The Commodity Futures Trading Commission hosted a wide-ranging discussion of high-frequency trading at a meeting of its Technology Advisory Committee on March 29, 2012. CFTC Commissioner Scott O’Malia, who chairs the advisory committee, announced the formation of a subcommittee consisting of 24 experts from the private sector who will help the agency develop a definition of HFT and update its regulatory policies. During the discussion, representatives of Intercontinental Exchange and CME Group described their risk controls and surveillance systems in considerable detail. In addition, representatives of Getco and RGM Advisors gave their perspectives on the evolution of trading technology and their recommendations for how the CFTC should respond to the increase in automated trading.
A summary of the HFT discussion follows:
CFTC Commissioner Scott O’Malia, who chairs the Technology Advisory Committee, has taken a keen interest in the topic of
To that end he formed a new subcommittee on automated and
high-frequencytrading within the context of automated trading systems;
- determining the distinctions among different types of HFT and how such distinctions should be “tagged” by exchanges;
- using oversight, surveillance and economic analysis to compare the trading behavior of
high-frequencytraders to other types of automated trading; and
- examining market
micro-structureissues “to identify possible disruptions that might be provoked by automated trading systems and potential solutions to mitigate such events.”
CFTC Chairman Gary Gensler, who was in attendance for most of the discussion on
CFTC Commissioner Jill Sommers agreed on the need to adapt and update the agency’s regulations but warned against attempting to design regulations around particular forms of trading. That point was echoed in comments by Richard Gorelick, the chief executive officer of RGM Advisors and the only member of the TAC who gave an opening statement.
Gorelick stressed that any inquiry into the performance of the markets should be driven by “empirical evidence” rather than “suspicion, emotion, rumor and anecdote” and urged the CFTC to analyze the detailed market data available to it before engaging in
Exchanges Describe Surveillance and Risk Controls
Next came presentations by experts from two exchanges – Mark Wassersug, vice president of operations at IntercontinentalExchange and Dean Payton, deputy chief regulatory officer of CME Group. They provided the TAC with a detailed and extensive overview of the risk controls and surveillance systems used by their exchanges. Highlights of their presentations included descriptions of their ability to track the activity of each and every market participant down to the millisecond level, the ability to scan market activity and search for unusual or disruptive behavior in real time, and the ability to warn, limit or terminate any market participant if warranted.
Dean Payton described some of the systems developed by the CME to monitor market activity. He mentioned that CME’s Rapid system, which tracks order entry data, reviews
Wassersug described in detail the risk controls maintained by ICE and mentioned several recent improvements. He mentioned in particular its “interval price limit” functionality, a type of circuit breaker designed to prevent price spikes in its commodity futures markets, and its WVR functionality, which discourages inefficient messaging by penalizing firms that submit large numbers of orders that are relatively far away from the market price.
Gensler asked the two exchange officials for more information about automated trading behavior and their surveillance capabilities. He expressed particular interest in
The TAC also heard a presentation on academic research on
The final presentation came from Sean Castette, chief information officer of Getco. He described the evolution of market making from floor to screen and the increased use of automation. He stressed the importance of speed in managing the risks of market making, and commented that the cost of market making has risen considerably because of the increased investment in both technology and the talent to manage that technology. He also stressed that the transparency of electronic markets provides regulators with more data for analysis and improves their ability to detect bad behavior.
O’Malia concluded with a question about best practices in the industry. He referred to two white papers on risk management drafted by the FIA Principal Traders Group and asked how many members of the FIA PTG are actually complying with the recommendations. Gorelick and Castette explained that these best practices were drawn from what PTG members are doing currently, and said the papers “codify” that learning and disseminate it more broadly to peers and competitors in the industry. Vice added that ICE is surveying its members on this very issue, asking automated trading firms if they comply with the best practices, and if not, to explain why not.
At the conclusion of the day, O’Malia announced that he is looking for new participants for the TAC in conjunction with the renewal of its charter in June.