SAN FRANCISCO, March 17 U.S. futures regulators, concerned about the frequency with which high-speed traders engage in banned self-dealing, are examining the practice with an eye toward crafting new rules to prevent it, a top regulator said on Monday.
The examination of so-called wash trades is "in a juvenile stage at this point," Commodity Futures Trading Commission's Bart Chilton told Reuters on the sidelines of the National Grain and Feed Association meeting.
"We are trying to figure out whether it's going on and why it's going on," he said.
In a wash trade, a trading firm improperly sells a contract to itself without taking any risk in the market.
The practice is barred under CFTC and exchange rules because it can create the appearance of an active market where there is none.
The review was prompted by a recent report by CFTC surveillance staff showing a "shocking" level of wash trading across a range of markets, including financial, energy, agricultural and metals contracts, Chilton said.
He would not provide figures, saying that CFTC lawyers asked him not to, but indicated wash trades accounted for more than a small amount of transactions.
He declined to say whether the CFTC's enforcement division was involved in the review of wash trades.
"If this were 0.4 percent (of trading) I wouldn't be giving speeches about it... (these are) whole percentages," Chilton said. "We looked at it over a specific continuum, and we saw fairly constant wash sales being generated."
Chilton said that until recently he thought the practice was fairly rare.
But the CFTC's surveillance data shows the practice is widespread among high-frequency trading firms, said Chilton, who has frequently accused rapid-fire computer-driven strategies of distorting markets and boosting the cost of trading for individual investors.
Some 13.7 million contracts changed hands on an average day last month at CME Group Inc 's futures markets; IntercontinentalExchange Inc 's markets handled about 3.6 million contracts.
In a speech to the grain group, Chilton called for new restraints on high-frequency trading firms, including requiring them to register with regulators, test their computer programs before running them out in live markets, and have "wash-blocking" programs that prevent them from being on both side of a trade.
He also said regulators should be able to levy greater fines on firms, and said he wanted the CFTC crack down on market-making programs, in which exchanges typically reduce or waive fees for high-speed traders in order to boost liquidity in certain markets.
"We need to be sure there aren't any perverse incentives to be involved in things like wash trades," he said. "We should have a rule on the market maker programs, to standardize these things a little bit."
Exchanges including CME and IntercontinentalExchange run dozens of market-making programs that get only cursory review from the CFTC, he said.
An IntercontinentalExchange spokeswoman said it has technology in place that prevents wash trades.
A CME spokeswoman said the exchange operator enforces its rules against wash trades and is "in the process of developing technology" to prevent it from happening at the exchange level.