The electronic trading industry is accustomed to pushing past challenges, as it did when it drove down the latency achieved during routine trades to increasingly microscopic levels. Today, latency of a few microseconds or less isn’t exceptional, it’s expected.
These days, though, industry leaders are spending just as much time thinking about how to address complex regulations as they are strategizing on how to push the limits of the speed of light.
Major regulatory changes are looming in the U.S. and overseas to increase transparency and reduce any undue influence by the industry on financial markets. This is putting intense pressure on companies in an environment of constant change and increasing global competition.
To survive, electronic trading firms must adapt. And there is a way for companies to architect their IT to find the agility needed to continue to deliver low latency, maximize collaboration, gain new data insight – all while staying ahead of evolving regulatory requirements.
Here’s is a look at some of the major regulations ahead, and how an interconnection-first strategy can help firms adjust when regulatory pressures hit hard.
Rules for a digital age – Regulation AT
The Regulation Automated Trading rules, or Regulation AT, were proposed by the U.S. Commodity Futures Trading Commission and aim to bring regulatory oversight into an age of automated trading, with all its new capability and risks.
“About 70 percent of markets are automated,” said CFTC Chairman Tim Massad, explaining the rationale for the rules. “The question is, ‘Do we have the regulatory framework to really monitor that and understand it and make sure that these markets are operating with integrity?’”
Among the key proposed changes:
- A new, more expansive, definition of an “AT (automatic trading) Person,” subject to testing, risk controls and registration requirements.
- Mandatory testing environments and algorithm source code repositories for all automated trading systems.
The expanded definition of an AT Person would require thousands of traders to register with the CFTC, which some say shows the rule is too broad and intent on sweeping too many people into a regulatory regime. Critics also worry about the cyber-safety of the proposed “source code repositories,” which would hold their most valuable intellectual property.
The rules are currently in an extended comment period.
Coming soon to Europe – MiFID II
The Markets in Financial Instruments Directive (MiFID) II, set to take effect next January, is an update to EU legislation that regulates investment services and activities. The revision is partly a response to the rise of high-frequency and algorithmic trading, which regulators say can cause rapid and significant market distortion.
Among its provisions:
- Algorithmic trading companies must keep regulators apprised of various practices, including risk controls and steps to that ensure its trading systems have sufficient capacity and resilience.
- Trading venues must ensure algorithmic trading can’t contribute to disorderly trading. They could, for instance, create systems that slow down order flow.
- High-frequency algorithmic trading investment firms must store time-sequenced records of their algorithmic systems and trading algorithms for five years.
Some object that keeping regulators up-to-date on practices will prove onerous and costly, as it requires substantial expertise. Others worry EU companies will disadvantage companies from regions with rules that aren’t as strict or complicated to implement.
An advantage where every advantage counts
All regulation brings uncertainty, but an Interconnection Oriented Architecture™ (IOA™) strategy can help firms better manage what’s ahead by putting interconnection first.
An IOA framework does away with the traditional IT architectures built around a centralized corporate data center and presents a more agile, distributed approach. It prescribes direct and secure interconnection and deployment of IT infrastructures at the digital edge, where commerce, population centers and digital ecosystems meet. Most firms are already close to trading and execution venues, but an IOA framework also puts them near cloud-based market information providers, analytics firms and the data itself. The result is faster insights and response times and superior, more cost-effective connectivity.
The costs of regulation are impossible to avoid, but an optimized IT infrastructure based on an IOA strategy can improve overall efficiency and flexibility. It offers an advantage in an industry where any advantage counts. For more details about how an IOA strategy speeds electronic trading, read our IOA Playbook.