Paradigm Files Comment Letter on the CFTC’s Conflicts and Affiliations Rulemaking

Publishing Date: October 5, 2026

Today, Paradigm filed a comment letter with the CFTC in response to its proposed rulemaking on conflicts of interest and affiliations. This proposal will set the terms on which market makers can trade on “affiliated,” or vertically integrated, exchanges and cuts to the very heart of whether modern markets can function. Without affiliated market makers, new exchanges and emerging markets struggle to generate liquidity and leave participants with no one to take the other side of a transaction. With them, the potential for self-dealing undermines the peer-to-peer promise of exchanges.

Thrust into the role of a regulatory Solomon, CFTC does an admirable job of rejecting both the draconian option of banning affiliated market makers altogether, and the soft option of leaving the potential conflicts unchecked. But we suggest several improvements that, if adopted, will ensure that this proposal becomes a just final rule that facilitates innovation and competition, subject to appropriate safeguards.

The core of the proposal, and thus one of the central focuses of our comment, subordination of affiliated trading at every price and in every market. While forcing affiliated trading to the back of the line may sound modest, it is unworkable in practice. A subordinated market maker absorbs toxic flow while competitors free-ride, and the firms seeding new markets are bled dry by the steady losses a last-in-line position generates. This is a recipe not for growth but for slowly killing many market makers, harming overall competition and vitality in the markets. The better approach, and the one we propose, is a cap (we suggest 5%) on affiliated trading once unaffiliated liquidity is sufficient or, for exchanges that prefer simplicity, a flat 5% cap on exchange-wide affiliated volume. This compromise creates space for an affiliate to seed markets no one else will, while imposing meaningful limits once real liquidity arrives.

Our other primary focus concerns the distinction between “bona fide market making”—which would be allowed—and “directional trading”—which wouldn’t. We support that distinction, but the proposal as written leaves key questions unanswered (and unanswerable): If you are market making on both sides but the takers are all on one side, do you have a directional position? If so, when did you cross that line? Can you hedge that exposure? If so, how do you prove it was a hedge? Until the CFTC gives regulated entities the ability to answer those questions, the potential penalty—being forced to immediately stop trading, thereby draining liquidity from open markets, with consumers caught in the crossfire—hangs like a Sword of Damocles that no regulated exchange could dare ignore.

We look forward to continued engagement as the CFTC moves toward a final rule, and you can read Paradigm’s full comment letter here.