May 2, 2019

Automated trading regulations in the US

May 2, 2019
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3.5 minutes

When starting out as a trader, there are many things to consider. What is legally permissible and what is not in the trading world? What assets should you trade? What brokers should you use? What strategies, technical and/or fundamental indicators, and other techniques should you follow?


While we can’t answer all of those questions for you, we figured you may want some knowledge on trading regulations, including info on automated trading regulations, before you get started. That’s why we’re beginning our series on automated trading regulations around the world, beginning with the US.


To start, let’s discuss brokers. The SEC (Securities and Exchange Commission) is the US regulatory body that oversees regulation of brokers as a whole. Consumers in the US can choose from regulated brokers and unregulated brokers. Regulated brokers offer certain protections and benefits to traders that unregulated brokers do not. Some of these protections and benefits include: Risk warnings, Transparency, Leverage limits, Segregation, Compensation, and Anti-money laundering.


Risk warnings require brokers to display clear risk warnings before consumers sign up for an account. Transparency requires forex brokers, for example, to submit to regular audits.



Limiting maximum leverage prevents individuals from borrowing excessive funds that they may not be able to pay back. Segregation dictates that brokers keep operating capital separate from client funds. Compensation is like insurance for consumers using brokers, where brokers sign up for a compensation fund, for example, so that investors can get at least some of their funds back if the broker goes bust.


Regulated brokers require consumers to provide photo ID and/or proof of address to prevent money laundering.


Broker regulation does not only benefit and protect traders, however - it also benefits brokers. Regulated brokers tend to gain a more trustworthy reputation and stability (due to, for example, limiting leverage).


Since the 2010 “flash crash” caused the Dow Jones to plummet 7% in just a few minutes, which has since been blamed on automated trading, there have been significant efforts to regulate automated trading in particular and not just all brokers.


In 2015, the US CFTC (Commodity Futures Trading Commission) approved proposals known as “Regulated Automated Trading,” which presented rules designed to mitigate risk and increase transparency, along with other safeguards.


Automation regulations in the US include new definitions for algorithmic traders, compulsory exchange controls for self-match prevention, registration criteria for direct connectivity to US-based FCMs (Futures Commission Merchants) and exchanges, pre-trade risk controls including cancellation systems and execution limits, and obligatory testing environments and algorithm source code stores for automated trading systems.


The CFTC defines an algorithmic trader, or AT Person, as a person or entity that engages in automated trading and is also registered as an FCM, floor broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor, introducing broker, or floor trader (which the CFTC defines as most proprietary trading firms or people trading for their own account).


Self-matching or self-trading is when the same entity takes both sides of a trade, which could be for the purpose of faking increased trading volumes or rates. This is illegal as per the CFTC’s rules.


Registration criteria for algorithmic traders includes personal details such as photo ID and proof of address to verify the identity of the trader.


Order cancellation systems provide traders with the ability to immediately disengage in algorithmic trading, cancel selected or all resting orders when market conditions require it, and prevent submission of new algorithmic trades.


Execution limits restrict the number of times a strategy or identical order is filled and then re-enters the market without human intervention.


Obligatory test environments simulate the production trading environment so that it can be checked by regulators. Automated trading systems must provide algorithm source code stores for the same reason.


In general, as you may have noticed, most of the regulation that affects automated trading pertains to the brokers rather than technology providers such as Capitalise.


What is Capitalise, you ask? Capitalise is the first platform empowering traders to automate their trades using plain English. All you need to do is write your strategies out in the natural language interface and Capitalise monitors the market and executes your trades from start to finish.


If you’re new to trading or even just automation, you can try out your strategies and the platform using simulation mode on the Capitalise platform, risk free. Just go to capitalise.ai and start typing.

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