CFTC ‘s TAC Discusses High Frequency Trading
AT TODAY’S MEETING OF THE CFTC’S TECHNOLOGY ADVISORY COMMITTEE (TAC), the Automated and High Frequency Trading (HFT) Subcommittee presented a working definition of the term “high frequency trading” and recommended a number of factors and characteristics that could be used to identify and help further define such trading activity. The interim recommendations will be finalized at a later point and then presented to the Full Committee who will subsequently present recommendations to the Commission if appropriate.
In his opening remarks, Chairman Gary Gensler said regulators cannot assume algorithms in the markets are “well designed, tested or supervised” and noted that the Commission is considering a draft concept release on “potential risk controls and system safeguards for electronic trading platforms, automated trading systems, clearing firms and other market participants in the evolving market for U.S. derivatives trading.” Gensler also said the Commission is reviewing a rule on the reporting of ownership and control information for trading accounts.
Commissioner Bart Chilton remarked on the need for registration of high frequency traders as well as required testing of algorithm programs utilized by HFTs and automated trading systems (ATSs) before they are “engaged in the market production environment.”
Commissioner Scott O’Malia, who leads the TAC, provided an overview of the HFT Subcommittee’s work. The panel was divided into four working groups and tasked with: defining HFT in the context of automated trading, identifying HFT strategies, exploring oversight and surveillance of automated trading and HFT, and identifying market microstructure issues. O’Malia stressed the formation of the panel was to help inform the public and the Commission on HFT and its market impacts, not to develop rulemakings.
The working groups prefaced that their presentations were a work in progress and that many issues must still be further analyzed. The panel developed a broad definition of HFT to allow for the inclusion of current and future practices while avoiding a definition that seeks to specifically identify “good actors” vs. “bad actors” as it relates to the intent of the employed trading strategies. The group said HFT must be generated by computer-based decision making that employs low latency technology, including proximity and co-location services. HFT must also involve high speed connections to markets for order entry and must experience high message rates that include orders, quotes or cancellations. As the group members noted, much work must still go into to the definition, such as determining the threshold for what is a high number of message rates and the length of the observation period for those message rates, e.g. one day, one hour, one second, etc.
To identify the impact of HFT, the group analyzed market microstructure under the following four categories: trading protocol, market participants, market efficiency, and operational efficiency. The group then identified HFT trading strategies that impact and relate to these categories, including arbitrage, short-term directional trading, liquidity provision, and liquidity detection, e.g. pinging and spoofing, among others.
Following the presentations, Chilton asked about the treatment of liquidity and whether there is a difference between a market participant holding a commercial risk for month or “someone who holds it for a second.” The group members who were end-users said at this point, “all liquidity is created equal” and that liquidity providers cannot really discriminate between the length of holding periods.
The recommendations of the group did not reflect a full consensus as certain members raised concerns with the method in which HFT would be defined and how that definition would subsequently be used in potential future regulatory action. To that end, Andrei Kirilenko, Chief Economist for the CFTC, referenced the Commission’s pending concept release and noted how the underlying theme in that release was risk controls have not kept pace with trading speeds and strategies.
O’Malia countered that the release does not seem to make such a definitive position and requested the subcommittee further analyze the extent to which proper risk controls are in place for HFT activity. While concluding the event, O’Malia stressed that to be fully informed of the impact of HFT, the question of whether high frequency traders move faster than risk systems must first be answered.
For documents and more information on the event, please click here.
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AT TODAY’S MEETING OF THE CFTC’S TECHNOLOGY ADVISORY COMMITTEE (TAC), the Automated and High Frequency Trading (HFT) Subcommittee presented a working definition of the term “high frequency trading” and recommended a number of factors and characteristics that could be used to identify and help further define such trading activity. The interim recommendations will be finalized at a later point and then presented to the Full Committee who will subsequently present recommendations to the Commission if appropriate.
In his opening remarks, Chairman Gary Gensler said regulators cannot assume algorithms in the markets are “well designed, tested or supervised” and noted that the Commission is considering a draft concept release on “potential risk controls and system safeguards for electronic trading platforms, automated trading systems, clearing firms and other market participants in the evolving market for U.S. derivatives trading.” Gensler also said the Commission is reviewing a rule on the reporting of ownership and control information for trading accounts.
Commissioner Bart Chilton remarked on the need for registration of high frequency traders as well as required testing of algorithm programs utilized by HFTs and automated trading systems (ATSs) before they are “engaged in the market production environment.”
Commissioner Scott O’Malia, who leads the TAC, provided an overview of the HFT Subcommittee’s work. The panel was divided into four working groups and tasked with: defining HFT in the context of automated trading, identifying HFT strategies, exploring oversight and surveillance of automated trading and HFT, and identifying market microstructure issues. O’Malia stressed the formation of the panel was to help inform the public and the Commission on HFT and its market impacts, not to develop rulemakings.
The working groups prefaced that their presentations were a work in progress and that many issues must still be further analyzed. The panel developed a broad definition of HFT to allow for the inclusion of current and future practices while avoiding a definition that seeks to specifically identify “good actors” vs. “bad actors” as it relates to the intent of the employed trading strategies. The group said HFT must be generated by computer-based decision making that employs low latency technology, including proximity and co-location services. HFT must also involve high speed connections to markets for order entry and must experience high message rates that include orders, quotes or cancellations. As the group members noted, much work must still go into to the definition, such as determining the threshold for what is a high number of message rates and the length of the observation period for those message rates, e.g. one day, one hour, one second, etc.
To identify the impact of HFT, the group analyzed market microstructure under the following four categories: trading protocol, market participants, market efficiency, and operational efficiency. The group then identified HFT trading strategies that impact and relate to these categories, including arbitrage, short-term directional trading, liquidity provision, and liquidity detection, e.g. pinging and spoofing, among others.
Following the presentations, Chilton asked about the treatment of liquidity and whether there is a difference between a market participant holding a commercial risk for month or “someone who holds it for a second.” The group members who were end-users said at this point, “all liquidity is created equal” and that liquidity providers cannot really discriminate between the length of holding periods.
The recommendations of the group did not reflect a full consensus as certain members raised concerns with the method in which HFT would be defined and how that definition would subsequently be used in potential future regulatory action. To that end, Andrei Kirilenko, Chief Economist for the CFTC, referenced the Commission’s pending concept release and noted how the underlying theme in that release was risk controls have not kept pace with trading speeds and strategies.
O’Malia countered that the release does not seem to make such a definitive position and requested the subcommittee further analyze the extent to which proper risk controls are in place for HFT activity. While concluding the event, O’Malia stressed that to be fully informed of the impact of HFT, the question of whether high frequency traders move faster than risk systems must first be answered.
For documents and more information on the event, please click here.