By Douwe Miedema
WASHINGTON, Sept 9 The U.S. derivatives
regulator put computerized trading in its sights on Monday in a
long-awaited study that could be the first step to rein in a
sector often blamed for market disruptions.
Citing a long series of recent glitches as evidence that its
rules needed updating, the Commodity Futures Trading Commission
(CFTC) asked for industry input on a long list of possible
measures to make trading safer.
"Recent malfunctions ... in both derivatives and securities
markets, illustrate the technological and operational
vulnerabilities inherent to automated trading environments," the
agency said in a so-called concept release.
Trading disruptions have plagued financial markets in the
recent past, most notably when thousands of stocks listed on
Nasdaq OMX Group's were paralyzed for three hours last
month because of a technological problem.
The CFTC, which regulates swaps and futures markets,
mentioned that outage, and other recent examples, to illustrate
the importance of having robust trading systems.
High-frequency traders uses software to post orders in
fractions of a second without human intervention, to be ahead of
other and slower traders, and is a favored tool of hedge funds
and trading desks at other investors.
It accounted for more than 60 percent of the entire volume
of futures trading in 2012 on U.S. exchanges such as CME Group
and IntercontinentalExchange, according to
industry research group The Tabb Group.
In equity markets, the numbers are similar.
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.
A panel of experts convened by the CFTC and the Securities
Exchange Commission in 2011 already issued recommendations to
reform automated trading after that event, but few of its ideas
have made it into new regulation.
"This looks like a long-overdue first step by the financial
regulators to stop abusive high speed computer-driven practices,
which have caused havoc in our markets," said Dennis Kelleher,
who heads financial reform group Better Markets.
In its concept release - a formal first step to possible
rule-making - the CFTC asked companies and other stakeholders to
answer more than 100 questions about possible proposals to adapt
its rule-book to the new technologies.
One possible measure are limits on the number of orders that
companies can send out to prevent them from flooding the markets
with misleading information, and stop them from acting faster
than their own risk control systems.
Maximum order sizes were another possible idea to prevent
"fat finger" trades that can disrupt the market.
The CFTC has already issued rules for co-location, a process
in hedge funds are allowed to place their computers within the
buildings of a stock exchange, to shave a few more milliseconds
off order times.
In a first step, the CFTC's Technology Advisory Committee,
which groups together regulators and industry participants, will
discuss the report at a meeting on Sept. 12.
The SEC, its sister agency, issued a concept release on
market structure in 2010 and has since adopted new rules in a
handful of areas, including risk controls for brokers and
automated stops to prevent big market swings.