* CFTC panel examines algorithmic, high-frequency trading
* O'Malia: may need new "risk controls" to protect markets
* Gensler: industry "best practices" may not be enough
* CFTC, SEC eye "quote stuffing" in May 6 flash-crash
* Concern about inadvertent "wash trades" from HFT (Adds comments from CFTC's O'Malia, Chilton and industry players)
By Christopher Doering and Roberta Rampton
WASHINGTON, July 14 (Reuters) - The U.S. futures regulator must look carefully at new "risk controls" to protect markets in an era when trades are executed at lightning speed, the head of a new technology panel for the Commodity Futures Trading Commission said on Wednesday.
The expanding use of algorithms to rapidly create and execute futures trades -- combined with new responsibility for the vast over-the-counter swaps market -- means the CFTC needs to evolve, Commissioner Scott O'Malia said at the first in a series of meetings designed to advise the agency on rules and technology it should put in place.
O'Malia told reporters some regulation is "inevitable" to govern how algorithmic traders are granted "direct access" to exchanges, but the agency hoped to first gather more information from traders and exchanges by October.
The Futures Industry Association has developed a set of "best practices" for direct access, but CFTC Chairman Gary Gensler said guidelines might not be enough.
"The only way that you get all market participants... to have sort of some minimum level and consistent level of risk management around these areas is probably by a rule," Gensler said.
COLUMN: John Kemp [ID:nLDE66C11J]
FACTBOX: CFTC technology panel [ID:nN1262075]
SPECIAL REPORT: High-frequency trading [ID:nN1735839]
Take a Look on CFTC's push for new limits [ID:nCFTCREG]
High-frequency trading may account for 60 percent of U.S. futures trade by the end of 2010, according to one estimate -- and came under heightened scrutiny after the May 6 stock market "flash crash" that drove the Dow Jones index .DJI down some 700 points within minutes.
Traders have said technology was not to blame, but regulators have said high-frequency strategies may have exacerbated the price moves.
The two dozen industry leaders at the CFTC meeting on Wednesday eyed new analysis of the flash crash conducted by Nanex LLC, a trade database developer.
The Nanex analysis argues "quote-stuffing" algorithms with descriptive names like "Barcode" and "Crystal Triangle" were used on May 6 to try to prevent others high-frequency traders from executing strategies.
"If we don't find out who did that, I think it's one of the biggest crimes of the year," said Michael Cosgrove, head of the North American commodities and energy brokerage for GFI Group GFIG.O.
Last week, top CFTC and SEC enforcement and surveillance officials met with Nanex to discuss the findings, and Nanex has provided regulators with its data, said Andrei Kirilenko, senior economist with the CFTC.
"We've taken their research very, very seriously," Kirilenko told the meeting.
CFTC Commissioner Bart Chilton said he found the revelation interesting but "daunting."
"If there are algo price pirates out there trying to take advantage of these systems, it's ... a new enforcement regime for us to look at," Chilton said.
CHASING ALGO "GHOSTS"
O'Malia said he was concerned about "wash trades" -- when firms simultaneously buy and sell contracts, a practice banned under U.S. futures law.
Trading firms running different computer algorithms often unintentionally trade against their own orders, and exchange officials from CME Group (CME.O) and IntercontinentalExchange (ICE.N) said they have ways to monitor those occurrences for abuse.
Members on the panel warned against acting too quickly and said the CFTC should monitor trades for abusive patterns over time before cracking down on trades.
Regulators should do a better job defining abusive practices such as "wash trades" and "spoofing" so that exchanges can prevent them, said Charles Vice, chief operating officer for IntercontinentalExchange Inc.
"I feel like right now we're chasing ghosts a little bit with people throwing around terms," Vice said. "It's very difficult to decide if there's a problem ... and what the solution should be, until we decide what it is we don't want." (Editing by Walter Bagley, Lisa Shumaker and Sofina Mirza-Reid)