Trid Improvement Act of 2017

Floor Speech

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Mr. FOSTER. Mr. Speaker, my amendment clarifies that this bill is only intended to apply to the source code underpinning algorithmic trading rather than any computer code that exists anywhere in the enterprise.

The algorithmic source code at a trading firm are its crown jewels. It is basically the core of its existence in its intellectual property.

It is not merely historical or descriptive like books or records that regulators routinely have access to. Likewise, it is not a broad expression of strategies that a firm might use some time in the future. Rather, it is a specific and prescriptive algorithm that generates a specific outcome based on a specific set of inputs.

The firms that rely on algorithmic trading have Ph.D. scientists, mathematicians, and economists researching correlations that lead to these relationships between the inputs and outputs. These may be simple but may also be incredibly complex, involving multiple inputs that do not appear related at first glance.

This complexity, coupled with the fact that they are written largely in computer code, limits the usefulness of inspecting source code as an examination tool. It is, rather, the behavior of the firm in the market that represents potential violations of security laws. Manipulative behavior, like frequently displaying or canceling orders, should get the regulators' attention and prompt them to ask the firm to explain it.

Source code would be and will be a valuable part of any investigation or enforcement action into observed manipulation of the market, but this is not the basis and should not be the basis for casual inspection. It would probably be central to proving the element of intent in an enforcement action because it demonstrates that the algorithm was designed to engage in, for example, manipulative or abusive behavior.

To this end, it is imperative that the firms achieve archived versions in effect at any given time and log modifications to those algorithms, including who made them, at any time that the code is altered. These should always be available by subpoena.

Additionally, I believe that most firms would allow the regulator on site to examine the source code on an air gap computer. To treat the source code as ordinary books and records would not limit the regulator to onsite examination, but would allow for staff to request it and that it be made available offsite, which has real dangers.

Because of the value the firm carries with its proprietary algorithms, it makes sense that the firm would be reluctant to allow any undue access to its crown jewels. It is really, I believe and I think the majority of my colleagues believe, something that should be accessible only by a subpoena.

My amendment simply clarifies that it is only the algorithmic trading code and related information that should be covered. I urge my colleagues to support my amendment and, upon its adoption, to support the bill on final passage.

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Mr. FOSTER. Mr. Speaker, I would just like to simply reiterate that it should be the actions in the market that are the first indications that the regulators should have a look at, and when they see suspicious activity in the market, that is the time to get the subpoena and go after the source code.

With that, I just urge the adoption of the amendment and the passage of the underlying bill.

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