CFTC searching for cause of rapid oil price plunge

WASHINGTON Mon Sep 17, 2012 5:48pm EDT

WASHINGTON (Reuters) - The U.S. Commodity Futures Trading Commission is in contact with futures exchanges over a brief plunge in oil prices on Monday afternoon, a top regulator at the agency said, adding that it is unclear if high-frequency trading played a role.

"Our people are aware of it. They are in contact with CME and ICE and are going to get to the bottom of it," Commissioner Scott O'Malia told Reuters.

IntercontinentalExchange Inc (ICE.N), home of the Brent crude oil contract in London, declined to comment. CME Group (CME.O), where U.S. crude primarily trades, said it was unaware of any technical issue that may have contributed to the selling on the New York Mercantile Exchange (NYMEX).

Brent crude prices plummeted more than $3 in a matter of minutes just before 2 p.m. EDT as trading volumes - which had been muted by the Rosh Hashana holiday - shot up.

It was not immediately clear what caused the price plunge, but traders said it could have resulted from a problem with a high-speed computer trading program.

Regulators have been closely examining high-frequency trading -- which accounts for roughly half of both U.S. equity volume and the futures market -- after high-profile glitches have roiled markets.

The May 2010 "flash crash" temporarily wiped $1 trillion in paper value from the stock market in minutes. Regulators have said the algorithms behind rapid-fire trading were a factor, but that they did not cause it.

More recently, in August, a software glitch at Knight Capital Group (KCG.N) flooded the New York Stock Exchange with unintended orders for dozens of stocks, boosting some shares by more than 100 percent and leaving the company with a crippling $440 million loss. The firm was forced to seek a financing deal to stay afloat.

High-frequency trading, which relies on tiny price imbalances to make razor-thin profits, contributes much needed liquidity to markets, according to its proponents. But critics say it puts retail investors at a disadvantage.

"When we see prices and volumes move this fast and this dramatically, the job of CFTC surveillance staff becomes even more important," Bart Chilton, another commissioner at the CFTC, said in an email on Monday.

REGULATIONS

The CFTC and the Securities and Exchange Commission have said they are committed to regulating the controversial trading technique, but progress has been slow.

An industry panel convened by the SEC last February made 14 recommendations, including fees on high-frequency traders and stock pauses during rapid price moves.

The SEC has worked with the exchanges to expand circuit breakers for stocks and has adopted a "limit up-limit down" plan designed to protect against market volatility by preventing trades from occurring outside of a specific price band.

But the agency has not made more dramatic moves to rein in high-frequency traders.

The CFTC's Technology Advisory Committee, an industry group convened by the agency and chaired by O'Malia has taken a stab at the issue, by presenting a working definition of high-frequency trading in June.

"We want to understand the way these things trade. Defining them and measuring their performance and behavior in our markets is something that we need to understand better," O'Malia said, emphasizing that it is too soon to know whether the practice was at fault in Monday's abrupt oil price swing.

(Reporting By Alexandra Alper; Editing by Alden Bentley and Tim Dobbyn)

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