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CFTC Technology Advisory Committee Meeting

First Published 29th March 2012

CFTC Technology Advisory Committee Meeting - Opening statement by Commissioner Scott D. O'Malia, 29th March 2012

Scott O'Malia, Commissioner, CFTC Technology Advisory Committee

Scott O'Malia, Commissioner, CFTC Technology Advisory Committee

"High frequency trading is not as well understood by the public and the relevant regulatory bodies as I believe it should be."

Washington - Today sees the meeting of the 5th Meeting of the CFTC Technology Advisory Committee Meeting. In his welcome address Commissioner Scott O'Malia said: "Despite its ubiquitous utilization in our markets, high frequency trading is not as well understood by the public and the relevant regulatory bodies as I believe it should be."

This is a subject close to our hearts here at Automated Trader; that of HFT, its definition and the role it plays in the trading community as whole. In fact we considered it to be of such vital importance and interest that we recently published the Automated Trader-2011 Algorithmic Trading Survey which covered this and many other relevant topics in great depth.

The TAC Committee discussion is to cover three different topics:

  • The role of high frequency trading in the markets
  • Recommendations of the Subcommittee on Data Standardization.
  • An exploration of the deployment of technology solutions in the swaps market

"Automated and high frequency trading ("ATS" and "HFT") strategies have narrowed market pricing and provided liquidity", said Mr O'Malia. He continued: "The Commission's challenge, however, is to ensure that as the markets evolve, the Commission is able to keep pace and develop oversight and surveillance capacity to ensure markets function in an appropriate manner. There is little empirical economic data regarding the impact of HFT strategies on markets, pricing and overall market behavior. Better data on and a standard definition of these market behaviors must be developed. Failure to develop a complete understanding of the participants and their trading behavior is unacceptable and will undermine public confidence.

Citing the prevalence of news stories which highlight the need for exact definitions and controls for ATS/HFT trading, (the most recent example being the BATS "unfortunate computer glitch."), and having previously asked TAC members for their definition of HFT, Mr O'Malia has requested Andrei Kirilenko, the Chief Economist of the CFTC, to lead a subcommittee to develop an appropriate definition of HFT with in the universe of ATS.

He stated: "My goal is to have a working description of the attributes of HFT activities in order to better understand the impact they have on our markets. Developing a nomenclature is important if only as a means to study this trading activity on a consistent basis."

Within the ATS/HFT Subcommittee, there will be four working groups, each tasked with identifying specific issues associated with automated trading.

  • The first working group will be tasked with defining high frequency trading within the context of automated trading systems.
  • The second group will examine whether or not there should be multiple categories of HFT. Specifically, that working group will be requested to examine distinctions in trading activity and how such distinctions should be tagged by the exchanges.
  • The third working group will focus on oversight, surveillance and economic analysis, to understand how HFTs behave as compared to other automated systems.
  • The fourth working group will address market micro structure issues to identify possible disruptions that might be provoked by automated trading systems and potential solutions to mitigate such events.

To ensure coordination between TAC and the SEC Dan Grey and Mike Watson of the SEC will participate in the workshops.

The debate will begin today, goals are:

  • Establish the existing exchange oversight and controls monitoring of ATS/HFT activity in the markets today. Dean Payton (CME) and Mark Wassersug (ICE) will testify regarding what each is doing to manage ATS/HFT trading on their respective exchanges;
  • Evaluate and discuss the current state of economic research regarding identifying and analyzing ATS/HFT behavior and economic their impact. Joel Hasbrouck (NYU) will provide an update on the current economic research on ATS/HFT; and
  • dentify attributes of both ATS and HFT strategies and firms and the extent to which they participate and impact futures markets. Sean Castette (GETCO) will provide his perspective on ATS and HFT strategies and their impact in futures markets.