WASHINGTON U.S. futures regulators on Thursday proposed a rule aimed at high-frequency trading that seeks to ensure all market players have equal access to bids and offers from exchanges and other trading platforms.
The Commodity Futures Trading Commission has said it plans to boost scrutiny of high-frequency trading, which now accounts for as much as half of all U.S. futures volume, and was fingered for its role in the May 6 stock market "flash crash."
Co-location is critical for high-frequency traders, who place their computer systems next to exchange servers to get information as quickly as possible, measured in microseconds and even nanoseconds. Critics have said it is unfair for some players to get faster access to buy and sell orders.
"This is probably one of the most important issues the CFTC will handle," said Michael Greenberger, a law professor at the University of Maryland, and a former CFTC official.
"I think there is a sense of urgency now that wasn't present prior to May 6 and I'm not sure the rule would have come out this fast had it not been for the flash crash," Greenberger said in an interview.
Banks, hedge funds and independent proprietary traders use lightning-quick algorithms to profit from tiny market imbalances.
The CFTC has said it will study high-frequency trading strategies and practices further, including reviewing whether more rules are needed to ensure markets are fair.
In its proposed rule, which is slated to be published in the government's Federal Register on Friday and will be open for public comment for 30 days, the CFTC said it wants to ensure all market participants have access to co-location services on similar terms.
"Any activity that negatively impacts equitable, fair, and transparent trading on those markets could constitute a disruption to market integrity," the CFTC said in its Federal Register notice.
Some traders have worried a crackdown from the CFTC on high-frequency trading could push the business overseas, damaging market liquidity.
Exchange giant CME Group said in March it would start offering co-location services early in 2012.
In its notice, the CFTC said it would require fees for equivalent co-location services to be equitable, uniform, and non-discriminatory, depending on the service provided.
The rule would ensure fees are not used to deny access to some players by "pricing them out of the market" for costs such as space, data connections and technical support, the CFTC said.
The CFTC would require exchanges and platforms to disclose on their websites the longest, shortest, and average latencies for each connectivity option.
Latency is the delay between transmitting buy and sell orders. Lower latency means faster trading, and can be affected by distance from computer servers as well as system traffic.
The agency also wants to ensure third parties are able to provide co-location services, but would require them to follow exchange and CFTC rules.