UPDATE 1-CFTC to propose new co-location rule

Thu Mar 11, 2010 4:05pm EST

Related Topics

* Critics say practice gives high-frequency traders leg up

* Exchanges moving forward with co-location offerings (Adds quote from Buttonwood CEO, paragraph 8)

By Mark Weinraub

BOCA RATON, Fla., March 11 (Reuters) - U.S. regulators will propose a rule, aimed at high-frequency traders, to ensure all market participants have equal access to market data, the head of the Commodity Futures Trading Commission said on Thursday.

"We are doing a proposed rule on co-location to best promote ... open access," CFTC Chairman Gary Gensler told reporters on the sidelines of the Futures Industry Association annual conference. "If there are such facilities (we want to ensure) that they be open and fair and consistent access."

Critics have charged that high-frequency traders, who place their computers next to exchange servers, a practice known as co-location, have an unfair advantage by getting an early peek at buy and sell orders.

Despite the prospect of increased regulation, U.S. exchanges are moving ahead with plans to ramp up products to serve high-frequency traders, who use computer algorithms to execute large blocks of trades at lightning-fast speed.

Rapid trading, estimated to account for some 40 percent in U.S. futures volume and 60 percent of cash equities, was one of the most profitable lines of business throughout the financial crisis.

Proprietary traders who use their own money to quickly enter and exit the market are a growing percentage of the volume on U.S. exchanges.

Imposing new rules could prompt high-frequency traders to move their trades to overseas exchanges, market participants have said. Traders contend that the loss of liquidity would reduce the efficiency of U.S. markets.

"The more knowledgeable the CFTC becomes about liquidity in the markets the less chance they'll do something egregious," said David Dugan, chief operating officer at Buttonwood Group Trading LLC, a proprietary high-frequency trading firm based in Chicago. "We have a great market, and the government will see that proprietary firms have no interest in destabilizing it."

Gensler declined to give a time table on the co-location proposal, but market watchers scoffed at the possibility of curbing the growing practice.

"The concept of abolishing, diminishing electronic proprietary trading is really like saying you do not like gravity," said Jane Gladstone, senior managing director of investment banking firm Evercore Partners.

Exchange operator CME Group (CME.O) said on Wednesday it would start offering co-location services early in 2012. (Additional reporting by Jonathan Spicer; editing by Carol Bishopric)

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