Bonds News

CFTC to scrutinize high-frequency trading-O'Malia

* HFT “baiting” strategy warrants further CFTC scrutiny

* CFTC technology panel to “ask tough questions” on HFT

* CFTC needs more resources for new OTC swaps authority

* Proposal coming for colocation, ownership/control report

By Christopher Doering and Roberta Rampton

WASHINGTON, June 3 (Reuters) - The U.S. futures market regulator will look hard at whether to impose new rules to limit high-frequency and algorithmic trading strategies that threaten to distort prices, a top official told Reuters on Thursday.

In his first major interview since taking over a revived Commodity Futures Trading Commission group that will study rapidly evolving technology in futures markets, Scott O’Malia said his group would ask “tough questions.” In particular, he vowed scrutiny of the practice of “baiting” the market by using small-volume trades to drive prices in one direction.

“I’m not worried about stepping on toes. We’ve got to make these markets function properly, effectively,” O’Malia said.

O’Malia is one of three CFTC commissioners who has expressed reservations on a proposal to impose position limits on U.S. oil and gas markets. He reiterated his belief that the agency should gauge the impact of the broad new powers it expects to receive from Congress to regulate swaps markets before making a decision on the plan.

He said he is wary of “momentum ignition strategies”, where orders are submitted or small trades are done to compel a market to move up or down.

“We need to ask ourselves, ‘What is the real price in these markets? Do consumers have the confidence in the markets?” O’Malia said, noting he does not believe the practice adds liquidity to markets.

“These are price discovery markets and these baiting strategies seem to question whether that’s a legitimate price,” O’Malia said.

His committee, set to meet for the first time on July 14, will closely examine the issue, but O’Malia stopped short of saying the CFTC needs rules to crack down on the strategy.

“We’re going to ask the questions: what reforms need to be put in place?” he said.


O’Malia, a Republican newly confirmed to the CFTC late last year, said he is confident the CFTC has strong oversight and surveillance for the exchanges it currently regulates.

But he said the agency will need more computing power and staff with quantitative analysis expertise to tackle the new authority to regulate the vast over-the-counter derivatives markets -- oversight it expects to receive from Congress this year.

“We see this tsunami of data coming, and we know that we have to get ahead of this thing,” O’Malia said.

The CFTC is working aggressively to boost market oversight through a series of proposed rules, the first of which will be a “relatively straightforward” rule released within days on co-location -- the practice of placing computer systems next to exchange servers to speed execution of algorithmic strategies. [ID:nN11252716]

The regulator also is poised to soon release a proposed rule on account ownership and control reporting, marrying large trader reports with exchange trade data so the CFTC can improve surveillance and aggregate traders’ positions, O’Malia said.

Understanding traders’ positions across traditional exchange-traded futures markets and opaque OTC markets is critical if the CFTC is to move forward on new proposals to limit speculative positions in energy and other markets, O’Malia said. (Editing by David Gregorio)