Developments in artificial technology have altered the way that individuals interact with the market and regulators are starting to take note. In May, the House of Representatives announced the creation of a Task Force on Financial Technology and a Task Force on Artificial Intelligence. Congresswoman Maxine Waters (DCA), Chairwoman of the House Committee on Financial Services, announced the creation of these task forces, stating "[a]s new technologies emerge and the financial services industry puts those technologies to use, Congress must make sure that responsible innovation is encouraged, and that regulators and the law are adapting to the changing landscape to best protect consumers, investors and small businesses."1 Algorithmic trading, a form of automated trading that is heavily reliant on complex mathematical formulas and high speed technology, is a likely candidate for heightened regulatory focus.

Algorithmic trading makes up a significant percentage of the overall trade volume in markets today. Because of its volume, frequency, and automated nature, there are concerns that algorithmic trading magnifies upward and downward market trends, resulting in artificially inflated market volatility. In the European Union, regulators have attempted to address this concern through the Markets in Financial Instruments Directive,2 which requires algorithmic traders to perform stress-tests on their algorithms and to maintain kill switch functionality in case of malfunction

The power to automatically execute a large volume of trades also raises concerns about market manipulation. There have been several regulatory responses to these concerns. In 2016, the SEC approved a rule proposed by the Financial Industry Regulatory Authority, Inc. (FINRA) that requires algorithmic trading developers to register as securities traders.3 In 2016, the Commodity Futures Trading Commission proposed a supplement to Regulation AT, which would have required, among other things, that the proprietary source code behind trading algorithms be made available to the CFTC and the Department of Justice.4 The attention that algorithmic trading has received from various regulatory bodies indicates that new regulations are a real possibility in the near future. It is difficult to predict the exact form that such regulation will take, but examining proposals and regulations adopted in other jurisdictions provides useful insight into what we can expect.

Footnote

1 See press release at http://bit.ly/2ZQ5X68.

2 See http://bit.ly/2FAIzl9.

3 See http://bit.ly/2LlyNXN.

4 See http://bit.ly/2FwSgBm.

Originally published in REVERSEinquiries: Volume 2, Issue 6.
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