On Aug. 24, 2020, Better Markets filed a comment letter on the CFTC’s new proposed principles and acceptable practices relating to electronic trading risks. The proposed regulations appear to be little more than a pretext for withdrawing previously proposed automated trading regulations.
If implemented, the CFTC’s new minimal rules would fail to:
- Detect market-wide risks
- Prevent “flash crashes”
- Protect the U.S. financial system from the risks of automated trading
During the past 20 years, electronic trading has become commonplace, and the risks associated with it have increased dramatically. While individual exchanges have implemented rules and procedures to manage those risks, disasters like the 2010 flash crash or the recent chaos in the oil futures market have demonstrated that these measures are insufficient. The CFTC has a responsibility to foster stability in derivatives markets by stepping in and creating sensible safeguards to prevent market breakdowns.
Yet, the CFTC’s most recent proposal indicates that the commission is happy to leave the status quo in place. The CFTC, for example, reveals an unsupported view that “[exchanges] are addressing most, if not all, of the electronic trading risks currently presented to their trading platforms” and therefore emphasizes what should be a puzzling expectation that the proposed “risk principles may not necessitate the adoption of additional measures by [exchanges],” as we explain in our comment letter.
In other words, the commission is proposing to outsource the task of controlling electronic trading risk to privately run exchanges. These exchanges face serious conflicts of interest when designing risk management procedures. First and foremost, these privately run exchanges have a duty to maximize the profit they generate for their shareholders, which often means attracting as much trading volume as possible. Any exchange that implements robust risk control measures and trading restrictions risks losing business to its competitors.
That is why the CFTC must act as a coordinating agent, forcing all exchanges to simultaneously adopt appropriate risk management measures. See our full comment letter here, or by clicking the button below.