CFTC's Chilton wants more high frequency trade oversight

WASHINGTON (Reuters) - A top U.S. futures regulator official said Wednesday he supported tougher oversight of the high-frequency trading market that’s responsible for a third of the volume on regulated U.S. futures exchanges, including requiring that the trades be reviewed and monitored.

Bart Chilton, a commissioner at the Commodity Futures Trading Commission, said in prepared remarks that traders responsible for high frequency or algorithmic trades that damage the market and consumers should be held accountable.

“One way to address the matter is to include such a provision in our new anti-disruptive trading practices authority,” Chilton said in a speech at a high frequency trading conference in New York.

“We should prohibit certain conduct that is specific to algo robots and high frequency trading. Taking into account what happened on May 6, this certainly seems like a reasonable proposition,” he said.

The May 6 crash sent the Dow Jones industrial average down some 700 points in a matter of minutes, before it sharply recovered. Although a government review did not blame high-frequency traders, the Securities and Exchange Commission and CFTC are under pressure to rein in the rapid traders, who use computer-driven algorithms to buy and sell shares at lightening speed.

Economists at the CFTC estimate high frequency traders account for about a third of all trading volume on regulated U.S. futures exchanges, said Chilton.

In his remarks, Chilton said the CFTC, as part of its core principles, should require exchanges to have “certain due diligence” and review these computer programs from the start.

“I’d also like to ensure that all exchanges have the ability to monitor individual programs trading and aggregate and slice, dice and chop up data to get a better handle on what is and could go on in market,” he said.

Chilton said high-frequency programs are a key part of trading today, but he added commercial firms trying to hedge their risk have complained the number and speed of high-frequency trades has made it difficult for them to enter the market. Without commercial firms, Chilton said price discovery and risk management will suffer.

He proposed the idea of adopting a definition of what high-frequency trading is, and even creating a “Good Housekeeping Seal of Approval.” But Chilton said questions remain including whether in fact it is a good idea and who should be put in charge of doing it.

Chilton also supported limits on high frequency trading. “We certainly should not allow some situations to exist,” he said.

The CFTC is drafting position limits for the energy and metals markets, though there is no timetable for when they might be proposed. The agency has a mid-January deadline to implement the rule, and some commissioners at the agency have said they may not make it.

Chilton said there are more speculative positions now than ever before. Between June of 2008 and October of 2010, futures equivalent contracts held by hedge funds, index funds and pension funds increased 47 percent in energy contracts, 20 percent in metals and 18 percent in agricultural commodities.

Chilton on Wednesday renewed a call for the agency to meet the deadline. He wants the rule proposed this month.

“Congress ... gave the agency the earlier implementation date for a reason -- so that we put limits in place now, not some later time of our choosing,” he added.

“Additionally, the law provides no such authority for regulators to delay the imposition of these limits. There is no regulatory escape valve.”