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Obama gives administrative state another grabby hand

November 7, 2016

Can a federal agency vote to eliminate due process for the people it regulates? The Commodity Futures Trading Commission (CFTC) is trying to do so with its 2-1 Friday vote that threatens liberty well beyond financial markets.

Most Americans probably think the ability to issue a subpoena, which compels the production of information, is an awesome power. It is especially awesome for CFTC commissioners who can vote to issue them without seeking a judge’s approval or finding probable cause. Mere suspicion of wrongdoing or even puzzling market activity is sufficient. But commission Democrats Timothy Massad and Sharon Bowen think the subpoena power is not enough.

This is probably because recipients of subpoenas have rights. They can challenge the subpoena in court, ask judges to narrow the scope of information required, or limit the conditions under which they must share data.

So Chairman Massad and Ms. Bowen voted to propose a new rule that will—without the need for a subpoena—force regulated companies to hand over the algorithms they use to automate financial trades. Few people care what happens to electronic trading firms. But Americans should understand the power about to be transferred to one agency, and consider how quickly others will want the same power.

“The subpoena process provides property owners with due process of law before the government can seize their property,” noted Commissioner Chris Giancarlo in his Friday dissent. “As a legal principle, it was woven into the Bill of Rights. As a bulwark of modern civil society, it protects the liberty of the governed from the tyranny of the government.”

The commission is already able to ask firms for books and records on the trades they have already made. Demanding the source code of algorithms means requiring firms to share the strategies on which they hope to make money in the future. Such algorithms are often among their most important assets and most closely held secrets.

This is like asking Apple to turn over the source code for the iPhone. China makes such demands all the time and tech companies wisely resist whenever possible because they know the information will be stolen or abused to benefit Chinese firms or spy on dissidents. Will any good come if U.S. agencies follow suit and Facebook has to share its software with the FCC?

There’s little reason to trust Washington to hold this data and prevent it from being hacked or abused for political purposes. Recall when Senator Bernie Sanders released confidential CFTC data on oil trading positions in 2011.

We’re told regulators want the source code because the CFTC staff are concerned about flash crashes—bouts of sudden, extreme volatility—in financial markets. But they have no idea what’s causing them. The regulators hope that knowing the algorithms will somehow make sense of it all. Such volatility isn’t surprising in markets that have been made less liquid by Dodd-Frank regulation, but that’s not a theory that the Obama Administration wants to hear. So the CFTC may try to find some high-speed traders to blame.

This financial power grab is part of President Obama’s rush to hand more power to the administrative state before he leaves office. Wayne Crews of the Competitive Enterprise Institute says Mr. Obama is on pace to shatter his own annual record of more than 81,000 pages of new and proposed rules in the Federal Register. The Administration recently crossed the 78,000 mark and could top 90,000 by year end. If you want an explanation for slow economic growth, this is it.

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