High-frequency and algo trading on regulatory plate

The Commodity Futures Trading Commission’s Technology Advisory Committee met today to discuss high-frequency and algorithmic trading practices, as well as the role of technology in pre- and post-trade transparency.

This was the second meeting of the regulator's Technology Advisory Committee, designed to explore the implementation of the Dodd-Frank Act. The committee also continued its discussion of computerized trade strategies and their role in the "flash crash" on May 6, 2010.

Meetings of this committee, and others like it, will produce the nuts and bolts rules and regulations that will enact the broader measures of 2010's sweeping financial reform.

CFTC Chairman Gary Gensler offered the following comments to kick off the meeting:

Good afternoon. Thank you Commissioner O’Malia for chairing today’s meeting of the Technology Advisory Committee. I also thank my fellow Commissioners for their hard work to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

As the Commodity Futures Trading Commission (CFTC) works to implement Dodd-Frank, it is essential that our rulemakings take into consideration the rapidly evolving technology in the marketplace. Rapidly changing technology has been a feature of our markets at least since the telegraph first facilitated greater transparency in the securities markets in the mid 19th century. Since the Securities and Exchange Commission (SEC) and our predecessor were set up in the 1930s, we as regulators have constantly had to remake our regulations so that new technology can be used to benefit investors and end-users and help best promote transparency and efficiency in markets.

While new uses of technology, such as algorithmic and high-frequency trading, co-location and electronic trading facilities, pose additional challenges, they are not so different from when the first telephones were brought to the floor of an exchange or when the internet was first used to trade futures and securities. As regulators, we need to ensure advances in technology help lower risk and promote transparency in the markets.

That is why I am so thankful that Commissioner O’Malia has convened this advisory committee. In particular, we will benefit from hearing panelists’ advice as we write rules for the swaps market and as we consider any appropriate responses to the events of May 6.

For example, what role should technology play in both pre- and post-trade transparency? What is the appropriate balance between electronic and voice trading for swaps in best promoting pre-trade transparency? How should we interpret the statute’s requirement for real time reporting “as soon as technologically practicable?” How should the CFTC use technology to link to swap data repositories (SDRs) and clearinghouses? How should the evolving world of high-frequency and algorithmic trading influence our new authorities regarding disruptive trading practices?

In addition to this Committee’s analysis of the role technology plays in implementing the Dodd-Frank Act, I also look forward to hearing the views of our panelists on the role that technology played in the unusual market events that took place on May 6. Also, what responses are appropriate to prevent such events in the future? We also are fortunate to have – and look forward to advice from – the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues.

Specifically, should executing brokers have an obligation to enter and exit markets in an orderly manner? Should they have to adopt certain trading practices when executing large orders by use of an algorithm, such as price or volume limits?

Further, would it be beneficial to increase visibility into the full order book in the futures markets? If so, what is the best technological way to accomplish this goal?

Lastly, on May 6, the E-Mini stopped trading for five seconds, which gave the order book time to replenish. Would it have been better if the pause came earlier? If so, what conditions should trigger a pause?

Again, I’d like to thank my fellow Commissioners and the Technology Advisory Committee members for participating in today’s meeting, and specifically Commissioner O’Malia for chairing.

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