While regulatory flashpoints such as capital requirements and proprietary trading receive more attention from the media, one CFTC commissioner is trying to raise awareness of a trading method he says could cause major problems if it continues to fly under the regulatory radar.
Commissioner Chilton has long been a critic of the absence of regulations governing High-Frequency Trading (HFT), or the use of complex algorithms to execute trades. Ever since the Flash Crash of May 6, 2010, when the Dow Jones Industrial Average fell about 1000 points within minutes (and recovered most of the loss minutes later), the possibility of high-frequency trading disrupting markets has been a real possibility. Just last week, the glitches that accompanied the Facebook IPO reminded traders of the extent to which technology can affect markets.
Commissioner Chilton’s position on HFT regulation has not received much support, either from the other commissioners or from their SEC counterparts. While the CFTC has a “circuit breaker” rule that would halt trading in the event of another Flash Crash (and the SEC is expected to adopt a similar rule on May 31), Commissioner Chilton argues that such rules are insufficient. The algorithms used by high-frequency traders are kept secret, and exchanges such as the CME refuse to disclose HFT trading information. In light of the opacity that reigns over this market sector, he would like to see high-frequency traders have to register at least their names and addresses with a regulatory agency.
High-frequency traders account for 50% of the trading volume on the CME, and up to 70% of trading volume on securities exchanges. It remains to be seen whether isolated voices such as Chilton’s will be listened to, or whether it will take a Flash Crash with serious consequences to wake up the regulatory community to the dangers of high-frequency trading.
Read more about Commissioner Chilton’s position.