George E.P. Box, the internationally renowned mathematician and statistician, once said, “Essentially, all models are wrong, but some are useful.”1 So where mathematical models replace human thought and judgment, as they are doing on an ever larger scale in today’s financial markets with the advent of electronic trading and digital technologies, it is inevitable that market disruptions will follow on. Automated trading presents a number of challenges, especially for market regulators, who must ensure a level playing field and durable markets, while at the same time take care not to stifle innovation.

While we at Crow & Cushing are only lawyers, not mathematicians or traders, something strikes us as unwise about one aspect of the effort by the United States Commodities Futures Trading Commission (“CFTC”) to regulate automated trading, known as Regulation Automated Trading, or Regulation AT, a proposal almost 500 pages long, first published in December 2015.2 The regulatory history of this provision of Regulation AT bears telling.

The Initial Proposal

Under Rule 1.81 of Regulation AT, as originally proposed by the CFTC, those engaged in algorithmic trading would have been required to maintain their source code in a repository (a structure that stores the code) and make it available to the CFTC and the Department of Justice without a subpoena. Rule 1.81 would also have required that algorithmic traders maintain the source code repository to manage source code, and provide access to copies of all code and any changes to the code. The regulation would have permitted monitoring by the CFTC in real time and required automated alerts when the trading system approached boundaries within which it was designed to operate or upon loss of network connectivity, among other monitoring requirements.

The CFTC viewed the provision as simply a matter of recordkeeping, although it acknowledged the unique characteristics of source code. Perhaps the most articulate and sustained defense of the CFTC proposal came from Better Markets, a not-for-profit dedicated to market reform founded in the wake of the 2008 financial crisis. Better Markets believes that access to source code is a key to detecting and rooting out many types of manipulative and predatory behavior which are otherwise unidentifiable through the use of conventional market data. Source code, Better Markets asserts, needs to be available in real time, not in the aftermath of potentially devastating events.

While not challenging the legality of the CFTC’s original proposal, most critics, and there were many, described source code, accurately we think, as a firm’s intellectual property which contains its confidential current and future trading strategies. Source code reveals not positions held in the past, which can be gleaned from other records already available to regulators, but what a trader intends to buy and sell and the basis for those decisions.

Given today’s level of competition, market participants view source code as the key to their success. They typically employ numerous safeguards to protect against disclosure of their code, including restricting certain classes of their own employees from viewing it. The critics objected strongly to a requirement that they provide unfettered access to regulators in real time and questioned whether the CFTC needed, or was even equipped, to monitor ongoing trading, especially in cases where there is no reason to believe there is an intent to disrupt markets.

A New Proposal Emerges

In the face of widespread industry criticism, and the vehement objections of one of its own Commissioners, the CFTC has now largely scrapped proposed Rule 1.81 and replaced it with Rule 1.84.3 The new proposal would require that covered traders maintain for a period of five years source code they use, material changes to the code and logs recording the activities of their algorithmic trading systems.

In its revised proposal, the CFTC pulled back from the requirement that traders provide real time unfettered access to the code to CFTC staff. In place of those provisions, the CFTC, in Rule 1.84, now proposes that traders covered by the rule make available the documents listed in the rule, including source code, to the CFTC upon a “special call” by the CFTC itself. In other words, the CFTC has added a layer of protection by inserting itself into the process and not leaving the judgment as to whether source code must be produced solely to staff.

Not surprisingly, the new proposal has done little to quell the anxiety of the critics of the original rule. They remain concerned as to how the CFTC will implement its source code review and what will happen to the code once the CFTC completes that review. In their view, the CFTC still fails to offer a valid reason why a subpoena does not provide sufficient access.

A Balance of Interests is Needed

There is to our knowledge no other federal regulation in existence which provides the government with access to the business plan of an enterprise without a subpoena. The SEC, for one, does not require that registrants provide access to their source code.

A balancing of these interests is in order. It seems to us that a less intrusive rule which simply requires that traders preserve all versions of source code and track material changes would not compromise a firm’s intellectual property, but still enhance regulatory oversight. The CFTC would be free at any time, as it is now, to obtain the code through a subpoena based on a showing to a third party that the demand is within its authority and relevant and material to an investigation.

While some of the reactions in opposition to the rule seem at times a bit overwrought–after all, governmental agencies already have ready access to other essential information–those opponents, we think, still have the better of the argument. Furthermore, the fact that the mere proposal of access to source code without a subpoena has proved so unsettling to market participants should itself give the CFTC pause.


1 Box and Draper, Empirical Model-Building and Response Surfaces, 414 (2007).

2 8 Fed. Reg. 78824 (Dec. 17, 2015).

3 81 Fed. Reg. 85393 (Nov. 26, 2016).


Maybe you thought that employers whose employees are not organized in unions or which are not involved in traditional labor activities like strikes, lockouts and picketing are outside of the jurisdiction of the National Labor Relations Board (“NLRB”). If you did, you would be wrong.

