OREANDA-NEWS. The Commodity Futures Trading Commission (CFTC) is moving to step up its supervision over the growing use of automated trading algorithms with the hope it can prevent faulty computer code from disrupting futures markets.

The Commodity Futures Trading Commission (CFTC) is moving to step up its supervision over the growing use of automated trading algorithms with the hope it can prevent faulty computer code from disrupting futures markets.

Automated trading by computer programs now represents up to 70pc of the trading volume in some US futures markets. Although the practice has added liquidity and competition to markets, its speed and prevalence has prompted regulators to look for ways to minimize its risks and set tighter standards for industry.

The CFTC today is poised to propose requiring companies that use automated trading to create and follow standards for developing, testing and monitoring trading algorithms. Those algorithms under the CFTC's rules would have to include new risk controls, such as setting a maximum number of trades per second and employing a system for canceling orders.

Companies also would have to maintain a record of the computer source code for trading algorithms under the rules. The CFTC would be able to review this source code at any time, giving the agency the ability to understand the programming behind an algorithm if a market problem develops.

The regulations would minimize the risk of problems caused by malfunctioning algorithms or errant data, CFTC chairman Timothy Massad said.

"No set of rules can prevent all problems, but that does not discharge us from our duty to take reasonable measures to minimize those risks," he said.

The CFTC expects up to 100 additional companies may have to register with the agency as floor traders under the proposed rules. That would mean those companies would have to meet new recordkeeping and compliance rules. The companies affected provide about a third of the contract trading volume in the markets the CFTC oversees.

The rules are likely to be controversial, even though they are based on practices the industry has developed to reduce the risk of automated trades. CFTC member Christopher Giancarlo has raised concerns about the agency's interest in reviewing traders' computer source code. But his biggest issue revolves around cost.

"I struggle to figure out if it will benefit the safety and soundness of America's futures markets enough to outweigh its additional costs and burdens. Its purpose must not be to allow a federal regulator to say that it has ‘done something' about computerized trading in response to media headlines, best-selling books or political campaign agendas," Giancarlo said.