WASHINGTON (Reuters) - The U.S. Commodity Futures Trading Commission is investigating high-frequency traders to see if they were breaching the derivatives regulator’s rules, its chief said on Thursday.
“Staff (is) responding to concerns brought to us about certain practices, whether it be spoofing just to give one example, whether that’s running afoul of our rule,” Acting Chairman Mark Wetjen told reporters during a meeting.
“And then whether or not it meets the definition of manipulative activity under our statute,” he said.
Many banks and hedge funds use sophisticated computer programs to send large batches of orders into equity and futures markets in fractions of a second, a controversial practice known as high-frequency trading (HFT).
Proponents of HFT say the firms make it easier for other buyers and sellers to meet each other in the market, but critics argue it can cause sudden market crashes and easily mask market manipulation or other illegal activity.
Spoofing is the practice of rapidly sending out large numbers of orders, which are then quickly withdrawn to give the illusion of a hot market and attract others.
Agency staff, including in the enforcement division, were looking at the activity, Wetjen said. He was responding to questions about a new book by author Michael Lewis, who says U.S. stock markets are rigged in favor of speed traders.
The CFTC oversees swaps as well as futures, with the latter a commonly used hunting ground for speed traders. But Wetjen said he had no indication now those markets were rigged.
“The more we dive into this, maybe we’ll come to that conclusion but I‘m certainly not in a position to say that right now,” Wetjen said on the sidelines of an unrelated meeting with participants about rules in the swaps market.
Wetjen also confirmed media reports that the CFTC was looking at whether exchanges give some of the speed traders discounts on fees the exchanges charge.
“There’s been some analysis done of the relationships between exchanges and some of their liquidity providers,” he said. That was first reported by the Wall Street Journal, which said that the Securities and Exchange Commission is also looking into a related matter.
Reporting by Douwe Miedema; Editing by Jeffrey Benkoe and Meredith Mazzilli