Understanding the Recent Reg AT Update

Very few topics have been as volatile or highly debated as Regulation AT, the CFTC’s proposal for regulating algorithmic trading.


On November 25, 2016, the CFTC released an update to the proposed rulemaking, which it released to the public for comment.  A brief summary of the updates is listed below:

  1. The Commission proposed moving the regulatory structure from a three-tier system composed of the AT Person, FCM, and Contract Market (Exchange), to a modified two-tier system in which the AT Person could delegate its pre-trade risk controls to its FCM.
  2. The Commission proposed expanding the scope of the regulation to cover all electronic trading, not just narrowly construed algorithmic trading for AT Person purposes.
  3. The Commission proposed allowing the Contract Market, FCM, or AT Person the ability to set pre-trade risk controls, creating more flexibility in the regulatory process.
  4. The Commission proposed registering certain market participants that are not already registered with the Commission, who would become “New Floor Traders” subject to a volume threshold.
  5. In lieu of an annual compliance reports, the Commission proposed that AT Persons and FCMs would instead be required to retain certain records and submit an annual certification and that contract markets would be required to establish programs for evaluating FCMs’ and AT Persons’ compliance with Regulation AT.
  6. The Commission proposed updates to its algorithmic trading source code preservation requirements, whereby the Commission would only have access to these records by a special call approved by the Commission itself (not staff), and indicated that the provision was not intended to be used for routine submission.
  7. The Commission made a variety of changes to defined terms either included in the original proposed rulemaking or as a result of responses from market participants.
  8. The Commission proposed the inclusion of additional rules focused specifically on DCMs’ trade matching platforms and self-trade prevention tools.
  9. The Commission proposed revising a series of defined terms throughout the regulation.

Notably, the introduction of a Volume Threshold Test for registration under Reg AT and clarification regarding source code retention were intended to directly address market participants’ concerns.  The Volume Threshold Test, included in 17 CFR 1.3(x)(2), indicates an “aggregate average daily volume of at least 20,000 contracts” and also requires the person to include volume from “other persons controlling, controlled by or under common control with such person.”

With respect to the retention of algorithmic trading source code, the metadata included in the Commission’s new Notice of Proposed Rulemaking specifically notes that proposed section “1.81(a)(vi) did not require the transfer of all source code to the Commission or other third party for centralized storage,” nor did it require the provision of source code “to the Commission on a regular basis.”

While these updates will likely satiate the concerns of some market participants, further changes are expected given the impact of the new Administration of the U.S. Federal Government.  The dissent of Commissioner Giancarlo’s statement on the subject may provide some guidance, where he highlighted that the Commission’s adoption of this rule would be a “giant stumble backwards in undoing Americans’ legal and Constitutional rights.”

Unfortunately for those of us managing risk, it seems this issue is far from settled.  We know how challenging it can be to navigate an ever-changing set of rules and regulations.  That’s why we’ve created easy-to-use tools that track regulatory changes in real time—because the more you know, the less you have to worry.

If You Have 10,000 Regulations . . .

“If you have 10,000 regulations, you destroy all respect for the law.”  —Winston Churchill

One thing is certain:  The growth in the number of laws and regulations is staggering, and this growth—not only in depth of rules, but breadth of rules—tends to overlook the notion that their purpose is to curb bad behavior.  A nearly 100-year-old distinction in antitrust law offers us two useful types of legal doctrine to analyze the types of rules: (1) Per Se, and (2) Rule of Reason. The former is the equivalent of a strict ban, while the latter allows for carve-outs and exceptions. (It’s no wonder that larger corporations prefer the latter: they have the scale necessary to compete.)

Rules and regulations that are constructed with more carve-outs create an implicit regulatory tax with which only larger institutions can compete.  These discrepancies aren’t always intentional by regulators—and occasionally, they’re even the result of good intentions.  Regulation is a necessary component of a properly functioning market:  it outlines the boundaries of the sandbox so that all parties are properly informed.  Moving towards per se methods of regulation more clearly defines the boundaries, but this isn’t the direction that the rules have been heading.

