CFTC Commissioner Bart Chilton continued his campaign to reign in high-frequency traders this week before the American Soybean Association Legislative Forum. High-frequency traders, sometimes known as cheetahs, use high-speed computers and hyper-sensitive algorithms to make lightening fast trades.
Chilton argues that unregulated cheetahs are dangerous to financial stability. They make markets susceptible to “flash crashes” like the one seen in May 2010, and they may abuse trading volumes to “cut the line” at exchanges. Chilton recommends (to borrow his extended metaphor) that cheetahs be captured and caged via CFTC regulation.
The Commissioner recommended four rules:
- Testing algorithms before they go live;
- A pre-approval or accreditation process for cheetah traders;
- Kill switches for “feral” programs;
- Accountability and enforcement for rouge cheetahs.
Chilton has been advocating for cheetah regulation since at least February 2011. The long arm of Dodd-Frank somehow missed this trader-type, and he would like to see this revised. However, not everyone sees the cheetah traders as a threat to market stability. Mark Spanbroek of the FIA European Principal Traders Association, a newly minted industry organization, argues that complaints about his profession are overblown: “Nine out of ten issues in FX stem from banking activity…Yes, there are some independent algo trading firms [in the space] but they are nowhere near as active as [the] banks.”
While he might not see eye-to-eye with Chilton on cheetah-related market instability, Spanbroek claims that market regulation and transparency measures would be welcome: “Regulation, and especially central clearing, would make the [foreign exchange] market more transparent for them to trade in. Right now, clearing is carried out through the prime brokerage relationship with a bank, not the clearing house model that we view as more open and transparent…I know this sounds odd, but principal traders want to be regulated.”