CFTC Weighs Crack-Down on High-Frequency Trades

Discussion in 'Professional Trading' started by ASusilovic, Jul 14, 2010.

  1. WASHINGTON (Reuters) - The U.S. Commodity Futures Trading Commission risks hurting markets if it is too aggressive in flexing its regulatory muscle to rein in high-frequency traders, exchanges and participants are expected to tell the agency on Wednesday.

    The U.S. futures regulator's technology committee will hold the first in a series of public meetings with exchanges, clearinghouses, trading firms, and other groups as it considers how to adapt to the rapidly evolving world of algorithmic and high-frequency trading.

    Lightning-fast computer strategies that determine how, when and what to trade have added liquidity, depth and transparency to markets, reducing overall costs, the chief operating officer of the world's largest futures exchange said in a statement -- part of a 181-page information packet released by the CFTC ahead of the meeting.

    "Careful consideration should be given to any decision to impose restrictions or limitations on algorithmic and high frequency trading that would be harmful to the marketplace and result in less efficient and less liquid markets," said Bryan Durkin, chief operating officer and managing director with CME Group Inc.

    High-frequency trading (HFT) accounts for about 35 percent of U.S. futures volumes -- a number that some expect will reach 60 percent by the end of the year.

    The CFTC's arcane technology has been outpaced by the state-of-the-art hardware and software used by the traders it polices. It finds itself grappling with the complexities of sub-millisecond trades and terahertz processors as technology becomes an even more vital component of the futures and derivatives markets.

    The futures regulator still relies on fax machines to receive some trade information, an anachronism it can no longer afford as it grapples with a five-fold surge in U.S. futures trading volume over the past decade and prepares to take oversight of even larger over-the-counter derivatives markets.

    The futures regulator still relies on fax machines....hahahahahahah:D :) :p
  2. Goalieee



    Maybe that one of the motives because they are not able to "regulate"...
  3. LeeD


    It's because they need something that has legal strength of a written document. Fax printouts provide this quality while e-mails are not accepted as a documentary proof of a transaction with substantial monetary value. "Secure E-mail" like that built into bloomberg or reuters terminal could replace fax but, understandably, CFTC is reluctant to pay over $10k a year for each such E-mail account.
  4. nitro


    To me the most egregious abuse by these strategies is the sub-penning that goes on. It is hard to imagine why it is allowed, except that once again, it is good for the exchanges and clearing firms revenues. It sucks big for investors, imo.

    And they wonder why people are leaving the stock market in droves...
  5. Sub pennying is legalized front running.

    * CFTC panel examines algorithmic, high-frequency trading

    * O'Malia: may need new "risk controls" to protect markets

    * Gensler: industry "best practices" may not be enough

    * CFTC, SEC eye "quote stuffing" in May 6 flash-crash

    * Concern about inadvertent "wash trades" from HFT
    (Adds comments from CFTC's O'Malia, Chilton and industry

    By Christopher Doering and Roberta Rampton

    WASHINGTON, July 14 (Reuters) - The U.S. futures regulator
    must look carefully at new "risk controls" to protect markets
    in an era when trades are executed at lightning speed, the head
    of a new technology panel for the Commodity Futures Trading
    Commission said on Wednesday.

    The expanding use of algorithms to rapidly create and
    execute futures trades -- combined with new responsibility for
    the vast over-the-counter swaps market -- means the CFTC needs
    to evolve, Commissioner Scott O'Malia said at the first in a
    series of meetings designed to advise the agency on rules and
    technology it should put in place.

    O'Malia told reporters some regulation is "inevitable" to
    govern how algorithmic traders are granted "direct access" to
    exchanges, but the agency hoped to first gather more
    information from traders and exchanges by October.

    The Futures Industry Association has developed a set of
    "best practices" for direct access, but CFTC Chairman Gary
    Gensler said guidelines might not be enough.

    "The only way that you get all market participants... to
    have sort of some minimum level and consistent level of risk
    management around these areas is probably by a rule," Gensler


    COLUMN: John Kemp [ID:nLDE66C11J]

    FACTBOX: CFTC technology panel [ID:nN1262075]

    SPECIAL REPORT: High-frequency trading [ID:nN1735839]

    Take a Look on CFTC's push for new limits [ID:nCFTCREG]


    High-frequency trading may account for 60 percent of U.S.
    futures trade by the end of 2010, according to one estimate --
    and came under heightened scrutiny after the May 6 stock market
    "flash crash" that drove the Dow Jones index .DJI down some
    700 points within minutes.