Our contemporary problem isn’t necessarily a result of the level of complexity or style, but rather the frightening depth of regulation that often detaches the rules from the purpose or very law itself.  Instead of writing clean, easy-to-understand rules and regulations and updating them as necessary, regulators turn to burying changes and new components in interpretations.  While this may be a byproduct of lengthy and difficult legislative processes, those processes exist to protect the market from over-burdensome regulation and over-active regulators.

A prime example is the Volcker Rule.  Largely expected to re-install the structural protections that were part of the 37-page Glass-Steagall Act (which prohibited commercial banks from engaging in the investment business), the Volcker rule comprised more than 900 pages when published.  This creates barriers to entering the market and hurts financial institutions by significantly increasing their costs. Instead of the rule of reason approach with various carve-outs, exceptions, and confusion, we should adopt the per se approach to writing rules: simple, clear, bright-line regulation.

Another example comes from our own experience reviewing a variety of regulations and—importantly—their sources.  In 2016, we found Enforcement Actions from a self-regulatory organization that cited the Q&A section from guidance documents as the authority on which they are prosecuting.  Now, there are five ways a corporation could get fined, as illustrated below.  Isn’t it anti-ethical to prosecute any party, in any format, on anything other than a published rule?


Clearly, the inefficiency and improper usage of non-rules adds significant cost.  So how do we fix this?

  • First, regulators should be upfront about the rules and include all relevant information in the (simple!) rule itself. This means placing all liability in the rules themselves, not buried in Q&A and interpretive notices.
  • Second, regulators should proactively add and subtract rules to address market harm and consolidate existing rules wherever possible.
  • Third, it is imperative that regulators write cleaner and more complete rules, rather than carving out exceptions that even the biggest players struggle to navigate.
  • Finally, and most importantly, regulators should embrace the per se style of drafting: clear rules and structures should be preferred over difficult, dense, and exception-riddled rules that only cause confusion, unintentional violations, and costs for all parties.

Until these changes take place, companies will continue to struggle with compliance—and this struggle drives Ascent’s mission.  We know that technology can help to equalize the playing field, and we’re working to build solutions that simplify compliance so you can get back to business.

On the Quantitative Value of Diversity

Ascent recently had the privilege of showing our support of ChickTech, a women-in-tech nonprofit that empowers women to stay in tech and encourage girls to join.  As a sponsor of the Career Fair at the organization’s ACT-W Conference in Chicago, we had the opportunity to meet many bright, highly skilled, and generally awesome women and girls in tech, and we were reminded of the importance of diversity—especially in the technology world.

The startup and tech communities are notorious for their lack of diversity—so much so that this serves as common fodder for countless blog posts, articles, seminars, and speeches—and many who rightfully assert that diversity is important for the social fabric of a business often contrast it with the economics of success.  After all, root capitalism is irreverent to notions of fairness for anything except price.  How, then, do we reconcile these two juxtaposed ideologies?


The answer, surprisingly, is highlighted quite accurately both by nature and in the unique fabric of the American melting pot.  In nature, biodiversity plays a key role in allowing for competitive and naturally selective outcomes.  Diseases or predators that target specific variations of species are incapable of targeting those that develop sufficient biodiversity (in essence, natural selection).  This diversity creates an optimal outcome for the species:  namely, survival.  The introduction of gene-editing techniques and the risks of removing specific gene sequences without knowing what they could eventually protect against creates risks of bio-homogeneity—and, as grandma would say, the bigger they are, the harder they fall. Biodiversity protects species from extinction and ensures optimal outcomes given conditions out of our control.

A society, whether ancient or contemporary, is an amalgamation of the various people within it.  The definition of a society is “the aggregate of people living together in a more or less ordered community.”  The definition of a data system refers to an “organized collection of symbols and symbol-manipulating operations.”  Each is a unique structure made up of components that create a complex, interwoven equation that depends on each variable’s difference to generate an optimal outcome.

