Electronic Trading and Order Routing
FIA and FIA PTG Comment on CFTC Market Surveillance Program (Aug. 4, 2014)
Responding to a request from the Technology Advisory Committee of the Commodity Futures Trading Commission, FIA and FIA Principal Traders Group submitted a joint letter on Aug. 4 suggesting that the CFTC should consider five principles as it examines ways to reform its market surveillance and oversight in a “technologically adept way.” The five principles are:
FIA Responds to CFTC Concept Release on Risk Controls and System Safeguards for Automated Trading (Dec. 11, 2013)
Washington, D.C. - Dec. 11, 2013 - The Futures Industry Association today submitted an extensive response to the Commodity Futures Trading Commission’s Concept Release on Risk Controls and System Safeguards for Automated Trading. The response describes the many risk controls and system safeguards that are currently in use in the futures industry, and outlines several principles for the CFTC to consider as it examines ways to further strengthen those controls and safeguards. The response also contains detailed responses to specific questions posed by the CFTC in its concept release, and draws on the collective expertise of nearly 100 individuals from members of FIA and the FIA Principal Traders Group.
FIA Special Report: CFTC Issues Concept Release on Automated Trading (Sept. 9, 2013)
The Commodity Futures Trading Commission on Sept. 9 issued a concept release on risk controls and system safeguards for automated trading in the U.S. derivatives markets. The CFTC said the concept release will serve as a platform for cataloguing existing industry practices, determining their efficiency and implementation to date, and evaluating the need for additional measures. Comments are due 90 days from publication in the Federal Register.
FIA Releases Drop Copy Recommendations (Sept. 6, 2013)
- FIA Provides Drop Copy Paper to U.S. Regulators
Washington, D.C.—Sept. 6, 2013—The Futures Industry Association today released a set of recommendations for increasing the usefulness of drop copy systems in exchange-traded markets. Drop copy systems, which provide a way to monitor trading activity in near real-time, are currently offered by many trading venues and have become a critical component in the risk management processes of brokers, trading firms and end-users. The purpose of the FIA recommendations is to promote the wider adoption and increased standardization of drop copy functionality. The FIA paper also recommends extending drop copy functionality to all types of trading venues and incorporating additional features to meet regulatory reporting requirements and other needs.
FIA Releases Futures Volatility Study (Aug. 27, 2013)
The Futures Industry Association released on Aug. 27 an empirical study on changes in the level of volatility in the futures markets. The study was conducted by Robert Whaley and Nicholas Bollen of Vanderbilt University and focused on 15 futures contracts listed on four leading futures exchanges—CME Group, Eurex, IntercontinentalExchange and NYSE Liffe. The study found that while prices in these 15 markets moved through cycles of high and low volatility as well as numerous price spikes attributable to macro-economic events, volatility attributable to structural factors did not change in most of these contracts. In other words, innovations such as algorithmic and high-frequency trading that have affected how trading is conducted do not appear to have affected the volatility of prices.
“The pace of innovation in the futures markets has been nothing short of remarkable,” said Whaley. “Where 10 or 15 years ago, most trading took place in the pits, today the lion’s share is executed electronically at speeds that would not have been imagined in days of old. Yet our research has shown that intraday volatility has not been affected by these changes. Trading is certainly faster than it used to be, but there is no evidence this has caused volatility to increase.”
FIA Webinar on CFTC’s Disruptive Trading Guidance (May 23, 2013)
FIA hosted an online discussion of the “interpretive guidance” issued by the Commodity Futures Trading Commission regarding its anti-disruptive trading practices authority. This guidance provides important insights on how the CFTC’s enforcement division will apply this authority to listed derivatives markets as well as swap execution facilities and what trading practices it will consider to be disruptive.
FIA PTG and FIA EPTA Issue Recommendations for Software Development and Change Management (March 14, 2012)
Washington, D.C. and Boca Raton, Fla.—March 14, 2012—The FIA Principal Traders Group and the FIA European Principal Traders Association today issued a set of recommendations to assist trading firms in establishing internal procedures, processes and controls for the development, testing and deployment of trading software. FIA PTG and FIA EPTA member firms believe that in order for a firm to meet its regulatory obligations and manage and monitor risks, its trading software and technical infrastructure need to work as intended. These best practices were developed by representatives from a dozen FIA PTG and FIA EPTA member firms and are the latest in a series of best practices recommendations developed by FIA members for trading firms, brokers and exchanges.
"These recommendations draw on the extensive experience that our member firms have in the field of electronic trading," said Don Wilson, chairman of the FIA PTG. "Through these recommendations, we are providing a framework that all principal traders can use to mitigate risk across the entire software lifecycle. We also hope that this paper will provide regulators with a better understanding of the types of software development and change management processes and controls that are in place at our member firms."
"Managing the development, testing and deployment of trading applications and technology infrastructure is a complex and dynamic process," said Remco Lenterman, chairman of the FIA EPTA. "Proper application of these best practices will reinforce the role of our member firms as responsible market participants. We are committed to business practices that are consistent with relevant regulatory obligations and risk management requirements."
FIA Issues Order Handling Recommendations for Executing Brokers (March 14, 2012)
Washington, D.C. and Boca Raton, Fla.—March 14, 2012—The Futures Industry Association today issued order handling risk management recommendations for executing brokers. The report documents both current practice and emerging technologies in order to respond to regulatory concerns about algorithmic trading. The recommendations were developed by experts from executing firms and represent the latest in a series of recommendations developed by FIA members for trading firms, brokers and exchanges.
