1 00:00:03,120 --> 00:00:06,519 Speaker 1: Global business news twenty four hours a day. If Bloomberg 2 00:00:06,559 --> 00:00:09,640 Speaker 1: dot com, the radio plus Mobile act and on your radio. 3 00:00:09,880 --> 00:00:14,320 Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters. 4 00:00:14,360 --> 00:00:17,920 Speaker 1: I'm Charlie Pello Fontal the SMP NEZ stack all advancing. 5 00:00:18,040 --> 00:00:20,520 Speaker 1: Let's head over to the first Word breaking news desk 6 00:00:20,600 --> 00:00:25,520 Speaker 1: for today's afternoon call. And here is Bill Maloney. Good afternoons, Charlie. 7 00:00:25,600 --> 00:00:27,880 Speaker 1: That's right. Gains in the menu as average today, with 8 00:00:27,960 --> 00:00:30,280 Speaker 1: the Dow currently hired by fifty two points. As a 9 00:00:30,320 --> 00:00:33,599 Speaker 1: beast gain eight and as it rises ten Earlier, Fed 10 00:00:33,720 --> 00:00:38,320 Speaker 1: Jellen reiterated FED to proceed cautiously and raising rates. The 11 00:00:38,360 --> 00:00:40,879 Speaker 1: small cap six hundred is down two points and the 12 00:00:40,920 --> 00:00:44,200 Speaker 1: US tenure yield at one point seven per cent. Seven 13 00:00:44,200 --> 00:00:46,279 Speaker 1: out of ten s B sectors are higher, led by 14 00:00:46,320 --> 00:00:50,760 Speaker 1: gains and energy, tellcom and Technology, Consumer discretionary, healthcare and 15 00:00:50,840 --> 00:00:54,760 Speaker 1: materials declined, doubt transports fall thirteen points and as a 16 00:00:54,800 --> 00:00:57,640 Speaker 1: bio Texas Sinc. Forty eight and the VIX is a 17 00:00:57,640 --> 00:01:01,080 Speaker 1: little changed down. Leaders included microsos Off, the Apple, and Nike, 18 00:01:01,400 --> 00:01:05,000 Speaker 1: while McDonald's, Disney and Boeing led to the downside. A 19 00:01:05,080 --> 00:01:07,800 Speaker 1: dual reports after the Bell Live from the first to 20 00:01:07,880 --> 00:01:10,040 Speaker 1: Baking News task on Bill Maloney. Charlie all right, hey, 21 00:01:10,040 --> 00:01:12,360 Speaker 1: thank you very much Bill Maloney, and to hear live 22 00:01:12,440 --> 00:01:15,600 Speaker 1: breaking news over your Bloombird Time Squawk. Ask you you 23 00:01:15,760 --> 00:01:19,520 Speaker 1: a w K on your terminal. I'm Charlie Llott. That's 24 00:01:19,520 --> 00:01:25,679 Speaker 1: a Bloombird business flash. You're listening to taking stock with 25 00:01:25,840 --> 00:01:32,200 Speaker 1: pim Box and Kathleen Hayes on Bloombird Radio. Algoes algorithmic trading. 26 00:01:32,840 --> 00:01:37,240 Speaker 1: This has become more and more controversial as many Wall 27 00:01:37,280 --> 00:01:41,280 Speaker 1: Street professionals worry that high frequency trading firms are using 28 00:01:41,319 --> 00:01:46,080 Speaker 1: these algos to speed up their trades but perhaps destabilize 29 00:01:46,160 --> 00:01:50,320 Speaker 1: the markets. In fact, now algorithmic traders in US derivatives 30 00:01:50,360 --> 00:01:53,760 Speaker 1: markets may be subjected to heightened regulation, as the Commodity 31 00:01:53,840 --> 00:01:58,040 Speaker 1: Futures Trading Commission ways a proposal that would set registration requirements, 32 00:01:58,040 --> 00:02:01,360 Speaker 1: among other things. We're joining now by Nathan Dean, government 33 00:02:01,360 --> 00:02:06,120 Speaker 1: analyst for Bloomberg Intelligence in Washington. So Nathan, first of all, 34 00:02:06,440 --> 00:02:09,600 Speaker 1: what is an issue here. Let's start with what is 35 00:02:09,639 --> 00:02:12,840 Speaker 1: going on in the