(Adds backgrounds, details)
Oct 21 (Reuters) – Any proposals to tighten oversight on automated trading in U.S. Treasuries futures would focus on measures aimed at curbing risks that stem from bad algorithms and inadequate testing of the algorithms, a top U.S. regulator said on Wednesday.
In the wake of the “flash” rally in the Treasuries futures and cash markets on Oct. 15, 2014, when prices swung wildly within minutes in the absence of fundamental news, regulators have increased scrutiny on the growth of automated trading in the near $ 13 trillion sector.
“In the near term, we are focused on looking at operational risks, and taking steps to minimize the potential for disruptions and other operational problems that may arise,” said Timothy Massad, chairman of the Commodity Futures Trading Commission in a prepared speech on Treasuries market structure at the New York Federal Reserve.
Massad said he expects the CFTC, which regulates trading of U.S. futures, to introduce some proposed reforms on automated trading in Treasuries futures next month.
Massad’s remarks echoed views of other federal regulators at the event, who said they would consider more oversight on computerized trading strategies that can move billions of dollars across markets within fractions of a second.
Possible proposals on automated trading in bond futures will likely be consistent with what many firms have in place and build on what futures exchanges have done already, Massad said.
Some of these proposed measures may include pre-trade controls, such as message throttles and maximum order size limits, he said.
Other proposals would pertain to the design, testing and supervision of automated trading systems as well as measures such as “kill switches,” which help with emergency intervention in the case of malfunctioning algorithms, he said.
Another area of regulatory focus, Massad said, is whether to require registration for proprietary firms that engage in algorithmic trading, not already registered with the CFTC. (Reporting by Richard Leong in New York; Editing by Jeffrey Benkoe and Chizu Nomiyama)