CFTC to define high-frequency trading

The CFTC has announced plans to examine high-frequency trading as a way to more clearly understand the relationship between electronic trading, commodity markets, and trade participants.

Last week, CFTC Chairman Gary Gensler explained that the agency plans to create a concept release that will “address potential market distortions that high-frequency traders and others who have direct market access can cause.” The subcommittee is charged with writing a working definition of high-frequency trading, propose methods to monitor the market, and point out possible disruptions that could spring up as the industry grows.

Though long the pet issue of Commissioner Bart Chilton, who nicknamed the high frequency traders “cheetahs” in speeches across the country and around the world, this particular effort has been spearheaded by Commissioner Scott O’Malia. O’Malia will establish a high-frequency trading subcommittee as part of the CFTC’s Technology Advisory Committee. The subcommittee itself will be helmed by CFTC chief economist Andrei Kirilenko, according to the The Wall Street Journal.

Settling on a definition for high-frequency trading “is anticipated to serve as an initial step toward assessing the presence and impact of HFT in CFTC regulated markets for consideration of appropriate regulatory and policy responses,” says O’Malia. This push to bring high-frequency trading under control comes as an ever increasing percentage of all futures contracts are traded in high-speed accounts. The latest figures show that 60% of all futures contracts traded on the Chicago Mercantile Exchange were made on at a high-frequency. As the market structure improves, those figures are likely to grow. As more trading is forced onto electronic platforms, more high-frequency traders will enter the market to exploit split-second opportunities.

This worries regulators, who still partially blame the May 2010 flash crash on high-frequency trading. The SEC is also stepped up its investigation of the practice by asking firms to show their trading algorithms.

Read more about the new subcommittee

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