UPDATE 2-U.S. CFTC guidance on bans may keep traders guessing
* Guidance proposed on scope of bans on disruptive trade
* "Spoofing" ban requires intent, other bans do not
* Sommers: guidance vague, could chill market
* Gensler: working on rule for testing, supervising algos (Updates with quotes from Sommers, enforcement official, vote results, other details)
By Roberta Rampton
WASHINGTON, Feb 24 (Reuters) - The U.S. futures regulator proposed guidance on Thursday on trades it will soon ban as disruptive, but one of its top officials said the new information would leave traders guessing about what is allowed and what is barred.
The Dodd-Frank financial reform law banned three specific trading practices, but traders have complained the prohibitions are so vague that they could chill markets, or leave the Commodity Futures Trading Commission tied up in court challenges if it tries to police the bans.
"This proposal does not cure that vagueness," said Jill Sommers, a Republican commissioner at the agency.
The CFTC proposed an "interpretive order" to try to address the confusion and elaborate on what would run afoul of bans on violating bids and offers, disrupting or "banging" the closing period, and "spoofing" the market with bids and offers that are subsequently canceled.
"In many areas, the order raises more questions than it answers," Sommers said, noting it would give CFTC staff "maximum flexibility" on how to enforce the ban.
"I believe that if this proposed guidance were final today, it would have a chilling effect on market liquidity, because it's so unclear what's illegal," Sommers told Reuters.
The CFTC's commissioners voted 4-1 to collect comments on the guidance for 60 days, after which time they would need to vote again to finalize it.
Whether or not the CFTC approves the new guidance, the bans on disruptive trading will take effect in July -- unlike most of the derivatives provisions in Dodd-Frank, which require the CFTC to craft regulations to implement the law.
FACTBOX-Details of rules [ID:N24352855]
Take a Look [ID:nCFTCREG]
Industry comments r.reuters.com/qaq84
NO NEW CURBS FOR ALGO TRADES - YET
Dodd-Frank gave the CFTC the power to ban other practices it deems disruptive, and the agency has asked whether it should consider new rules for supervising algorithmic trading, or for holding algo traders responsible when their programs run amok.
The agency is working on a proposed rule for testing and supervising algorithmic trading, Chairman Gary Gensler said.
The rule will be based in part on recommendations from a panel of experts advising the CFTC and the Securities and Exchange Commission on how to prevent another "flash crash" like the stock market plunge of May 6, 2010, Gensler said.
The CFTC needs to go beyond the three bans to take steps to ensure high-frequency traders using complex algorithmic strategies do not disrupt markets, said Bart Chilton, a Democratic commissioner.
"We need explicit rules to address trading using advanced analytics," Chilton said.
SPOOFING REQUIRES INTENT
Traders and exchanges have argued the CFTC should specify that traders need to intend to disrupt markets to run afoul of the new bans.
Enforcement officials said submitting and canceling bids and offers with the intent to create the appearance of market depth -- or an intentional overload of a trading system -- would fall under the spoofing ban.
Traders who have part of their orders filled before canceling other parts would not violate the ban if they intended to "consummate a trade", said Bob Pease, an attorney in the agency's enforcement division.
The Dodd-Frank law did not require the CFTC to prove intent for the bans on violating bids and offers or banging the close, officials said. (Editing by Dale Hudson and John Picinich)
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