Bloomberg's Dean on Proposed Regulation for Algo Trading(Audio)

the Dow currently hired by fifty two points. As a beast gain eight and as it rises ten Earlier, Fed Jellen reiterated FED to proceed cautiously and raising rates. The small cap six hundred is down two points and the US tenure yield at one point seven per cent. Seven out of ten s B sectors are higher, led by gains and energy, tellcom and Technology, Consumer discretionary, healthcare and materials declined, doubt transports fall thirteen points and as a

bio Texas Sinc. Forty eight and the VIX is a little changed down. Leaders included microsos Off, the Apple, and Nike, while McDonald's, Disney and Boeing led to the downside. A dual reports after the Bell Live from the first to Baking News task on Bill Maloney. Charlie all right, hey, thank you very much Bill Maloney, and to hear live breaking news over your Bloombird Time Squawk. Ask you you a w K on your terminal. I'm Charlie Llott. That's

a Bloombird business flash. You're listening to taking stock with pim Box and Kathleen Hayes on Bloombird Radio. Algoes algorithmic trading. This has become more and more controversial as many Wall Street professionals worry that high frequency trading firms are using these algos to speed up their trades but perhaps destabilize

the markets. In fact, now algorithmic traders in US derivatives markets may be subjected to heightened regulation, as the Commodity Futures Trading Commission ways a proposal that would set registration requirements, among other things. We're joining now by Nathan Dean, government analyst for Bloomberg Intelligence in Washington. So Nathan, first of all, what is an issue here. Let's start with what is going on in the derivatives trading that is being done

by algorithms and what is the extent of it. So this rule is a proposal from the CFTC, and this really stems from UH several flash crashes or in the derivative markets over the last couple of years and UH several occurrences in which algorithms have run amuck UH and the exchanges have had to essentially shut those algorithms off. So the CFTC proposed rule. UH. This rule does not

slow down high frequency trading. But really what it does is that it puts restrictions on algorithms in terms of pre trade post trade risk controls a lot of things that the exchanges already do. But there's there's two controversial elements here. One is source code provisions. UH. This rule would require algorithmic traders to hand over their source code to the CFTC, to the Justice Department upon request. Obviously they're not hal be about that. And the second thing

is registration requirements. A lot of these algorithmic traders, these are five ten person firms and they they just don't have the compliance and UH risk departments that can handle this proposal. Nathan, can you tell us about kill switches? What would they do? So it kill switches essentially like pulling the key out of your ignition. Uh. You know, it stops the algorithm. Uh. And a lot of the

hyperquincy traders already have this, The exchanges already have this. Uh. And so this would allow the exchange to go in and essentially just press a button and block the all go from its market. Uh. You know, this is one of the provisions that we think that the CEEFTC is

going to try and finalize this year. Uh. You know, this rule is a very large rule, and so just recently the chair decided that or at least announced that he was planning to split this rule off and kill switches we think is going to be part of the finalized rule this year. Well, kill switches source code? How does that play in? And you have to be a computer geek to understand how this all works. So the source code is, uh, you know, it's the brains of

the algo. You know, it's it's the computer programming. And a lot of the high frequency traders out there will say that the source code contains the prietary and the business strategy and everything that's crucial to their success. And what happens here is that under the proposal to see IFDC or the Justice department will notice that an algorithm runs a muck and they call the high frequency trader over and say you have to provide it without a subpoena.

You just have to provide it. And obviously from a cybersecurity perspective, from a privacy perspective, Uh, these small firms are not happy with this provision and so uh uh you know, if this world to be finalized, it wouldn't be surprising the sea and legal challenges come out of it. Nathan, What effect would this have, if any, on high frequency trading? So it's gonna make so it won't slow down the high frequency traders. And this is only in the derivatives market.

The equity high frequency traders are under your different program. Uh, it won't slow them down, but it will increase their compliance costs. Uh. The CFTC estimates that there's about four hundred and twenty hyperquency trading firms out there, uh, and only estimates thirty five million dollars for them to implement this. We think that figure is very low, that it's going to be much more costly, but it's gonna be a

regulatory headache. And like I said before, a lot of these firms are five, ten, fifteen people firms, and uh, they're gonna have to have a compliance person really dig through and to see how they can comply with this role.

Is this a way to slow something down, to perhaps put a curb on high frequency trading by adding these excess steps, adding more or I shouldn't sayccess but adding additional steps, adding more regulation, rather than facing head on this question of whether or not algorithmic trading is something that has gotten a lot of control or really is creating more volatility and destabilizing markets. You know, I think

it's the first step in the process. You know, the CFTC has said that the hyperquency trading isn't an issue, or at least that's what they've alluded to, So they don't want to slow it down, but they need to do something. Uh. And so this proposal was a broad, broad sweep here of trying to bring in many, many aspects of algorithmic training under regulations. And UH, I think what they're gonna face with is, UH, you know, they're going to have to start picking off what they expect

they can actually get done this year. And UH, at the end of the day, if I don't think a high food. See trading firm has to worry much that their their algorals are going to be slowed by this. Is there an issue having to do with market makers statistics? Yes,

that's so, that's one part of the proposal. And so this proposal would require market makers and it would require the exchanges UH to release more details about their market making and their incentive programs, you know, the compensation paid to market makers, benefits received, etcetera. And what the goal here is to increase transparency in those market making programs so they can ensure that there's no false liquid out there.

You know, there's some because some claims out there that you know, high frequency traders are essentially just making whatever they need to make as per their compensation program and then the liquidity disappears. UH. You know, this portion of the rule was something that we think is going to get pushed off in the two thousand seventeen. Thank you very much for joining us and giving us that insight.

Nathan Dean is government analysts for Bloomberg Intelligence. He's based in Washington, d C. Home of course to Bloomberg FM and one oh five point seven FM h D two. You're listening to taking Stock I'm pim Fox, my co host Kathleen Hayes, and this is Bloomberg Radio. Brexit It's not only important for the UK, it's important for all of Europe. If the UK decides to go or stay, what does it mean for Europe's outlook. We're gonna go in depth now on Bloomberg Radio.