Chicago - A working group on behalf of the Commodity Futures Trading Commission (CFTC) proposed a definition of high frequency trading which is based on four key criteria and which is designed to avoid regulatory arbitrage.
Greg Wood, a director at Deutsche Bank and a member of the working group, outlined the new definition and the thinking behind it at a meeting of the CFTC's Technical Advisory Committee (TAC)
"We chose to use language that has a recognised legal interpretation," he told the TAC meeting, which was open to the public.
"We chose to emphasise a very mechanical description of high frequency trading that is deliberately neutral regarding types of trading strategies and how they interact with the market place."
The main reason behind this, Wood said, was because there were many types of market activity that can be labeled as HFT activity. "We want to provide a basis for a regulatory definition of HFT as opposed to a popular definition. A lot of people have their own views as to what constitutes HFT," he said.
The definition considers HFT to be a form of automated trading
a) algorithms for decision-making, order initiation, generation, routing or execution
b) low latency technology that is designed to minimise response times, including proximity or co-location services
c) high speed connections to markets or order entry
d) recurring high message rates (orders, quotes or cancellations), using one or more forms of objective measurement, including cancel-to-fill ratios, participant-to-market message ratios, participant-to-market trade volume ratios
Wood said the the definition included a caveat that stated objective forms of measurements were to be determined by a regulator for a specific financial instrument or class of instruments and provide a benchmark for comparing activity that is higher than normal.
The definition also called for these benchmarks to be published on a regular basis and applied for specific time periods following publication.
Wood said the group deliberately didn't include specific metrics. "We want the metrics to be decided by people who actually look after the marketplaces where this activity occurs," he said.
He added there was discussion -- and some dissent - about whether to include issues like holding periods or high turnover rates. "We decided, democratically across the working group, that we would not include those metrics so they've been left out of the definition."