The melting pot that is America encourages the same social diversity.  Race, religion, creed, sexual orientation, age, national origin, and many more, create a culturally rich group of individuals.  The frustrations we endure, the iterative challenges to “getting it right” regarding an egalitarian society, the discussions, the failures, the successes, and the progress are equally as chaotic as the alignment of any set of diverse data points coming together to form a trendline.  The very struggle to create such a world is what defines the breadth of those who are able to live comfortably in it.  America’s struggle to ensure equal access (not equal outcomes) is the equivalent of the cogs grinding in a massively productive machine.

It may seem inconsequential to compare such grandiose notions of diversity to that of a commercial enterprise.  Nonetheless, the “firm” has cemented itself in American society as the single most effective means of wealth creation and efficient method of resource allocation ever conceived.

Turning to economics, the three main sources of production (or wealth creation) are land, capital, and labor.  Land is a constant, and capital (cash) is homogeneous.  What, then, separates different types of wealth creation?

The answer, quite simply, is labor (made-up by the people in it).  Ergo:

Production (Supply) = Land + Capital*B1 + Labor*B2.

Production (or supply) coupled with market demand produces, in efficient markets, proper prices. Nonetheless, supply and demand only determine price for a market of defined size.  When identifying a market, we must look at the attributes of the demand constituents to ensure they fit the needs of the customers in that market.  And, of course, each customer’s needs are made up by the idiosyncratic experiences, interests, and commercial behaviors of its participants.

If we want to design a product for the largest possible market (thereby maximizing market fit), we must appeal to the broadest group of people in said market.  As a result, one should consider the makeup of the market and expand the potential pool of buyers before analyzing supply-demand behavior.

In other words, the more a company understands or represents its customers in a given market, the larger the potential revenue.  As capital and land are homogeneous, the only alterable variable is labor.

What this encourages, then, is a labor curve that is diversified by experiences.  These come from creed, race, religion, gender, geography, and a litany of other attributes of each of the employees.  The more diverse the labor, the more optimal the labor trendline, and the larger the potential product-market fit.

In summation:  Diversity is good for people, and for businesses. It’s not only the socially conscious thing to encourage, it’s also your fiduciary duty.

Say Hello to Our New CTO!

We’re absolutely thrilled to welcome Chris Doyle, previously CTO at PrettyQuick, to our executive team!  As CTO, Chris will lead our technology team to quickly bring our initial product offering out of beta as a trusted, efficient compliance platform.

Long-term, Chris plans to focus on building the team, processes, and infrastructure necessary to fully execute our transformational vision of machine-assisted intelligent compliance. “Reasonable regulation is an important part of the free market, protecting consumers and leveling the playing field,” he noted. “But, due to their complexity and sheer volume, regulations often feel more like a punitive burden, stifling competition and preventing innovation. I’m excited to help our customers fulfill the spirit (and letter) of their obligations in a way that lets them breathe easy and focus on creating value for their own customers through their core business.”

Chris brings a wealth of knowledge and expertise to Ascent, having spent more than a decade in software development and management in both startups and large companies. As CTO of PrettyQuick, he oversaw all strategic and tactical technical activities for backend, web, and mobile to build a best-in-class beauty-booking platform that seamlessly matched supply and demand through appointment-level dynamic pricing. Upon its successful exit through acquisition by Groupon, Doyle joined Groupon to aid in developing strategic priorities and partnerships for PrettyQuick. His work at Ascent is a natural extension of his previous experience creating workflow tools, gracefully combining human and machine operations, and building beautiful, intuitive, user-oriented experiences.

We’re excited to have Chris on our team, and we look forward to working with him to build an industry-leading solution that helps our customers save time, save money, and reduce risk!

What is RegTech?

When we’re asked to describe what we do at Ascent, we strive to educate our customers and partners on a new, burgeoning industry:  “RegTech,” short for Regulatory Technology.  We’re often mistakenly lumped into the exploding “FinTech” community, but this characterization isn’t wholly accurate.  FinTech, in its standard accepted form, is the application of technology to traditionally service-oriented financial services industries.  RegTech, conversely, is the application of technology to traditionally service-oriented regulatory offerings on an industry-agnostic basis.

