U.S. regulators should reevaluate whether markets have sufficient risk controls in place to oversee high-frequency trading, Federal Reserve Bank of Chicago President Charles Evans said.
The Commodity Futures Trading Commission and other agencies are right to consider new ways of monitoring derivatives markets that increasingly rely on electronic trading and not “human judgment and human speeds,” Evans said in a comment letter to the CFTC dated yesterday. The letter is posted on the CFTC’s website today.
The Chicago Fed staff, in a response to a CFTC request for comments on possible new regulations for automated trading, said consistent risk controls are necessary to remove the danger that algorithms can malfunction.
The CFTC, along with the Securities and Exchange Commission, boosted scrutiny of high-frequency and algorithmic trading after May 6, 2010, when $862 billion in equity value was erased in 20 minutes before share prices recovered.
CFTC members voted unanimously on Sept. 9 to issue a concept release requesting input on more than 100 questions, including whether to expand testing and supervision of high- speed trading strategies. The release, a step prior to a formal proposal, also sought comment on whether to require registration for automated trading firms, taking a first step in potential restrictions on high-speed and algorithmicderivatives trading.
The CFTC release also considers ways to limit the number of trading orders a firm can place in a given amount of time.