derivatives trading that is being done 36 00:02:12,960 --> 00:02:17,680 Speaker 1: by algorithms and what is the extent of it. So 37 00:02:18,160 --> 00:02:20,680 Speaker 1: this rule is a proposal from the CFTC, and this 38 00:02:20,800 --> 00:02:24,440 Speaker 1: really stems from UH several flash crashes or in the 39 00:02:24,480 --> 00:02:27,280 Speaker 1: derivative markets over the last couple of years and UH 40 00:02:27,320 --> 00:02:30,480 Speaker 1: several occurrences in which algorithms have run amuck UH and 41 00:02:30,480 --> 00:02:33,679 Speaker 1: the exchanges have had to essentially shut those algorithms off. 42 00:02:33,960 --> 00:02:36,760 Speaker 1: So the CFTC proposed rule. UH. This rule does not 43 00:02:36,919 --> 00:02:39,799 Speaker 1: slow down high frequency trading. But really what it does 44 00:02:39,880 --> 00:02:42,840 Speaker 1: is that it puts restrictions on algorithms in terms of 45 00:02:42,960 --> 00:02:45,720 Speaker 1: pre trade post trade risk controls a lot of things 46 00:02:45,720 --> 00:02:48,799 Speaker 1: that the exchanges already do. But there's there's two controversial 47 00:02:48,840 --> 00:02:52,119 Speaker 1: elements here. One is source code provisions. UH. This rule 48 00:02:52,160 --> 00:02:55,800 Speaker 1: would require algorithmic traders to hand over their source code 49 00:02:55,800 --> 00:02:59,480 Speaker 1: to the CFTC, to the Justice Department upon request. Obviously 50 00:02:59,480 --> 00:03:01,720 Speaker 1: they're not hal be about that. And the second thing 51 00:03:01,800 --> 00:03:04,520 Speaker 1: is registration requirements. A lot of these algorithmic traders, these 52 00:03:04,520 --> 00:03:07,639 Speaker 1: are five ten person firms and they they just don't 53 00:03:07,639 --> 00:03:11,440 Speaker 1: have the compliance and UH risk departments that can handle 54 00:03:11,480 --> 00:03:15,280 Speaker 1: this proposal. Nathan, can you tell us about kill switches? 55 00:03:15,440 --> 00:03:18,840 Speaker 1: What would they do? So it kill switches essentially like 56 00:03:18,880 --> 00:03:21,360 Speaker 1: pulling the key out of your ignition. Uh. You know, 57 00:03:21,639 --> 00:03:24,080 Speaker 1: it stops the algorithm. Uh. And a lot of the 58 00:03:24,160 --> 00:03:28,079 Speaker 1: hyperquincy traders already have this, The exchanges already have this. Uh. 59 00:03:28,120 --> 00:03:30,680 Speaker 1: And so this would allow the exchange to go in 60 00:03:30,760 --> 00:03:33,560 Speaker 1: and essentially just press a button and block the all 61 00:03:33,600 --> 00:03:36,320 Speaker 1: go from its market. Uh. You know, this is one 62 00:03:36,360 --> 00:03:38,760 Speaker 1: of the provisions that we think that the CEEFTC is 63 00:03:38,800 --> 00:03:41,880 Speaker 1: going to try and finalize this year. Uh. You know, 64 00:03:41,920 --> 00:03:44,200 Speaker 1: this rule is a very large rule, and so just 65 00:03:44,320 --> 00:03:47,560 Speaker 1: recently the chair decided that or at least announced that 66 00:03:47,560 --> 00:03:49,680 Speaker 1: he was planning to split this rule off and kill 67 00:03:49,680 --> 00:03:51,120 Speaker 1: switches we think is going to be part of the 68 00:03:51,160 --> 00:03:55,920 Speaker 1: finalized rule this year. Well, kill switches source code? How 69 00:03:55,960 --> 00:03:58,080 Speaker 1: does that play in? And you have to be a 70 00:03:58,120 --> 00:04:00,680 Speaker 1: computer geek to understand how this all works. So the 71 00:04:00,760 --> 00:04:04,280 Speaker 1: source code is, uh, you know, it's the brains