United States: CFTC Commissioner Quintenz Promises New Approach To Regulating Algorithmic Trading

CFTC Commissioner Brian Quintenz explained CFTC efforts to facilitate FinTech development and promised a "reset" of the CFTC's approach to regulating algorithmic trading. In remarks before the Symphony Innovate 2017 Conference in New York, Mr. Quintenz said that new technology presents new risks, so regulatory leadership must prioritize engagement with the FinTech community to encourage technological advancement and ensure that regulatory efforts keep pace with innovations.

Mr. Quintez highlighted LabCFTC as an initiative that makes the CFTC "more accessible" to FinTech companies. He stated that the initiative informs the CFTC's understanding of how emerging technologies interact with existing rules and helps guide future policy development. LabCFTC consists of two major elements: (i) GuidePoint, which allows FinTech companies to consult with the CFTC regarding the regulatory implications of particular technological innovations, and (ii) CFTC 2.0, in which the CFTC seeks to adopt new technologies to bolster its regulatory efforts (see previous coverage). He noted that a legal barrier prevents the CFTC from "demo-ing" technology, but expressed hope that legislative action – spearheaded by Congressman Patrick McHenry (R-NC) – can help to solve this issue. Finally, Mr. Quintenz said that LabCFTC also supports CFTC efforts to coordinate with international regulators on issues related to FinTech.

Mr. Quintenz explained that the Technological Advisory Committee exists to provide guidance on important technological advances and corresponding regulatory challenges. He highlighted "Autonomous, Algorithmic Trading" as an area that presents significant issues. For example, the difficulties surrounding the determination of intent when evaluating algorithmic trading present a hurdle for regulatory oversight. Mr. Quintenz characterized Regulation AT as a "missed opportunity." He asserted that poorly tailored terminology led to significant flaws, cast a net that was too wide, and ignored the nuances of classifying trading methods. He argued that the CFTC re-proposal of Regulation AT was inadequate, and said that the CFTC needs to reset its stance on the issue. Mr. Quintenz also said that the CFTC "source code repository" plan, which would mandate that regulated entities provide the CFTC with proprietary code, is "dead."

Mr. Quintenz also spoke about bitcoin and blockchain, explaining that the CFTC considers bitcoin a commodity. As a result, bitcoin trading platforms will be required to register with the CFTC unless "actual delivery" occurs within 28 days. (Determination of actual delivery, Mr. Quintenz said, presents its own set of challenges). Mr. Quintenz also reflected on cybersecurity challenges faced by regulators and FinTech companies, and said that he is confident in the CFTC's ability to remain effective in regulating capital markets in light of continued technological advancement.

Commentary / Bob Zwirb

In his inaugural speech, Commissioner Quintenz stakes out a position on Reg AT that arguably goes beyond that of the Chairman in questioning the agency's regulatory posture on this issue. While the Chairman's criticisms of the proposed rule focus on a number of discrete issues including the prescriptive nature of the proposed rule, due process concerns, and inadequate source code protections, (see Statement of Dissent by Commissioner J. Christopher Giancarlo Regarding Supplemental Notice of Proposed Rulemaking on Regulation Automated Trading (Nov. 4, 2016)), Mr. Quintenz's critique fundamentally challenges the notion of attempting "to regulate and dictate all algoritimic trading activity."

Moreover, while Chair Giancarlo recently signaled that the agency intends to go forward with Reg AT in "some form" to "better keep pace with the dramatic expansion of algorithmic trading in our markets," (see Todd Ehret, CFTC's Giancarlo signals priorities, focus on swaps, algos, position reporting, Reuters (Sep. 28, 2017)), Mr. Quintenz appears to be somewhat more reluctant with his call for the CFTC to first have a "serious discussion" about the "finite circumstances" in which automated trading "can create large-scale market disruptions" before proceeding with "additional regulatory solutions" to address "those concrete and specific instances." His speech also stands in marked contrast to that of recently departed Commissioner Sharon Bowen, who in her farewell address, expressly called for "robust oversight of algorithmic firms," including their registration "in the interests of harmonization and avoiding regulatory arbitrage."

One other aspect of Commissioner Quintenz's speech is also worth noting, i.e., his dismissal of the proposed rule as another "registration scheme." This is important because all too often the regulatory response for dealing with new developments in the market is to seek registration of those engaged in such activity before attempting to understand what they are doing and before considering whether registration is appropriate. Think program traders after the 1987 market crash or stock market newsletter writers in SEC v. Lowe more than 30 years ago.

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