* "Voluminous" wash trades create "fantasy liquidity,"
* Chilton is frequent critic of high-frequency trading firms
* Wash trading barred by CFTC, exchange rules
By Ann Saphir
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," the 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
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, said Chilton, a CFTC
He would not provide figures, saying that CFTC lawyers asked
him not to, but he indicated the self-dealing was frequent
enough that it was unlikely to be accidental.
"It's more than just bumping into each other," he said. The
resulting volume, he said, is "fantasy liquidity."
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
But the CFTC's surveillance data shows the practice is
"voluminous" and widespread among high-frequency trading firms,
said Chilton, who has frequently said rapid-fire computer-driven
strategies distort markets and boost the cost of trading for
Some 13.7 million contracts changed hands on an average day
last month on CME Group Inc's futures markets;
IntercontinentalExchange Inc's markets handled about 3.6
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
sides of a trade.
He also said regulators should be able to levy greater fines
on firms, and said he wanted the CFTC to crack down on
market-making programs, in which exchanges typically reduce or
waive fees for high-speed traders to boost liquidity in certain
"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 receive 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 them from happening at the exchange
Spokeswomen from both exchanges declined to comment on how
common wash trades are.
On Monday CME fined a trader named Michael Cardwell $5,000
for wash sales made in 2009 and barred him from trading for nine