After Dodd-Frank and before MF Global, regulators began to focus in on high-frequency trading, and the industry worried that this source of liquidity would be the next target. Most FCM leaders we spoke to see high-frequency trading as a net positive, yet some were a little more open to putting down some rules of the road.
"They make it easier for individual traders to enter trades and establish positions, and to get out of positions at favorable prices. We have not seen any evidence that they’ve had a negative impact on the markets at all," says O’Neil.
Kadlec believes the controversy is overblown. "If the trade is done on a regulated exchange in a proper manner and there is true price discovery I don’t know what the controversy is," he says.
For Gordon, this is an issue where a rash judgment could have serious unintended consequences. "Over time there have been calls to limit one kind of trading or another," he says. "It is often unclear what the effect of that particular type of trading is. If you restrict [high-frequency trading] there easily could be unintended consequences that hurt the liquidity of markets."
Breteau sees the value in increased volume. "There are good high-frequency traders and bad high-frequency traders, but there is nothing inherently bad about this category of client. They improve prices, bring liquidity into the market, bring competition and efficiency to the market," he says. "However, we should have more industry-wide controls. We have invested in diverse [risk management] technology at Newedge.We also are extremely vigilant [over] what level of control the high-frequency trader has."
Breteau adds, "We have seen rogue trading in big institutions. I don’t want the next one to happen in [a] high-frequency trading organization."
Peterffy, whose firm derives a portion of its profits from market-making activity, has a more dramatic recommendation. "We believe that high-frequency traders should be incentivized to register as market-makers and they should be compelled to take on affirmative obligations," Peterffy says. "If you are not a registered market-maker your order should be delayed by one tenth of a second. If you are a registered market-maker [with an] affirmative obligation your orders go to the markets immediately."
He adds that this would solve the two problems associated with high-frequency traders: "They leave when the market is under stress and they initiate runs in the market. When the market looks to run, they jump on it."
What comes next?
In recent years the futures industry has been forced to deal with a crisis not of its making, which resulted in a more stringent regulatory model that perhaps unfairly affected business. Today there is a crisis that strikes very close to home as the sanctity of customer segregation has been challenged.
The early reports have not been good as many end-users have expressed a feeling of abandonment by exchange and regulatory leaders. There is much more at stake than the reported missing MF Global segregated funds, estimated to be $633 million; the integrity of the industry is based on the notion that when a clearing firm comes under pressure, customer funds are safe and secure. It is what industry leaders — whether exchange officials, regulatory officials, lobbying groups, FCMs, vendors or legal professionals — have been touting for years, particularly in the face of the recent financial crisis. It has led one industry professional to ask whether it all was just a mirage.
The future of the industry may depend on leaders stepping up and proving all this talk was not merely a mirage.
Additional reporting by Michael McFarlin.