Section 7 of the National Labor Relations Act, a depression era law, guarantees that employees have the right to join unions. It also establishes the fundamental right, without reference to unions, of employees “to engage in other concerted activities for the purpose of…mutual aid or protection.”1 Employers who interfere with that right are guilty of an unfair labor practice under Section 8(a)(1) of the Act.2

The NLRB alleged in a Complaint3 that Bridgewater Associates had violated this right by including in its employment agreements certain provisions, which, as we shall see, are a staple of individual employment contracts in the financial services industry. The NLRB’s action arose out of complaints of an employee, an adviser to large institutional investors in Bridgewater, who first contended that his male supervisor had sexually harassed him for about a year by propositioning him and trying to discuss sex during work trips. The employee alleged he was pressured to withdraw his harassment claims, accused of lying and criticized for “blowing he whole thing out of proportion.”

The employee ultimately withdrew his sexual harassment complaint, but instituted a charge with the NLRB, asserting that Bridgewater had suspended him indefinitely for threatening to file the NLRB charge. The allegations of sexual harassment and retaliation were widely reported, but another aspect of the NLRB’s Complaint against Bridgewater seemed to have potentially broader implications.

The NLRB also asserted that Bridgewater had interfered with the rights of its employees under Section 7 of the Act by including in Bridgewater contracts of employment the requirement that employees keep the contractual terms confidential, an overbroad definition of “confidential information,” a restriction on disclosing such confidential information without prior authorization, a prohibition on disparaging Bridgewater and a provision requiring that employees submit any dispute with Bridgewater to binding arbitration.

The NLRB’s allegations against Bridgewater are not completely novel. In fact, the NLRB under the current administration has as a matter of policy taken aggressive stands against restrictions in employment contracts that by now seem unremarkable in many industries, especially the financial services industry. In other words, while the NLRB may be reaching into industries it has traditionally avoided, the claims against Bridgewater are not wildly different from those it has made in the past against others.

In its Complaint, the NLRB was vague about the scope of the remedy it sought. However, there is no reason to believe that the agency is broadly targeting confidentiality provisions, non-disclosure agreements or arbitration clauses.

The courts and the NLRB itself have widely held that an employee’s rights under Section 7 need to be balanced against the employer’s interest in preventing disparagement of its products or services, protecting the reputation of its business and demanding loyalty of employees. Employees are denied the protection of the Act when they are unjustifiably disloyal or engage in defamatory communications or complain of matters not connected with a labor dispute.

So an employer could not utilize a confidentiality policy to bar employees from discussing their salaries, since such discussions would, according to the NLRB, qualify as a protected “concerted” activity. But that same policy could certainly prohibit disclosure of proprietary information, such as an investment strategy, a valuable asset which has no discernible relation to terms of employment. By the same token, an arbitration clause is an appropriate means to resolve most workplace disputes–indeed, the clause in Bridgewater’s agreement may have been the reason that its employee withdrew his sexual harassment complaint. However, arbitration would be inappropriate, at least in the NLRB’s view, as a forum for the adjudication of rights that employees, even non-union employees, assert for their “mutual aid or protection.”

Even in the face of an aggressive NLRB, employers still have the right to require that their employees respect the confidentiality of the vast majority of the information employers seek to protect, to demand employee loyalty and to have workplace controversies resolved through arbitration. Until there is a more employer-friendly NLRB in power, the challenge will be to draft contract clauses and policies that achieve legitimate objectives, but do not substantially impinge on employee associational rights.


1 27 U.S.C. §157.

2 29 U.S.C. §158(a)(1).

3 Bridgewater Associates, LP and Christopher Tarui, Case 01-CA-169426 (June 30, 2016).


​The debate that engrossed observers of the equity markets over the application of the dark pool featured in Michael Lewis’s Flash Boys: A Wall Street Revolt, has faded. As well, the Investors Exchange LLC (“IEX”), application for approval as public exchange has died down for the time being. What may reignite the controversy is the filing of a suit threatened by other exchanges or high frequency traders, or both, challenging the SEC’s June 2016 decision to approve the application.

​Central to the threatened lawsuit is the claim, advanced most forcefully by the exchanges and Citadel Investment Group, that IEX’s strategy violates Regulation NMS, and specifically Rule 600(b)(3). The problem, they say, is an innovation by IEX commonly referred to as a “speed bump,” which consists of 38 miles of coiled fiber-optic cable. The speed bump adds 350 microseconds (350 millionths of a second) to the time it takes orders to reach IEX’s system.

