Futures Market:

Automation Can Enhance Detection of Trade Abuses But Introduces New Risks

IMTEC-89-68: Published: Sep 7, 1989. Publicly Released: Sep 7, 1989.

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Pursuant to a congressional request, GAO provided information on the: (1) potential benefits in using the Chicago futures exchanges' planned automated systems to detect or prevent trade practice abuses; (2) potential vulnerabilities associated with using automated systems in conjunction with or in place of the current trading process; and (3) Commodity Futures Trading Commission's (CFTC) activities in assessing automated exchange systems.

GAO found that: (1) although the exchanges were developing automated order routing systems and researching the use of hand-held trading terminals to improve the open-outcry trading process, the extent to which the systems would detect trading abuses was unknown; (2) the systems would provide improved timing data for customer orders, but could not determine the timing and trading sequences of floor traders' personal trading; (3) although the planned systems had the potential to better control trading abuses, the systems introduced risks that the exchanges planned to address to ensure correct transaction processing, responsive operations, and secure and continuous operations; and (4) although CFTC responsibilities included assessment of the exchanges' automated systems, CFTC did not conduct or set guidelines for technical assessments of the systems' capabilities to control trade abuses and automation risks, since it did not have the technical resources for such assessments.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Although CFTC has initiated several actions to respond to this recommendation, GAO audit work shows that more needs to be done. However, GAO is closing this recommendation because subsequent recommendations in IMTEC-91-21 recognized the need for the CFTC Chairman to be more aggressive in controlling automation risk by acquiring additional expertise to oversee the exchanges' automation activities.

    Recommendation: The Chairman, CFTC, should acquire the necessary expertise to technically assess the systems planned by the futures exchanges. Such assessments should include analyses of proposed technical solutions and alternatives to ensure that the futures exchanges design, develop, and implement systems that maximize the automation's potential to control trade practice abuses. CFTC should also assess the risks of using the exchanges' automated systems to ensure that they are adequately controlled.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: Although CFTC has initiated several actions to respond to this recommendation, GAO audit work shows that more needs to be done. However, GAO is closing this recommendation because subsequent recommendations in IMTEC-91-21 recognize the need for the CFTC Chairman to be more aggressive in controlling automation risk by taking additional steps to oversee the development and use of automation.

    Recommendation: To acquire the expertise needed for such assessments, CFTC should consider: (1) obtaining its own technical resources; (2) requiring exchanges to have independent technical assessments performed on their systems under guidelines set by CFTC; or (3) creating a technical advisory committee consisting of government and private-sector representatives to advise CFTC on the relative merits and risks associated with using automated systems to better detect or prevent trade practice abuses.

    Agency Affected: Commodity Futures Trading Commission

 

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