Throughout section III below, the Commission seeks public comment on the benefits of standardizing various risk controls and system safeguards, including through the uniform application of regulatory standards to help ensure an integrated risk management infrastructure in regulated derivatives markets. The Commission draws commenters' particular attention to the joint regulatory and industry response to the Flash Crash summarized above and seeks public input regarding the need for similar joint efforts with respect to the pre-trade risk controls, post-trade reports, and system safeguards contemplated in this Concept Release.
4. Manual Risk Controls and System Safeguards in Automated Trading Environments
Orders in automated trading environments may be initiated by ATSs and algorithms. Multiple other automated systems perform other processing, communicating, and other functions. The speed of such automated processes has necessarily shifted risk management functions to parallel automated risk management systems acting with equal speed.
Within this context, manual risk controls, and particularly systems safeguards, remain crucial to orderly markets. In many cases, manual risk controls have shifted "upstream" to system design and "downstream" to system management. In automated trading, humans design and test ATSs, establish decision criteria, manage implementation, and intervene when technology systems fail. ATS designers must identify the range of market conditions that an ATS could reasonably face, and determine the range of permissible responses by the ATS to each condition. Designers must also consider the array of information that ATS operators will need to effectively monitor their ATSs and the markets in which their ATSs operate. ATS operators, in turn, must be prepared to intervene when market conditions are outside of an ATS's design parameters, when an ATS's trading strategy must be modified, or when an ATS appears to be malfunctioning and must be shut down. Rapid decisions must be made while simultaneously digesting large quantities of information regarding multiple, fast-moving markets. Accordingly, this Concept Release contemplates a number of risk controls and system safeguards that emphasize the role and interaction of manual processes with automated trading environments, particularly ATSs.
B. The Commission's Regulatory Response to Date
The Commission has responded to the development of automated trading environments through a number of regulatory measures that address risk controls within both new and existing categories of registrants, including DCMs, SEFs, FCMs, SDs, MSPs and others. In
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