of 72 00:04:04,440 --> 00:04:08,400 Speaker 1: the algo. You know, it's it's the computer programming. And 73 00:04:08,640 --> 00:04:10,960 Speaker 1: a lot of the high frequency traders out there will 74 00:04:11,000 --> 00:04:13,920 Speaker 1: say that the source code contains the prietary and the 75 00:04:13,960 --> 00:04:18,280 Speaker 1: business strategy and everything that's crucial to their success. And 76 00:04:18,480 --> 00:04:21,560 Speaker 1: what happens here is that under the proposal to see 77 00:04:21,560 --> 00:04:24,120 Speaker 1: IFDC or the Justice department will notice that an algorithm 78 00:04:24,200 --> 00:04:26,400 Speaker 1: runs a muck and they call the high frequency trader 79 00:04:26,480 --> 00:04:29,640 Speaker 1: over and say you have to provide it without a subpoena. 80 00:04:29,800 --> 00:04:32,440 Speaker 1: You just have to provide it. And obviously from a 81 00:04:32,480 --> 00:04:37,080 Speaker 1: cybersecurity perspective, from a privacy perspective, Uh, these small firms 82 00:04:37,080 --> 00:04:40,000 Speaker 1: are not happy with this provision and so uh uh 83 00:04:40,240 --> 00:04:43,120 Speaker 1: you know, if this world to be finalized, it wouldn't 84 00:04:43,120 --> 00:04:46,280 Speaker 1: be surprising the sea and legal challenges come out of it. Nathan, 85 00:04:46,360 --> 00:04:49,279 Speaker 1: What effect would this have, if any, on high frequency trading? 86 00:04:50,200 --> 00:04:52,960 Speaker 1: So it's gonna make so it won't slow down the 87 00:04:53,240 --> 00:04:56,320 Speaker 1: high frequency traders. And this is only in the derivatives market. 88 00:04:56,360 --> 00:04:59,640 Speaker 1: The equity high frequency traders are under your different program. Uh, 89 00:04:59,680 --> 00:05:02,360 Speaker 1: it won't slow them down, but it will increase their 90 00:05:02,360 --> 00:05:05,640 Speaker 1: compliance costs. Uh. The CFTC estimates that there's about four 91 00:05:05,680 --> 00:05:08,719 Speaker 1: hundred and twenty hyperquency trading firms out there, uh, and 92 00:05:08,839 --> 00:05:11,680 Speaker 1: only estimates thirty five million dollars for them to implement this. 93 00:05:12,360 --> 00:05:14,719 Speaker 1: We think that figure is very low, that it's going 94 00:05:14,760 --> 00:05:16,800 Speaker 1: to be much more costly, but it's gonna be a 95 00:05:16,839 --> 00:05:18,839 Speaker 1: regulatory headache. And like I said before, a lot of 96 00:05:18,839 --> 00:05:22,160 Speaker 1: these firms are five, ten, fifteen people firms, and uh, 97 00:05:22,200 --> 00:05:24,520 Speaker 1: they're gonna have to have a compliance person really dig 98 00:05:24,600 --> 00:05:26,719 Speaker 1: through and to see how they can comply with this role. 99 00:05:27,200 --> 00:05:30,880 Speaker 1: Is this a way to slow something down, to perhaps 100 00:05:30,920 --> 00:05:35,839 Speaker 1: put a curb on high frequency trading by adding these 101 00:05:35,880 --> 00:05:38,520 Speaker 1: excess steps, adding more or I shouldn't sayccess but adding 102 00:05:38,560 --> 00:05:42,240 Speaker 1: additional steps, adding more regulation, rather than facing head on 103 00:05:42,320 --> 00:05:45,920 Speaker 1: this question of whether or not algorithmic trading is something 104 00:05:45,960 --> 00:05:48,520 Speaker 1: that has gotten a lot of control or really is 105 00:05:48,680 --> 00:05:52,440 Speaker 1: creating more volatility and destabilizing markets. You know, I think 106 00:05:52,480 --> 00:05:54,880 Speaker 1: it's the first step in the process. You know, the 107 00:05:54,920 --> 00:05:59,200 Speaker 1: CFTC has said that the hyperquency trading isn't an issue, 108 00:05:59,240 --> 00:06:01,160 Speaker 1: or at least that's what they've alluded to, So they 109 00:06:01,200 --> 00:06:03,680 Speaker 1: don't want to slow it down, but they need to 110 00:06:03,680 --> 00:06:07,919 Speaker 1: do something. Uh. And so this proposal was a broad, 111 00:06:08,760 --> 00:06:12,600 Speaker 1: broad sweep here of trying to bring in many, many 112 00:06:12,640 --> 00:06:16,719 Speaker 1: aspects of algorithmic training under regulations. And UH, I think 113 00:06:16,720 --> 00:06:19,360 Speaker 1: what they're gonna face with is, UH, you know, they're 114 00:06:19,360 --> 00:06:21,599 Speaker 1: going to have to start picking off what they expect 115 00:06:21,600 --> 00:06:24,120 Speaker 1: they can actually get done this year. And UH, at 116 00:06:24,120 --> 00:06:26,120 Speaker 1: the end of the day, if I don't think a 117 00:06:26,200 --> 00:06:28,560 Speaker 1: high food. See trading firm has to worry much that 118 00:06:28,640 --> 00:06:30,479 Speaker 1: their their algorals are going to be slowed by this. 119 00:06:31,320 --> 00:06:36,080 Speaker 1: Is there an issue having to do with market makers statistics? Yes, 120 00:06:36,200 --> 00:06:39,160 Speaker 1: that's so, that's one part of the proposal. And so 121 00:06:39,240 --> 00:06:42,240 Speaker 1: this proposal would require market makers and it would require 122 00:06:42,240 --> 00:06:46,760 Speaker 1: the exchanges UH to release more details about their market 123 00:06:46,800 --> 00:06:49,960 Speaker 1: making and their incentive programs, you know, the compensation paid 124 00:06:50,000 --> 00:06:53,520 Speaker 1: to market makers, benefits received, etcetera. And what the goal 125 00:06:53,600 --> 00:06:57,080 Speaker 1: here is to increase transparency in those market making programs 126 00:06:57,160 --> 00:07:00,520 Speaker 1: so they can ensure that there's no false liquid out there. 127 00:07:00,880 --> 00:07:03,120 Speaker 1: You know, there's some because some claims out there that 128 00:07:03,520 --> 00:07:06,840 Speaker 1: you know, high frequency traders are essentially just making whatever 129 00:07:06,880 --> 00:07:09,840 Speaker 1: they need to make as per their compensation program and 130 00:07:09,880 --> 00:07:13,440 Speaker 1: then the liquidity disappears. UH. You know, this portion of 131 00:07:13,440 --> 00:07:15,720 Speaker 1: the rule was something that we think is going to 132 00:07:15,800 --> 00:07:18,280 Speaker 1: get pushed off in the two thousand seventeen. Thank you 133 00:07:18,400 --> 00:07:20,880 Speaker 1: very much for joining us and giving us that insight. 134 00:07:21,040 --> 00:07:25,160 Speaker 1: Nathan Dean is government analysts for Bloomberg Intelligence. He's based 135 00:07:25,160 --> 00:07:29,360 Speaker 1: in Washington, d C. Home of course to Bloomberg FM 136 00:07:29,520 --> 00:07:33,520 Speaker 1: and one oh five point seven FM h D two. 137 00:07:34,000 --> 00:07:36,640 Speaker 1: You're listening to taking Stock I'm pim Fox, my co 138 00:07:36,720 --> 00:07:46,360 Speaker 1: host Kathleen Hayes, and this is Bloomberg Radio. Brexit It's 139 00:07:46,400 --> 00:07:49,440 Speaker 1: not only important for the UK, it's important for all 140 00:07:49,480 --> 00:07:53,400 Speaker 1: of Europe. If the UK decides to go or stay, 141 00:07:53,440 --> 00:07:56,360 Speaker 1: what does it mean for Europe's outlook. We're gonna go 142 00:07:56,480 --> 00:07:58,080 Speaker 1: in depth now on Bloomberg Radio.