Regulator’s Plan to Rein In Trading Risks Raises Concerns


(This article first appeared in The New York Times)

The Commodity Futures Trading Commission is overreaching in its quest for market safety and soundness.

The agency wants the power to obtain access to the source codes of trading companies without a subpoena. Record retention is a worthy goal, but it is unclear whether the strapped regulator can protect such intellectual property. Worse, it may open the door for other officials to ask for the same unusual gateway.

Market participants are justified in their concerns about the agency’s proposal. As part of its plan to rein in the risks of automated trading, the regulator, which mainly looks after commodities markets, wants companies to store their source code in a repository, which would be easily accessible to its officials. The Justice Department would also be granted access.

The intentions of the commission, led by its chairman, Timothy G. Massad, are valid given recent market-manipulation cases. One worry is that traders could spoof the market, the practice of making and then quickly canceling orders, and make the algorithms disappear. But the agency could require traders to maintain records without being given extraordinary powers. The commission has already successfully pursued several spoofing cases with its current authorities.

There is reason to wonder whether the agency could protect the source codes it might obtain. Like the Securities and Exchange Commission, it is perennially underfunded. Every year, lawmakers either cut its expense requests or leave its budget flat. Even government entities with fewer resource problems, like the White House, are vulnerable to hacking.

Other agencies could see this as an opening to push for unfettered access. For example, the Federal Trade Commission could argue it needed to regularly inspect the search algorithms of Alphabet’s Google when examining antitrust concerns. The Justice Department was viewed as pushing legal boundaries when it sued Apple to force the company to provide access to a mass shooter’s iPhone.

The Commodity Futures Trading Commission has been hearing out the concerns. The agency reopened the comment period for the proposal and held a discussion with industry participants last week. Officials have repeatedly said they wanted to ensure that the rule enshrined confidentiality. Protecting the integrity of the markets is an important goal. But so is preventing the government agency from starting down a dangerous and slippery slope.

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