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CFTC Targets Rapid Trades In Latest Window Dressing Excercise
A top U.S. regulator said his agency plans to widen day-to-day monitoring of the commodities and futures markets, targeting the high-speed trading firms that are a growing force.
Instead of just policing completed futures trades, the Commodity Futures Trading Commission will seek to watch the fleeting buy and sell orders that increasingly influence the market, CFTC Chairman Gary Gensler said in an interview.
The move follows a Securities and Exchange Commission plan to sharpen oversight of stock trades following the 2010 “flash crash.” Regulators are seeking to catch up with high-frequency trading firms that are responsible for roughly half of orders, the vast majority of which are never executed. The SEC is probing the close relationship between high-speed firms and the computerized exchanges they do business with.
Regulators are ramping up oversight of high-frequency trading, which some fear could disrupt or distort financial markets with aggressive, rapid-fire trading strategies. Some more traditional institutional trading firms worry that uncompleted orders are sometimes used to manipulate markets by making it appear there is more interest in buying or selling a contract than there is in reality.
The futures regulator expects to acquire and implement a computer system soon that can download and track all orders, including those that aren’t executed, although not in real time, Mr. Gensler said during the interview, at a futures-industry conference here. The shift is in part due to new technology and software that can store and sift through the huge daily downloads of data, he said. The SEC’s initial plan to track trades in real time was estimated to cost billions of dollars, but neither the SEC nor the CFTC have provided cost estimates for the systems they are currently planning. The new tracking systems, which aren’t expected to be implemented this year, will “give us a more detailed view of who owns and controls accounts,” he said. The CFTC will ask the financial industry this spring or summer about how the agency should approach regulating automated trading.
The CFTC is preparing for a major change in the trading of derivatives contracts mandated by the Dodd-Frank financial-overhaul law. Currently, most trading of derivatives contracts takes place over phones between human traders. Certain provisions of Dodd-Frank mandate that some derivatives trade on exchanges, but the exact rules and timing haven’t been determined yet.
Some high-speed firms welcome the increased scrutiny. “We all depend on having market integrity,” said Richard Gorelick, chief executive of RGM Advisors, an Austin, Texas, high-frequency trading operation. “We all need to know that the rules are fair and that they’re enforced accordingly.”
An estimated 80 to 90 orders are put into futures markets for every trade that actually happens, according to Mr. Gensler, and experts say about 90% of all orders on stock exchanges are canceled. The SEC is weighing whether to put a fee on orders that high-speed firms place and later cancel. For now, the CFTC doesn’t have a cancellation fee, but a new group in the commission will consider the issue, which many exchanges and high-frequency firms oppose.
Some futures exchanges are already moving to curb excessive orders. IntercontinentalExchange, where benchmark contracts for cotton and sugar and a prominent U.S. dollar index are traded, said in late February that a policy it implemented last year is having success at curtailing what the exchange called “inefficient and excessive” bids and offers. ICE penalizes traders who submit orders far off the market price — a tactic that can be used by high-frequency traders and others to give other market participants the impression prices are poised to change rapidly.
Meanwhile, the CFTC plans to hold the first meeting of a high-frequency trading advisory panel on March 29. High-frequency trading is “taking an even larger role in our market, a bigger impact,” said Scott O’Malia, the CFTC commissioner who is spearheading the push. “You can’t ignore a trading style that occupies 40% of our market on any given day,” he said.
About 50 to 60 trading firms and exchanges have applied for membership with the roughly 25-member high-frequency subcommittee, including CME Group Inc., CME +1.40%which operates the largest futures exchange in the U.S. Mr. O’Malia said a decision about who would make up the subcommittee hadn’t yet been made. The subcommittee will weigh a definition of high-frequency trading to better regulate it, among other matters.
It also will probe the relationships between futures markets and the stock market. On May 6, 2010, massive sales of futures contracts tied to stocks helped trigger the flash crash, the SEC said in a report. Mr. O’Malia said he has reached out to the SEC to see if it would participate in the subcommittee.