The U.S. Commodity Future Trading Commission’s Regulation Algorithmic Trading, which aims to bring the commodity and derivatives markets on par with the equities market from a systemic risk perspective. is a done deal even though the regulator only published the proposed rule in November.

However, it’s doubtful that the regulator plans to implement the proposed rule as it is currently written. It would lead to complete open warfare between Wall Street and the regulator with the U.S. Congress more than likely getting involved.

If the CFTC truly wants to the industry to adopt Reg AT, it needs to remove the onerous requirement that CFTC-registered AT organization must store a copy of their algorithmic-trading source code in a repository, which the regulator and the U.S. Department of Justice could access without the benefit of a warrant.

From a regulatory perspective it’s a understandable request: If something goes haywire, regulators want to examine possible causes as quickly and easily as possible.

Yet, the proposed mandate shows the disconnect between the federal government and the industry concerning the value of source code.

For the industry, it’s the lifeblood of trading businesses and is largely responsible for generating its revenue.

For the government, represented by regulatory agencies like the CFTC, the face value of algorithmic-trading source code is considerably less.

All you have to do is examine the unsuccessful prosecution of the former-Goldman Sachs programmer Sergey Aleynikov, who was indicted and unsuccessfully prosecuted, twice, for stealing portions of his then employers algorithmic-trading source code.

When the US Court of Appeals for the Federal Circuit overturned Aleyniko’s federal conviction, it determined that source code was not physical property and as such could not be considered stolen under the National Stolen Property Act.

Source code is purely intellectual property and if it is left unprotected by a copyright or patent there is very little legal protection for it, accept as a trade secret.

Storing a valuable asset like source code that has little legal recourse if copied and distributed to unauthorized parties in a third-party repository is too much of a risk to ask trading firms.

If the CFTC insists on keeping this proposed portion of Reg AT in the regulation’s final version, it should tweak the requirement so that a copy of the source code could be stored locally behind the regulated firm’s firewall.

This would allay the trading firm’s concern over access while eliminating the hacking risk from storing all of the industry’s trading algorithms in single location.

It’s not a perfect solution, but it is a better solution than what the CFTC is proposing currently.