RegTech companies are able to choose their industry just like how a consultant chooses a specialization or a student chooses an academic major.  For example, Ascent has chosen to focus on financial services regulation.

Compliance Concept on İnterface Touch Screen

Why is RegTech a growing field?

Simply put, existing service offerings are too expensive, and the cost of compliance is increasing dramatically for regulated entities.  Government studies reveal an endless series of eye-popping numbers regarding the complexity and cost of regulation.  Cost-side efficiencies abound to companies who produce RegTech products, and distributed networking, big data analytics, and disintermediation have all played their part.

But this doesn’t answer an even more basic question:  Why do these companies exist?

The answer is two-fold.  First, the velocity of regulation is increasing.  We’re regulated by multiple different organizations, and administrative and regulatory laws are increasing in number.  (The legitimacy and legality of such activities should be—and is—constantly scrutinized.)

We write laws with computers, but follow them with sticky notes and spreadsheets—an unsustainable juxtaposition.  Let’s look at a brief case study in Europe.

Europe has operated in a quasi-federalist state since the implementation of the European Union.  It’s no mistake that RegTech has taken off in the face of such complexity, where inter-jurisdictional issues and cross-border disputes abound.  Using RegTech to follow, and comply with, the tangled web of rules is increasingly necessary to ensure the crossing of t’s and dotting of i’s.

This evolution is akin to the development of a major city.  Transportation is easy to coordinate and plan in the early days.  But, following 200 years of growth and infrastructure development, even a single new road can have extraordinary consequences on traffic patterns and citizen behavior.  Regulatory changes and the imposition of new rules are no exception.

In the United States, we’re seeing the introduction of both of these motivators:  Regulatory complexity is increasing (a basic function of action and time), and cost-side efficiencies and the introduction of technological solutions are pressuring existing industries.  In other words, the timing is ripe for a RegTech revolution.

At Ascent, this drives our work.  We’re fixated on data completeness and obsessed with creating efficiencies and safety for our customers.  Protecting your business and managing your risk is more important than ever.  Investing in RegTech solutions will have extraordinary payouts as time increases, and as you embrace the growing field of RegTech, you can count on Ascent to lead the charge.

Regulation Strangulation

So, here’s a quick rundown of applicable regulations to registered entities based on review of four regulators (CME/CFTC/ICE/NFA):

  1. FCM: 1,457
  2. IB: 847
  3. CTA: 566
  4. CPO: 659
  5. Swap Dealer: 705
  6. DCM: 320
  7. SEF: 258
  8. MSP: 673
  9. DCO: 457

Is it any surprise that there are fewer FCMs?  If cost is a basic function of (# of regulations) x (spend per line item), it’s obvious that the clearing firm community would shrink (and will continue to do so).  We conducted a little research and concluded that the approximately $6.4-billion spend on regulatory compliance in the derivatives sector—calculated based on industry statistics—can be split amongst the 6,500 active derivatives firms and the total number of obligations we have (4,146).

Accordingly, each line item costs the industry $1.54 million, or $237 per firm per line item. In the case of a clearing firm, this means the cost is about (237) x (547 more rules than an IB) = $130,000 more in compliance costs than another firm!  (Note: These are not weighted by complexity of rule, so it’s pure numerical analysis—weighting would likely skew the numbers on a marginal basis up or down).


While we’re careful not to draw conclusions of causation vs. correlation, the anecdotal evidence is astounding:  there are 1,457 obligations on clearing firms—far more than clearinghouses, SEFs, and actual exchanges.  By constraining these middlemen, we are placing a bottleneck on the financial services supply chain:


By isolating that single entity and not being thoughtful about regulation and the implicit costs (which should be aggregated here based on our calculation), there is little surprise that the number of clearing firms is decreasing at an alarming rate.  That’s why we do what we do:  our software helps these firms track and manage their regulations more efficiently—saving time, saving money, and reducing risk.