A major US financial regulator has signalled the first serious effort to curb high-speed automated trading in the futures market, which increasingly influences benchmark assets such as equities, commodities and government bonds.
The plans detailed by Timothy Massad, chairman of the Commodity Futures Trading Commission, come with concern growing among regulators over the sudden large price movements that have plagued a number of markets in recent years.
Such so-called “flash events” have become linked with the growing popularity of high-speed, computerised trading, which has been criticised by institutional investors for fuelling volatility.
Mr Massad made his comments on Wednesday at a conference examining the market for US Treasury bonds, a bedrock of the financial system which last October swung wildly in a 12-minute span, unnerving investors and regulators.
A July report by the US Treasury and regulators into the so-called “flash event” found the growth of rapid electronic trading had played a central role in the abrupt price and yield swings.
Automated traders account for about 67 per cent of 10-year Treasury futures listed on the Chicago Board of Trade, Mr Massad said. They are on at least one side of half the trades in metals and energy futures, he added.
Mr Massad said he was not seeking to stop the growth of automation, nor attempt to define high-frequency trading. However, he wants to safeguard financial markets from algorithms going haywire.
In 2011, Chicago-based Infinium Capital Management was fined $850,000 over a series of malfunctions in computer trading programs, including a huge order for crude oil on the New York Mercantile Exchange.
The proposals that Mr Massad is putting forward would also not address predatory activity such as “spoofing”, a tactic meant to fool other traders with false orders that is already facing a crackdown by the CFTC, exchanges and prosecutors.
“We are really focusing on controls that minimise the risk of disruption,” he said.
Without identifying a cause, Mr Massad said that “flash events” had become more common in recent years. In 2015 alone, West Texas Intermediate crude oil futures underwent 35 such events, Mr Massad said.
At the same conference on Tuesday, Mary Jo White, chair of the US Securities and Exchange Commission, called for high-frequency trading firms to be registered and regulated. She said: “It is essential that our collective regulation of this critical market keeps pace with dramatic changes in the Treasury market.”
Mr Massad, a Democrat, said that he hoped to propose new rules requiring, among other things, pre-trade risk controls such as “message throttles” and maximum order size limits. His agency is also looking at proposing new requirements for the design, testing and supervision of automated trading systems and “kill switches”, which shut down runaway algorithms.
He said that the agency was looking at whether to require automated trading groups to register with the CFTC for the first time. FIA PTG, a lobby group for proprietary traders, has in the past argued that exchanges already capture enough oversight information and that an added registration requirement would not be useful.
Mr Massad said that he was looking at whether to require limits on the practice of “ self-trading”, when one of a trader’s algorithms transacts with another from the same firm. Finally, he said that he was examining whether to force more transparency on murky incentive schemes in which exchanges compensate traders for volume.
The planned proposal comes two years after CFTC outlined possible reforms for automated trading under a “concept release” that drew extensive public comment.
Jim Overdahl, an adviser to the FIA PTG, said: “We’re pleased that many concepts the chairman outlined today align with our recommendations.”
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