A US proposal to allow the government to seize trading firms’ secret computer code is “dead,” a senior regulator has declared, a pronouncement that will delight the high-frequency trading industry.
Brian Quintenz, a new member of the Commodity Futures Trading Commission, said in his first public remarks that the agency must start from scratch on its embattled automated trading rule, meant to reduce the risk of market chaos from software going haywire.
The most controversial aspect of that regulation dealt with “source code”, the closely guarded programs that contain a trading firm’s proprietary strategies. The CFTC had sought access to a company’s source code for performing surveillance.
“The prior administration’s massively overreaching and highly concerning ‘source code repository’ proposal is D-E-A-D,” Mr Quintenz told a conference in New York on Wednesday, spelling out the letters.
The CFTC oversees more than $200tn in futures and swap derivatives markets. The majority of the volume of US futures markets is now generated by automated trading systems.
Mr Quintenz, a Republican, joined the CFTC in August. He previously worked as a congressional aide and managed an investment fund, Saeculum Capital Management. He is now one of three leaders of the commission after the departure last week of Sharon Bowen, a Democrat.
The CFTC first proposed an automated trading rule nearly two years ago when it was chaired by Timothy Massad, a Democrat. It would have required traders to preserve their source code in repositories that would be open to government inspection without a subpoena.
Financial industry groups pushed back, arguing it put their intellectual property at risk of disclosure. Their concerns have been underscored by news that criminals hacked into the Securities and Exchange Commission, a regulatory counterpart of the CFTC.
The agency amended the proposal last year to require the commission to issue a subpoena or a “special call”, a kind of government order for documents, before it could obtain source code.
Mr Quintenz’s antipathy towards the source code provision is shared by CFTC chairman Chris Giancarlo, a Republican nominated by President Donald Trump. “Commissioner Quintenz’s remarks on a source code repository shouldn’t surprise anyone. It’s an accurate commentary on the political reality of the issue,” a spokeswoman for the chairman said.
In an interview, Mr Quintenz said the source code proposal “creates an environment where firms that have spent an enormous amount of resources, time and money on an immensely proprietary technology or idea can lose the ability to protect it. The CFTC still can gain access . . . by working with firms and reviewing it and understanding it in a controlled environment. We’ve done that in the past. We can also use our subpoena power if we need to.”
In his prepared remarks, Mr Quintenz broadly criticised the automated trading proposal, saying it showed a “top-level disregard for the enormity of the trading method spectrum”.
“I don’t believe the right answer is to regulate and dictate all algorithmic trading activity. To me, the right answer is to understand and address automated trading risk. The agency needs to reset its posture on this issue,” he said.
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