    Traders have said technology was not to blame, but
    regulators have said high-frequency strategies may have
    exacerbated the price moves.

    The two dozen industry leaders at the CFTC meeting on
    Wednesday eyed new analysis of the flash crash conducted by
    Nanex LLC, a trade database developer.

    The Nanex analysis argues "quote-stuffing" algorithms with
    descriptive names like "Barcode" and "Crystal Triangle" were
    used on May 6 to try to prevent others high-frequency traders
    from executing strategies.

    "If we don't find out who did that, I think it's one of
    the biggest crimes of the year," said Michael Cosgrove, head of
    the North American commodities and energy brokerage for GFI
    Group (GFIG.O).

    Last week, top CFTC and SEC enforcement and surveillance
    officials met with Nanex to discuss the findings, and Nanex has
    provided regulators with its data, said Andrei Kirilenko,
    senior economist with the CFTC.

    "We've taken their research very, very seriously,"
    Kirilenko told the meeting.

    CFTC Commissioner Bart Chilton said he found the
    revelation interesting but "daunting."

    "If there are algo price pirates out there trying to take
    advantage of these systems, it's ... a new enforcement regime
    for us to look at," Chilton said.


    O'Malia said he was concerned about "wash trades" -- when
    firms simultaneously buy and sell contracts, a practice banned
    under U.S. futures law.

    Trading firms running different computer algorithms often
    unintentionally trade against their own orders, and exchange
    officials from CME Group (CME.O) and IntercontinentalExchange
    (ICE.N) said they have ways to monitor those occurrences for

    Members on the panel warned against acting too quickly and
    said the CFTC should monitor trades for abusive patterns over
    time before cracking down on trades.

    Regulators should do a better job defining abusive
    practices such as "wash trades" and "spoofing" so that
    exchanges can prevent them, said Charles Vice, chief operating
    officer for IntercontinentalExchange Inc.

    "I feel like right now we're chasing ghosts a little bit
    with people throwing around terms," Vice said. "It's very
    difficult to decide if there's a problem ... and what the
    solution should be, until we decide what it is we don't want."
    (Editing by Walter Bagley, Lisa Shumaker and Sofina

    I have for a long time the suspicion that the simultanous buy and sell of contracts ( Wash trade :A transaction designed to make it appear that a purchase and sale has occurred even though no change in ownership occurred. For example, an investor might simultaneously buy and sell shares in one security through two different brokerage firms in order to create the appearance of substantial trading activity that will draw in other investors. Wash trades are illegal ) of one and the same trading firms in ES contracts are responsible for the bullsh1t we see every single day.

  7. Analysis of the "Flash Crash"
    Date of Event: 20100506


    1. Quote and trade data must be time stamped by the exchanges at the time it is generated. This will ensure delays can be detected by everyone.

    Reasoning: Changing the procedure to time stamp at the time a quote or trade is generated is a near trivial exercise. It probably comes as a surprise to many that time stamping isn't done that way now.

    2. Quote-stuffing should be banned.

    Reasoning: It is a manipulative device designed to overload the quotation system. Quote and trade dissemination (data feed) is a finite resource, and should be treated as such.

    3. Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses. If the quote is part of the NBBO, it may be improved (higher bid or lower offer price) at any time without waiting for the expiration period.

    Reasoning: The exchanges must protect the integrity of the National Best Bid/Offer system. What is the point of having a National Best Bid/Offer, if not everyone in your nation (apologies to Alaska/Hawaii) can reasonably execute a trade against it? 50ms is approximately the time it takes light and electronic communication to travel from New York to California and back. It is impossible to transmit information any faster. This rule would not limit quote/trade rates. So long as trades are executing, quotes can update thousands of times a second. Only a small percentage of quotes today would be affected and the potential for catastrophically high rates would be eliminated.


    Publication Date: June 18, 2010

    Copyright © 2010 by Nanex, LLC
    All Rights Reserved.

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  8. thats total bollocks. Nowadays emails can (stress can, if properly set up and pre-agreed upon) have the same legal implications than any other written or hand-signed document.