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CFTC eyes new powers to police algorithmic trading

WASHINGTON (Reuters) - The U.S. futures regulator said on Thursday it would look at whether new regulations could help prevent market disruption from high-frequency algorithmic trading in the wake of the May 6 “flash crash.”

The Commodity Futures Trading Commission has new powers in a Wall Street reform law to tackle attempts to manipulate or disrupt markets, and plans to look at high-frequency traders’ role in the equities plunge as it crafts new rules.

“While I do not believe that the flash crash was the direct result of reckless misconduct in the futures market, I question what the CFTC could have done if the opposite were true,” Scott O’Malia, a CFTC commissioner, said in a statement.

“Who is responsible when technology goes awry? Do we treat rogue algorithms like rogue traders?” O’Malia said.

The U.S. Securities and Exchange Commission also is looking at new controls for computer-driven, split-second trading after the May 6 crash, in which the Dow Jones industrial average plunged 700 points in minutes before recovering.

A CFTC-SEC joint investigation found a computer-driven sale of S&P 500 Index e-mini futures contracts worth $4.1 billion by a single trader helped trigger the crash.

An expert commission is now charged with making recommendations for regulators.

(For a Reuters Insider interview on new regulations, click on link.reuters.com/kec37p )

The CFTC is also looking at how an algorithm malfunction at a high-frequency firm in February caused a sudden surge in oil prices.

O’Malia chairs a committee looking at the challenges posed by algorithmic trading to futures markets.

The committee, due to hold a public meeting on October 12, will discuss a report authored in part by CFTC economists showing high-frequency trading “exacerbated the downward move in prices”.

"We believe that technological innovation is essential for market advancement. As markets advance, however, safeguards must be appropriately adjusted to preserve the integrity of financial markets," the report said. (r.reuters.com/huq47p )

The committee is also slated to discuss how swaps trades should be reported, and what level of transparency is required before trades are made.

The issue is a top concern for traders concerned that telegraphing large swaps deals -- business traditionally done privately and bilaterally -- could affect underlying futures markets.

Editing by Dale Hudson

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