FOOTNOTE 73 The Commission notes that some existing regulations address pre-trade risk controls. See supra section II.B. END FOOTNOTE
Finally, the Commission notes the importance of risk controls designed to protect the financial integrity of DCOs, and to address risks posed by market participants utilizing DMA. Throughout the range of pre-trade risk controls discussed below, and other measures discussed later in this Concept Release, the Commission specifically solicits public comment regarding the following questions:
6. Are there distinct pre-trade risk controls, including measures not listed below, or measures in addition to those already adopted by the Commission, that would be particularly helpful in protecting the financial integrity of a DCO?
7. Are there distinct pre-trade risk controls, including measures not listed below, or measures in addition to those already adopted by the Commission, that should apply specifically in the case of DMA?
The following sections describe the pre-trade risk controls inquired about in this Concept Release, and present a series of questions to assist the Commission in determining the effectiveness, adoption rate, and need for any additional action with respect to these pre-trade risk controls or others that commenters may think advisable.
1. Message and Execution Throttles
The Commission seeks public comment regarding the potential benefits and existing use of maximum message rate and execution rate throttles ("execution throttles"). The Commission also seeks public comments regarding the types of execution throttles that would be most effective at alerting market participants to potential algorithm malfunctions and limiting the extent of market disruption when there is a malfunction. /74/
FOOTNOTE 74 The Commission understands that some trading firms and several exchanges already have limits on the number of orders that can be sent to a trading venue during a specified period of time.
Execution throttles prevent an algorithm from exceeding its expected message rate or rate of execution, and when tripped, can alert monitors at both the exchange and the trading firm. Such alerts can facilitate rapid detection of malfunctioning algorithms. Depending on the nature of the malfunction, execution throttles may also reduce the damage and monetary losses caused by the disruptive algorithm during the time when it is being investigated. The Commission understands that trading firms /75/ and exchanges /76/ employ individual variants of throttles to limit the number of orders that can be transmitted to or processed by an exchange. The Commission requests public comment regarding the extent to which market participants that already utilize execution throttles apply them in a static manner (i.e., a fixed threshold, beyond which notifications are generated), or dynamically (i.e., dependent on the time of day or the previous activity of the algorithm). /77/ The Commission also requests public comments regarding the extent to which throttles are applied by trading firms on a per-algorithm basis, calibrated to take into account the expected message and execution rates of each algorithm for a given time period.
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