CHICAGO Feb 10 (Reuters) - High-speed traders defended the merits of their business on Monday as the U.S. futures regulator kicked off a new round of scrutiny for the sector often blamed for market disruptions.
Traders spoke out as a Commodity Futures Trading Commission (CFTC) committee held its first meeting on automated and high-frequency trading (HFT) since issuing a long-awaited report on the practices last fall.
Citing a series of trading glitches as evidence that its rules needed updating, the CFTC had asked for industry input on a long list of possible regulations to make trading safer.
The move to computer-driven trading has been "broadly positive but also unsettling to some," Richard Gorelick, chief executive of high-speed trading firm RGM Advisors, told the committee.
"Criticizing HFT has become a cottage industry," he said, adding that he was confident that regulators would see through "fear mongering and hype" when assessing potential new rules.
Trading disruptions plagued financial markets last year, most notably when thousands of stocks listed on Nasdaq OMX Group's were paralyzed for three hours because of a technological problem.
The CFTC, when it issued the report on computerized trading last fall, mentioned that outage and other examples to illustrate the importance of having robust trading systems.
High-frequency traders use computer software to post orders in fractions of a second without human intervention. The speeding trading is a favored tool of hedge funds.
The May 6, 2010 "flash crash" - in which futures and securities indices fell more than 5 percent in minutes, before rapidly recovering - is the most prominent market lapse associated with high-frequency trading.
Still, automated trading has helped make markets more liquid and lowered trading costs, said Rob Creamer, president of Geneva Trading and a representative of a Futures Industry Association (FIA) traders' group.
"Any regulatory effort to improve market infrastructure must, at a minimum, preserve the market quality improvements that have occurred as markets have become more automated and competitive," the FIA group said in prepared comments.
Among the issues the CFTC asked about in its report was the use of "kill switches" to halt automated trading programs if they are malfunctioning. The switches can be an "effective last resort" but should be used only in extreme events, the group said.
It is important for the CFTC to assess a number of potential regulatory changes in light of the high-speed trading environment, including its definitions of banned practices like front running, said Caitlin Kline, derivatives specialist for Better Markets, a group that says it fights for the public interest in financial markets.
High-frequency traders are "effectively are able to see the future" when they digest information faster that other investors, she said.
CFTC staffers are reviewing responses to the report and will make a recommendation on the next steps the committee should take. The deadline for comments is Feb. 14.