NEW YORK Oct 23 (Reuters) - The head of the U.S. commodities regulator said on Tuesday that he is working on a broad package of proposals for possible new rules governing high frequency trading, which has been blamed for increasing market volatility.
Commodity Futures Trading Commission Chairman Gary Gensler said he had a designed a broad package of potential rules, which address some of the dangers of high-speed trading, and he hoped to put it before the commission "shortly."
"We've seen our markets change quite fundamentally in terms of the participation," he said, adding that market participants' direct electronic access to exchanges had changed the composition of the marketplace from one dominated by noisy humans to a silent space in which machines can complete trades in less than a second.
"As regulators, we owe it to the American public to try to stay abreast of that," Gensler said, speaking on the sidelines of the Securities Industry and Financial Markets Association's annual conference.
This broad package, known as a concept release, is designed to initiate a public debate. Based on feedback the CFTC will get when it publishes the concept release, the agency may then move to propose new rules.
The Securities and Exchange Commission took that step more than two years ago, publishing a concept release on high-speed trading that included proposals for a "trade-at" rule, which would require stock market participants to carry out trades at the best price published in any one of the many stock trading venues.
High-speed trading has been blamed for recent volatility in the stock markets, including large price swings over very small periods of time in individual stocks, as well as massive market events like the 2010 "flash crash."
The SEC established new controls on stock trading following the flash crash.
But high frequency traders operate in markets other than stocks. A March 2010 letter, the Chicago Federal Reserve Bank warned the SEC that "high frequency trading practices ... have implications for risk management at clearing houses."
The Chicago Fed's letter pointed out that since high frequency trading happens so quickly, most derivatives positions taken by high frequency firms aren't held overnight and are therefore not subject to the same, protective collateral requirements other market participants must meet.
"This strikes us as imprudent," the letter said.
Gensler offered few details on the contents of the concept release, but said it will contemplate whether there should be more pre-trade filters in place, and whether testing and supervision of trading programs should be required.