USA LAW AND PRACTICE Contributed by: Margo H.K. Tank, Michael Fluhr, Era Anagnosti, Kristin Boggiano, David Stier, Liz S. M. Caires, Adam Dubin, Emily Honsa Hicks, Kathleen Birrane and Chezelle McDade, DLA Piper LLP
ing market manipulation, insider trading and front - running; and • sanctioning and disciplining those who violate securities laws, regulations, and rules. With respect to CFTC, the core mission of CFTC is preserving market integrity. CFTC may pursue manip - ulation, attempted manipulation, fraud, and false reporting of any commodity in interstate commerce. 7. High-Frequency and Algorithmic Trading 7.1 Creation and Usage Regulations In the USA, high-frequency trading (HFT) and algorith - mic trading are regulated by SEC for securities and CFTC for commodities. SEC Reg NMS ensures best execution and prevents trade-throughs, and the Market Access Rule man - dates pre-trade risk controls for algorithmic trading and post-trade surveillance. SEC has adopted rules that require market participants that perform dealer functions to register as dealers, subjecting them to capital requirements and anti-manipulation and anti- fraud provisions. Also, HFT and algorithmic trading are often scrutinised in the context of potential market manipulation, including under the Exchange Act and Rule 10b-5. CFTC implemented anti-manipulation rules under the Dodd–Frank Act, such as banning spoofing and other disruptive trading practices. CFTC also implemented a principle-based approach applicable to DCMs and generally imposed risk controls regarding trading. Market makers in the USA are typically acting as deal - ers. A dealer is defined as any person engaged in the business of effecting transactions in securities from its own inventory, not acting as an intermediary between sellers and buyers. Dealers present themselves as willing to buy or sell a security at a quoted price on a continuous basis. The Exchange Act requires, with limited exemptions, dealers to register with SEC as a 7.2 Requirement To Be Licensed or Registered as a Market Maker When Functioning in a Principal Capacity
broker-dealer. Dealers are also subject to regulatory oversight by FINRA. See 7.3 Regulatory Distinction Between Funds and Dealers . Digital asset market makers either offer continuous quotes of bids and offers on centralised cryptocur - rency exchanges or contribute to liquidity pools on decentralised cryptocurrency exchanges that fund the trading of token pairs effected by smart contract- powered algorithms called automated market mak - ers (AMMs). Crypto-asset market making is generally unregulated given that neither centralised crypto- exchanges nor AMMs are registered with SEC. SEC has asserted, in enforcement actions, that crypto mar - ket makers are required to register as dealers. 7.3 Regulatory Distinction Between Funds and Dealers In the USA, a fund may qualify as an investment com - pany and be subject to the registration requirements of the ICA, unless subject to an exemption. An adviser to a fund likely must register with SEC pursuant to the Advisers Act or with a state securities regulator. An adviser manages portfolios or pooled investments from third parties. Advisers are generally paid by col - lecting a management fee and/or incentive fees based upon the performance of the portfolio. Advisers are subject to fiduciary, custody and disclosure obliga - tions. A “dealer” is any person engaged in the business of buying and selling securities for the person’s own account, through a broker or otherwise. Dealers, like brokers, must register pursuant to the Exchange Act, absent limited exemptions. Dealers generally make money by collecting transaction-based fees or through the bid-ask spread. They do not collect man - agement or incentive fees, like funds. SEC released FAQs to clarify the application of exist - ing broker-dealer financial responsibility and transfer agent rules to digital assets. 7.4 Regulation of Programmers and Programming There is no SEC regulation that expressly applies to programmers, but all persons are subject to the anti- market manipulation and fraud provisions of the US
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