Chicago - The Commodity Futures Trading Commission (CFTC) would be better off focusing on pre-trade functionality in overseeing high-frequency trading rather than inspecting algorithms directly, as some countries have talked about doing, Commissioner Scott O'Malia said.

O'Malia, one of five commissioners serving the US regulator, made the remarks in a wide-ranging interview with Automated Trader, in which he called for more cost-benefit analysis by regulators and less emphasis on what he believes are artificial deadlines.

"If we were to review each and every algorithm, that would put us similar to the FDA, the Food and Drug Administration, right? They have the mission and responsibility to review and look at the impact of all the drugs on the market and medicines et cetera. So is that the role the Commission would do? We don't have the people in that capacity to understand it," he said.

Hong Kong and Australia have both floated the idea of their regulators conducting reviews or inspections of private firms' algorithms.

The best solution, O'Malia suggested, would be to push for proper pre-trade functionalities, to make sure there were robust controls in the market when trades occurred.

"The challenge of trying to guess at the outcome of an algorithm, or to preview or pre-clear an algorithm, when it's a very dynamic trading environment, it would be incredibly difficult."

O'Malia is chairman of the CFTC's Technical Advisory Committee (TAC), which has begun to focus on high frequency trading (HFT).

(Automated Trader subscribers can read the full transcript here. The full video of the interview will also be posted later.)

"I'm trying to build at least a fact-based debate. I think it's important to understand what the ramifications of this solution are, that many times people jump to conclusions or concerns about the HFT. And I want to get to the bottom of it. If it's good for trading, if it's bad for trading, the impact on it, and fundamental traders and the price discovery and formation."

O'Malia still has concerns about HFT, noting that some who are familiar with the futures market have argued that markets are not offering the same price discovery and hedging opportunities they once did.

"So that's a concern. We don't want people to lose confidence in these markets. We want to make sure that everybody has the opportunity to execute their business model and their mission that they need in the market, whether it's price discovery, hedging, speculation et cetera. We need all of these players in the market."

O'Malia made the comments just after a TAC meeting in Chicago, which coincided with a Futures Industry Association gathering. He is no stranger to the US Midwest, having been born in neighbouring Indiana and raised in Michigan. As the CFTC says on its website, he learned first-hand about commodity prices growing up on a family farm.

His readiness to speak directly and forcefully about what he believes are dangerous practices has sometimes put him at odds with his fellow regulators. He signalled no intention of easing up in his use of every tool in his arsenal to drive the regulatory debate.

"I use the opportunity to speak publicly, to talk about and to raise awareness of the issues, and if I can sway the debate, all the better," O'Malia said.

"I'm trying to articulate a vision. I'm trying to talk about the importance of schedules, cost-benefit analysis and transparency. I'm using all the tools available to me. And I'll continue to do so."

O'Malia said he has "serious concerns about some of our rule-making process" because of the speed at which the CFTC has acted. So does he believe he is making a difference in speaking out?

"I think I have had an impact. I think we have had more rule proposals that kind of take a more measured approach."

Where he is most outspoken is in his criticism of the schedule the CFTC has been following.

"You can't use speed as an artificial deadline to force action. Dodd-Frank had a one-year implementation, they wanted all of our rules, which is totally unrealistic. There's no way you're going to implement the entirety of Title VII, let alone the entirety of Dodd-Frank, in one year," he said.

Having already missed the initial deadline, O'Malia argued that any other deadline was arbitrary.

"So, if we're going forward, it's always important that we do it right rather than do it fast. I would much prefer that we go ahead and we can set whatever deadlines the chairman would like, but we have to be careful about our regulation to make sure that we understand the impacts that these regulations are going to have," he said noting incidents where the CFTC has already had to offer no-action relief and clarify its moves.

"I'm not articulating a slow-down strategy as opposed to a do-it-right strategy. I think I have had an impact. I think we have had more rule proposals that kind of take a more measured approach," he said.

Despite the seemingly anti-Dodd-Frank veneer, O'Malia finds much to admire in the ambitions set forth in the Pittsburgh communique that led to the US law.

Reporting of trades, execution on screen, clearing of trades, higher margin requirements for OTC markets are all potentially good for the market. "I do support more onscreen trading, bringing more transparency to this market," he said. "Risk mitigation is critically important to reduce the systemic risk among participants and in the market as a whole. And the transparency that's offered by reporting of trades is very important."

The problem has been when the CFTC has tried to specifically push changes the market is not prepared for or which are either too expensive or not actually possible to implement in terms of technology.

The CFTC has five commissioners and it is structured so that three of them are from the party of the current president and two from the opposition party. O'Malia said the commissioners have no problem debating the issues. Would he change anything about the CFTC structure if he could? He said the CFTC was doing fine. "Our little bureaucracy is a pretty effective little bunch. "

He also said he didn't buy the argument that it would necessarily be more efficient under one roof with the Securities and Exchange Commission.

"I think ultimately we will be better off if we are able to harmonise our roles, especially where we have overlap of markets," he said. "It is imperative that we send a clear, consistent message when we have overlap. That's critically important. But when we have separate markets, responsibilities and decisions, it's okay to be different. We are different markets."

For all the criticism, O'Malia seems to relish his work. "I really enjoy the policy debate and there is not a better agency to be at right now in terms of good policy discussion. "