options or swaps) on or subject to the rules of a DCM, where:

  • One or more computer algorithms or systems determines whether to initiate, modify, or cancel an order, or otherwise makes determinations with respect to an order, including but not limited to: the product to be traded; the venue where the order will be placed; the type of order to be placed; the timing of the order; whether to place the order; the sequencing of the order in relation to other orders; the price of the order; the quantity of the order; the partition of the order into smaller components for submission; the number of orders to be placed; or how to manage the order after submission; and
  • Such order, modification or order cancellation is electronically submitted for processing on or subject to the rules of a DCM. 

The proposed rules would exclude from the definition of algorithmic trading any orders modifications, or cancellations that are manually entered into a front-end system by a natural person with no further discretion by any computer system or algorithm, prior to their electronic submission to a DCM.


The CFTC believes that the proposed rules are needed to prevent persons from using Algorithmic Trading to violate the Commodity Exchange Act ("CEA") or CFTC regulations, including by disrupting the market. The proposed rules would require risk controls and other requirements in order to address the risks of Algorithmic Trading, including the potential for market disruptions arising from system malfunctions, other errors, or intentional disruptive conduct. Under the proposal, risk controls and other requirements must be adopted at three levels:

  • Market participants using algorithmic trading systems (AT persons in the proposed rule);
  • Clearing member FCMs with respect to their AT Person customers; and
  • DCMs executing AT person orders.

The proposed rules would apply whether or not a market participant engages in or facilitates high frequency trading; their requirements would apply to algorithmic trading irrespective of the speed of such trading. The proposal does not apply to trading on swap execution facilities.


Under current CFTC regulations, persons that engage in proprietary trading (i.e., not on behalf of customers) are not required to register unless they trade for their own account in or around a trading pit, ring, post, or other place provided by a DCM, and, in that case, they must register as a Floor Trader. The proposed rules would amend the definition of the term Floor Trader to include persons who trade commodity interests at a DCM for their own account through "Direct Electronic Access." Direct Electronic Access is defined as an arrangement where a person transmits an order electronically to a DCM, without the order first being routed through a clearing member FCM of a derivatives clearing organization to which the DCM submits transactions for clearing. The CFTC requests comment as to whether the Floor Trader definition should be expanded to all firms operating algorithmic trading systems in CFTC-regulated markets that are not otherwise required to register (not just through Direct Electronic Access).


The proposed rules contain requirements that apply to market participants that are "AT Persons." An AT Person is defined as:

  • Any person registered or required to be registered as an FCM, floor broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor, or introducing broker that engages in Algorithmic Trading, or
  • A Floor Trader that engages in Algorithmic Trading through Direct Electronic Access.

Risk Controls. AT persons would be required to implement risk controls on orders submitted through Algorithmic Trading, including pre-trade risk controls (e.g., maximum order message and execution frequency per unit time, order price and maximum order size parameters) and order cancellation systems that can disengage algorithmic trading, cancel selected or all resting orders, and prevent submission of new orders.

Development, Testing, and Monitoring. AT persons would be required to implement standards for the development, testing and monitoring of algorithmic trading systems, including complete separation of the environment used for system development from the one used for production, testing before implementation, real- time monitoring of such systems, and standards to ensure that systems comply with CFTC regulations, and must designate and provide training for algorithmic trading staff responsible for ensuring compliance.

Source Code Repository. AT persons would be required to establish and maintain a source code repository that includes the documenting of strategy and design of proprietary algorithmic trading software used and any changes implemented, including an audit trail that shows who made a change, when it was made, and its coding purpose. Repository records must be kept under the CFTC's recordkeeping regulation and made available for inspection upon request by the CFTC or the Department of Justice ("DOJ") (for any reason without a subpoena). This requirement has provoked controversy within the industry due to concerns about the CFTC/DOJ being able to protect sensitive proprietary information. Commissioner Giancarlo raised these concerns at the open meeting and in his concurring statement.

Compliance Reports. AT persons would be required to annually prepare and submit to DCMs compliance reports regarding their risk controls, as well as copies of written policies and procedures developed to comply with testing and other requirements. They would also be required to keep books and records regarding their Algorithmic Trading procedures for inspection by DCMs.

Notification Requirement/Use of Self-Trade Prevention Tools. Prior to an AT person's initial use of Algorithmic Trading to submit an order to a DCM, such AT person would be required to notify applicable clearing member FCMs and DCMs that the AT person will engage in Algorithmic Trading, and calibrate or otherwise implement DCM-provided self-trade prevention tools.


Risk Controls. The proposed rules would require that clearing member FCMs implement risk controls for Algorithmic Trading orders originating with AT persons, including pre-trade risk controls applicable to AT persons. Pre-trade risk controls would have to be set at the level of each AT person, or at a more granular level as each clearing member FCM may determine. Clearing member FCMs would have to implement DCM-provided risk controls for Direct Electronic Access orders. They would also be required to have policies and procedures reasonably designed to ensure that natural person monitors at the FCM are promptly alerted when pre-trade risk control parameters are breached.  

Compliance Reports. Clearing member FCMs would be required to annually prepare and submit to DCMs compliance reports that describe how they comply with maintenance of risk controls on their AT person customers. The report would have to be certified by the CEO or CCO that the report is accurate and complete to the best of his/her knowledge and reasonable belief. Clearing member FCMs would also be required to keep, and provide to a DCM upon request, books and records regarding their risk controls for Algorithmic Trading orders for inspection by DCMs.


Risk Controls. Under the proposed rules, DCMs would be required to implement risk controls on orders submitted through Algorithmic Trading (and parallel controls for manual orders), including maximum order message and execution frequency per unit time, order price and size parameters, and order cancellation systems.

Compliance Reports. DCMs would have to require risk control compliance reports from AT persons and their clearing member FCMs. DCMs would be required to periodically review compliance reports, identify outliers and provide instructions for remediation, as well as review, as necessary, books and records of AT persons and clearing member FCMs concerning Algorithmic Trading procedures.

Test Environments. DCMs would be required to provide test environments where AT persons can test algorithmic trading systems.

Self-Trade Prevention. DCMs would be required to establish self-trade prevention tools, and either apply such tools or provide them to all market participants (not just AT persons) and require their use. The rules would define "self-trading" as the matching of orders for accounts with common beneficial ownership or under common control. DCMs would be required to determine which accounts will be prohibited from trading with each other, or require market participants to identify such accounts. Exemptions would be provided for order matching for accounts with common beneficial ownership but initiated by independent decision makers, or for certain orders that comply with a DCM's cross-trade, minimum exposure requirements or similar rules. Prior approval from the DCM would need to be obtained in order for a market participant to rely on these exemptions.

Disclosure Regarding Electronic Trade Matching Systems. DCMs would be required to provide public disclosure regarding certain elements of their electronic trade matching systems that materially affect order execution, including the ability to cancel, modify, or limit display of orders; the ability to cancel or modify orders; and the transmission of market data and order or trade confirmations to market participants.

Market Maker and Incentive Programs. DCMs would be required to provide disclosures of market maker and incentive programs submitted to the CFTC as rule filings. Such disclosures would have to specify all of the products or services to which they apply, eligibility requirements, and payment benefits or incentives received (e.g., fee rebates), as well as non-financial benefits (e.g., enhanced trading priorities or preferential access to market data). Payments would be prohibited for trades between accounts under common beneficial ownership.


The proposal would require registered futures associations to adopt membership rules, as deemed appropriate by the registered futures association, relevant to algorithmic trading for each category of member. AT persons would be required to become members of a registered futures association (currently, the only registered futures association is the National Futures Association).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Julian E. Hammar
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.