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By Richard Hill
Nov. 2 — The CFTC is considering backing off from its proposal to give its staff nearly unfettered access to the proprietary computer software that drives high-speed trading, a source with knowledge of the matter said.
The agency currently must obtain a subpoena to access the codes. Under its 2015 proposal to regulate automated trading, staff, with some limits, could request the codes from a firm for inspection anytime.
One possible change to the proposal the commission may consider when it meets Nov. 4 would limit who has the authority to request the codes, according to the source, who declined to be identified.
This procedure, known as a “special call,” is already used by the agency to obtain trader data. The director of the Division of Market Oversight has the authority to issue a special call and the decision isn’t subject to a commission vote, a former CFTC official said.
The commission also may tweak proposed registration requirements to bring fewer firms under commission oversight, the source told Bloomberg BNA Nov. 2. Under the proposal, firms with direct electronic access to an exchange would be required to register. The commission is considering adding an additional qualification, the source said. The person didn’t provide any details but said the qualification would be notable.
In a third possible amendment to the proposal, the commission is considering reducing pre-trade risk controls from three tiers of controls to two—one at the exchange level, and another at either the trader or futures broker level. Chairman Timothy Massad signaled the change at an industry gathering in October.
All three aspects of the 2015 proposal have seen pushback from the high-speed trading industry, which uses complex algorithms to execute thousands of trades per second.
The source code provision has encountered particularly intense opposition. Trading firms are concerned that the codes would be vulnerable to theft and hacking if the CFTC is allowed to collect them without a subpoena. Narrowing the parameters to a special call is unlikely to satisfy the industry, which says the subpoena process adds the most protection.
Subpoenas can be challenged in court, with the result that their scope is often limited, Michael Ryan, executive vice president and general counsel for Trading Technologies International Inc., told Bloomberg BNA. The court might limit the amount of code that has to be turned over, or limit the number of staff with access, he said. TTI provides software that enables traders to build custom trading algorithms.
Former CFTC Commissioner Bart Chilton said the best system is to require a subpoena and then have staff inspect the code at the firm, so it never leaves the trader’s premises. “I’m not saying the government shouldn’t look at these things. But it’s got to be a really high hurdle, and it’s got to be under a protected system,” he said in a phone interview.
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