​The purpose of the speed bump, of course, is to blunt the advantage of high frequency traders, who look for signals that other buyers and sellers are in the market and then insert themselves ahead of the slower orders so they can profit from short term trades. The strategy has come to be known euphemistically as latency arbitrage. This is how IEX characterizes its aims:

Our speed bump has two primary purposes. First, it protects client orders on IEX from being scalped at stale prices by certain high-speed traders who have purchased faster access to information from other exchanges, and know the prices to be stale. Second, it protects clients who use IEX’s Router from being beaten to other exchanges by high-speed traders who are looking to react to the clients’ orders by removing liquidity on those exchanges before the orders can be executed.

​The exchanges profit from the volume high speed traders provide and the premiums the traders pay for faster access to information from other exchanges, which permits the traders to front run the order flow of other investors. The exchanges have not attempted to refute IEX’s claims in any meaningful way. Their opposition to IEX’s application before the SEC focused largely on legalities.

​Rule 600 of Regulation NMS, which defines an “automatic quotation” as one that “immediately and automatically” responds in some fashion, whether by executing an order or cancelling it, is at the heart of the controversy. IEX’s opponents contend that the speed bump, by introducing a latency of 350 milliseconds, runs afoul of the rule because quotations are not “immediately” available.

​On its face, the claim is not implausible. The original purpose of Regulation NMS was to modernize securities trading by replacing specialists on the floor of the exchange with computers that rapidly match orders so that investors get the best prices. In other words, the intent was to eliminate the inefficiencies of an antiquated system by encouraging speed. The rule had never been interpreted to permit delays, intentional or otherwise.

​While the legal arguments of the exchanges opposing IEX have some surface appeal, they don’t hold up quite so well to closer inspection. For example, in seeking to explain the meaning of the term “immediately” in Rule 600(b)(3), Nasdaq relied on judicial holdings that the term “immediately” in a federal statute did not permit “deferral” or “postponement” of an action and that a rule requiring that emergency room care be made available immediately meant that it had to occur without loss of time. These precedents were not particularly helpful in answering the question whether Regulation NMS permits introduction of a barely perceptible delay in a trade. After all, 350 microseconds is about one thousandth of the time it takes to blink.

​But the SEC was still required to essentially reinterpret Regulation NMS to justify approving IEX’s application in a way that deemphasized the importance of speed. Its chief basis for doing so though was a practical consideration, not a legal principle. The SEC found its justification in the fact that market participants today, for technological and geographic reasons, routinely experience delays in receiving updates to displayed quotations, many in excess of IEX’s 350 microsecond one-way delay.

​The SEC thus determined that the requirement of immediacy in Rule 600(b)(c) precluded an exchange’s use of a device that would delay action with respect to a quote unless the delay was “de minimus” — that is, a delay so short as not to frustrate the aim of Regulation NMS to protect fair and efficient access to the exchange’s quotations. IEX’s 350 microsecond delay fell within the exception.

​Federal courts give substantial deference to an agency’s interpretation of its own regulations when that language is open to question, unless some alternative reading is compelled by the language of a statute. The SEC’s interpretation of a less than crystal clear rule here seems reasonable enough and would probably survive judicial scrutiny.

​Legalities aside, the argument of the exchanges is laced with irony, undoubtedly unintended. Imposing the speed bump, they say, not only violates Rule 600(b)(3), but undermines the integrity of the markets and thereby puts investors at risk. But the exchanges which make this claim have themselves introduced multi-tier markets, investing large sums in technology so they can profit from offering faster data access to a small cohort of traders who can both afford and benefit from superior access. They provide slower products, and inferior access, to those who cannot.

​It is ironic as well that the exchanges would rely on Regulation NMS, a rule designed to insure fairness and market transparency, to protect both high frequency traders, whose tactics are widely viewed as unfair and not noticeably transparent, and the exchanges’ own franchise in catering to those traders.

​This then is what the argument is really about, not whether it takes 350 microseconds to execute an order. IEX has now won the argument in the SEC and, perhaps more importantly, among the community of investors who believe themselves victimized by high speed traders.

​In a recent interview, Nasdaq CEO Robert Greifeld claimed the SEC’s approval of IEX was an “abuse of process and a misuse of process” and insisted Nasdaq’s case was “very strong.” Sounds like Nasdaq is prepared to litigate the SEC’s approval of IEX. Right?

​Instead, in an about face, Nasdaq signaled its intention to compete with IEX by seeking approval of what it called an “extended life” order type, which would allow investors to move ahead of other similarly priced orders if they agreed not to cancel their orders for approximately one second. Having exhausted all other possibilities, maybe Nasdaq has belatedly opted for what is really in the interest of it core clientele.

The SEC has for years been flirting with taking action to address directly the problems caused by high speed trading. By approving IEX as a public exchange, it has now done so indirectly.

One important reason for those problems is perhaps that the SEC’s approach — to deal with the legal and financial aspects of the debate — doesn’t work here. The central issues connected with high speed trading are not first and foremost legal or financial ones. They are matters of technology. The SEC needs to ask itself: Is it consistent with our securities laws and our notions of fair play to reserve the biggest profits for those with the fastest computers?