Futures traders shun mandatory guards against 'wash trades'

CHICAGO Wed Dec 11, 2013 7:35pm EST

CHICAGO Dec 11 (Reuters) - Mandatory safeguards to prevent automated traders from illegally acting as buyer and seller in the same transactions would be harmful to the trading industry by exposing firms to unnecessary risk, a futures-industry group said on Wednesday

Such transactions, known as wash trades, are barred under U.S. regulatory and exchange rules because they can create the appearance of an active market where there is none and potentially be used to manipulate prices.

Still, mandatory controls to block the transactions "would be not only difficult, but potentially dangerous," the Futures Industry Association (FIA) said in a letter to the U.S. Commodity Futures Trading Commission (CFTC).

The stance was among a number of positions the FIA took in response to a call for comments from the CFTC about automated and high-speed trading.

Citing a series of trading glitches as evidence that its rules needed updating, the CFTC in September asked for industry input on a long list of possible measures to make trading safer.

Wash trades, in particular, have been in focus. The CFTC, concerned about the frequency with which high-speed traders engaged in wash trades, earlier this year was reviewing the banned self-dealing with an eye toward crafting new rules to prevent it, a CFTC commissioner said in July.

The FIA said it did not believe "additional regulatory standards will provide increased protection to markets and market participants" because the CFTC and exchanges already have effective rules to prohibit intentional wash trades.

"A 'one-size-fits-all' approach may result in unnecessary financial exposure caused by the inherent blocking of legitimate transactions," the FIA said in its letter.

Mandatory controls from exchanges, or designated contract markets (DCMs), could be dangerous "due to limited options surrounding DCM self-match prevention choices, coupled with the diverse business structures," it said.

"The options for this type of functionality must be flexible enough so that market participants can choose the method that best suits their business and preserves legitimate trading," the FIA said.

CME Group Inc, the largest U.S. futures exchange operator, this year launched an optional feature on its electronic trading platform designed to prevent wash trades by allowing traders to block matching buy and sell orders.

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