CFTC’s Scott O’Malia discusses automated trading rules.

commissioner-omalia-portrait-2010 (InnerPortrait)

According to The Trade, CFTC’s Scott O’Malia mentioned in a conference held by the Investment Company Institute on Thursday that the Commodity Futures Trading Commission will need to implement the use of more data, as well as focus on high frequency traders (HTFs) as it begins to formulate new automated trading rules.

O’Malia feels the use of data will allow the CFTC to understand problems that can occur within the market, citing the Flash Crash of 2010, where the market was found to be vulnerable to automated trading errors after the event.

The Flash Crash refers to a strange occurrence on May 6, 2010, in which the Dow Jones dropped 600 points in a mere five minutes, only to then recover almost completely within twenty minutes. Both the CFTC and SEC blame, at least partially, high frequency trading firms for the crash, who at one point traded over 27,000 contracts within fourteen seconds.

In order to draft new rules for automated trading, O’Malia feels it’s important to focus on three things: surveying and choosing the most effective market controls, considering which exchange rules to adopt based on best practices, and deciding whether or not a registration process for automated trading firms would be sufficient for new rules.

O’Malia also mentioned that in order to properly manage automated trading, the CFTC will need to upgrade its technology significantly. This was a critique of the CFTC’s reporting of the Flash Crash, as it took five months for the CFTC to be able to properly monitor and evaluate all the data from an event that took less than a half an hour.