In recent years, a number of high-profile system events associated with automated trading have raised public, Commission and industry awareness. For example, on May 6, 2010, major equity indices in both the futures and securities markets lost more than 5% of their value in a matter of minutes when an automated order led to extreme downward price movement and a liquidity crisis in the Chicago Mercantile Exchange's ("CME") E-mini futures contract. /1/ In August 2012, a trading firm in the securities markets--Knight Capital Group--submitted a significant number of errant proprietary orders to the New York Stock Exchange ("NYSE"), causing price swings in nearly 150 securities and costing the firm approximately $440 million in the process. /2/ Most recently, in August 2013, trading on the Nasdaq stock market was disrupted for three hours due to malfunctions in quote dissemination systems and potential connectivity issues between it and another trading platform's systems. These and other recent events in automated trading environments are discussed in greater detail in section II.C., below.
FOOTNOTE 1 See "Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues," September 30, 2010 [hereinafter, the "CFTC and SEC Joint Report on the Market Events of May 6, 2010"], available at http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/staff-findings050610.pdf. END FOOTNOTE
FOOTNOTE 2 See Jenny Strasburg & Jacob Bunge, "Loss Swamps Trading Firm," Wall St. J. (Aug. 2, 2012), available at http://online.wsj.com/article/SB10000872396390443866404577564772083961412.html.
On October 2, 2012, the Securities and Exchange Commission ("SEC") conducted a roundtable entitled "Technology and Trading: Promoting Stability in Today's Markets" ("SEC Roundtable"). See SEC, Notice of Roundtable Discussion: Technology and Trading Roundtable, 77 FR 56697 (Sept. 13, 2012). A transcript of the SEC Roundtable [hereinafter, the "SEC Roundtable Transcript"] is available at http://www.sec.gov/news/otherwebcasts/2012/ttr100212.shtml. At the SEC Roundtable, then-SEC Chairman Schapiro raised the Knight Capital incident and noted that "[e]vents like these demonstrate the core infrastructure and technology issues that can be problematic in any market structure." See SEC Roundtable Transcript at 11. END FOOTNOTE
The Commission has taken steps to address the transition to automated trading and require appropriate risk controls for designated contract markets ("DCMs"), swap execution facilities ("SEFs"), futures commission merchants ("FCMs"), swap dealers ("SDs"), major swap participants ("MSPs") and others. In April 2012, it adopted final rules requiring FCMs, SDs and MSPs that are clearing members to establish risk-based limits based on position size, order size, margin requirements, or similar factors, and requiring those entities to use automated means to screen orders for compliance with the risk limits when such orders are subject to automated execution. Further, in June 2012, the Commission adopted final rules with respect to DCMs, including requirements that DCMs establish and maintain risk control mechanisms to prevent and reduce the potential for price distortions and market disruptions. Relevant controls cited in the rule include trading pauses and halts under conditions prescribed by the DCM. The Commission adopted similar requirements in its final rules for SEFs in 2013. Finally, the DCM final rules also require risk control requirements for exchanges that provide direct market access ("DMA") to clients.