"The executing broker has an important role to play in monitoring and controlling market access," said FIA President John Damgard. "The recommendations are designed to clearly differentiate the role of the execution-only broker and set an industry standard for handling orders generated by automated execution tools."
FIA Comments on Regulatory Responses to the May 2010 Flash Crash (July 28, 2011)
The FIA on July 28 submitted a comment letter to the Commodity Futures Trading Commission and the Securities and Exchange Commission expressing its views on certain regulatory initiatives recommended by a joint advisory committee established by the two agencies in response to the market events of May 2010, also known as the “flash crash.” In the letter, the FIA cautioned that using trading halts to compensate for temporary reductions in liquidity and recommended instead that regulators use “proven market mechanisms” that are less disruptive. These include the CME’s “stop spike” functionality and the Eurex “volatility interruption functionality as well as “price banding” mechanisms used at CME and NYSE Liffe. The FIA letter also contained several recommendations regarding pre-trade risk controls and emphasized that the responsibility for risk mitigation should be shared among trading firms, executing brokers, clearing firms and exchanges. With respect to the regulation of market-making functions, the FIA recommended avoiding “overly prescriptive rules” and allowing each exchange to develop their own incentive structures to promote liquidity.
FIA Survey of Risk Controls at Futures Exchanges (Jan. 25, 2011)
In the fall of 2010 FIA conducted a global survey of futures exchanges to determine what controls are in place to manage the risks in providing trading firms with direct market access. Twenty-six exchanges responded to the survey with detailed information about the types of risk controls that they have in place or are planning to implement in the near future. Leslie Sutphen, an expert on electronic trading, summarized the survey findings in an article published in Futures Industry and gave a presentation on the findings in a webinar.
FIA Offers Recommendations on CFTC’s Disruptive Practices Rulemaking (Dec. 23, 2010)
The FIA submitted a letter to the Commodity Futures Trading Commission on Dec. 23 responding to the agency’s request for comments on the disruptive practices authority contained in the Dodd-Frank Act. The FIA warned that this section of the Dodd-Frank Act is “impermissibly vague and unenforceable” and could discourage market participants from engaging in many legitimate trading practices.
The FIA recommended that the CFTC clearly identify the specific characteristics, problems or concerns that would be subject to additional enforcement authority. The FIA also recommended that the CFTC should clarify that manipulative intent is required to breach the prohibitions on disruptive trading, and suggested that any rulemaking should “reinforce” the role of exchanges in overseeing trading activities. Other recommendations in the letter included the suggestion that executing brokers and market makers should receive protections from liability if they implement policies and procedures “reasonably designed to prevent market disruptions.”
The FIA also defended the use of automated and algorithmic trading systems and noted that exchanges already have a variety of mechanisms to address disruptive trading, such as rules on price banding and stop logic. The FIA therefore urged the agency to avoid stifling this type of technological innovation in the automation of trading and clearly define the activities that are prohibited. “A regulatory environment where any price correction, cancelled trade or market halt could lead to a federal enforcement action as a disruptive trading practice would deter trading by firms and their customers,” the letter said.
FIA Issues DMA Risk Recommendations (April 27, 2010)
The FIA has issued a report that recommends a number of principles for managing the risks in direct access to exchanges. This type of arrangement has become increasingly common among derivatives exchanges in many parts of the world. The report recommends that exchanges establish certain risk controls and apply those risk controls across all trading firms. This will ensure a level playing field in terms of the latency of trading and avoid creating competitive pressures among clearing firms and trading firms to reduce the latency of trading by applying fewer risk controls. The report was drafted by a working group consisting of representatives from derivatives exchanges, clearing firms and trading firms. The report is the latest in a series of FIA initiatives that promote best practices in the listed derivatives markets worldwide.
FIA comments in response to IOSCO's report on Direct Electronic Access
The Futures Industry Association on May 26, 2009 submitted comments to the International Organization of Securities Commissions regarding its consultation paper on direct electronic access. The comments covered a number of issues, including minimum customer standards, the importance of legally binding agreements, the delegation of access privileges, customer identification, pre- and post-trade information, and risk systems and controls. The FIA highlighted some of the findings in its September 2007 joint study with the Futures and Options Association on risk controls, and emphasized that futures commission merchants rather than regulators are best situated to determine appropriate risk management for their business.
On Dec. 3, 2007, the Futures Industry Association published a six-page “profile” on the practices used by exchanges and futures commission merchants to monitor and manage the risks of clients that access exchanges directly. The paper summarized the practices in place at six exchanges: the Chicago Board of Trade, the Chicago Mercantile Exchange, Eurex, IntercontinentalExchange, Liffe and the New York Mercantile Exchange.
Survey of DMA Risk Management Practices
For additional information about this type of direct market access and the associated risk management issues, see the following articles in Futures Industry:
Pure Direct Market Access on the Rise
By Stephane DiTullio
Fast and Furious: Risk Management in a DMA Environment
By Nina Mehta
Clearing the Deck: CME Introduces “Drop Copy” Functionality
By Sarah Rudolph
FIA Publishes Disclosure Statement for Electronic Trading and Order Routing Systems (March 1999)
In the late 1990s, the National Futures Association formed a joint committee with industry members to develop a one-page uniform risk disclosure statement that could be used by all exchanges for electronic trading and order routing in lieu of each exchange’s existing disclosure statements. The uniform disclosure statement, which was finalized in March 1999, was intended to simplify the process by which futures commission merchants meet CFTC requirements to provide disclosures to customers about the risks of placing orders for execution through electronic systems.