Finally, the Commission requests comment regarding a series of issues central to its improved understanding and surveillance of trading in automated environments. For example, the Commission requests comments regarding any surveillance tools that it should deploy specifically for the surveillance of automated trading and areas for academic research to improve its understanding of ATSs' impact on market microstructure. Section IV lists all questions raised in this Concept Release.
The Commission's Concept Release reflects fundamental statutory objectives under the CEA. Such objectives include fostering a system of effective self-regulation, deterring and preventing disruptions to market integrity, protecting market participants and "promot[ing] responsible innovation and fair competition among boards of trade, other markets and market participants." /6/ Notably, the Commission must ensure that U.S. derivatives markets continue to serve as effective centers of price discovery and risk mitigation, regardless of the technologies employed by trading platforms, market participants, and others. The Commission must further ensure that its regulatory framework and industry practices are fully adapted to the automated technologies of modern derivatives markets.
FOOTNOTE 6 See CEA section 3(b); 7 U.S.C. 5(b). END FOOTNOTE
A. Characteristics of Automated Trading Environments
1. Automated Order Generation and Execution
Automated trading environments have developed in tandem with automated systems for both the generation and execution of orders. Systems related to the generation of orders ("automated trading systems" or "ATSs") /7/ operate at the beginning of the order and trade lifecycle; they reflect a set of rules or instructions (an algorithm) and related computer systems used to automate the execution of a trading strategy. /8/ ATSs may operate as automated execution programs designed to minimize the price impact of large orders; achieve a benchmarked price (e.g., volume-weighted average price and time-weighted average price algorithms); or otherwise execute instructions traditionally provided by a human agent. /9/ They may be employed by a range of market participants, with varying degrees of sophistication, for both proprietary and customer trading. For example, buy-side firms (such as mutual funds and pension funds) may use automated systems and execution algorithms to "shred" one or more large orders (called "parent order") into a series of smaller trades ("child orders") to be executed over time. Such systems can include additional algorithms to micro-manage the size, frequency and timing (often randomized) of child orders. In addition to automated execution, ATSs may also operate market-making programs; opportunistic, cross-asset and cross-market arbitrage programs; and a number of other strategies.
FOOTNOTE 7 While the Commission has no regulatory definition of ATS, the term is generally understood to mean a computer-driven system that automates the generation and routing of orders to one or more markets. Other elements of an ATS may also include systems for analyzing market data as a precursor to order generation, managing orders for conformance with establish risk tolerances, receiving confirmations of orders placed and trades executed, etc. Section III.E.4. of this Concept Release seeks public input regarding whether the Commission should formally define ATS and if so, how ATS should be defined. END FOOTNOTE
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