By Tom Polansek
CHICAGO, Feb 10 (Reuters) – High-speed traders defended the
merits of their business on Monday as the U.S. futures regulator
kicked off a new round of scrutiny for the sector often blamed
for market disruptions.
Traders spoke out as a Commodity Futures Trading Commission
(CFTC) committee held its first meeting on automated and
high-frequency trading (HFT) since issuing a long-awaited report
on the practices last fall.
Citing a series of trading glitches as evidence that its
rules needed updating, the CFTC had asked for industry input on
a long list of possible regulations to make trading safer.
The move to computer-driven trading has been “broadly
positive but also unsettling to some,” Richard Gorelick, chief
executive of high-speed trading firm RGM Advisors, told the
committee.
“Criticizing HFT has become a cottage industry,” he said,
adding that he was confident that regulators would see through
“fear mongering and hype” when assessing potential new rules.
Trading disruptions plagued financial markets last year,
most notably when thousands of stocks listed on Nasdaq OMX
Group’s were paralyzed for three hours because of a
technological problem.
The CFTC, when it issued the report on computerized trading
last fall, mentioned that outage and other examples to
illustrate the importance of having robust trading systems.
High-frequency traders use computer software to post orders
in fractions of a second without human intervention. The
speeding trading is a favored tool of hedge funds.
The May 6, 2010 “flash crash” – in which futures and
securities indices fell more than 5 percent in minutes, before
rapidly recovering – is the most prominent market lapse
associated with high-frequency trading.
Still, automated trading has helped make markets more liquid
and lowered trading costs, said Rob Creamer, president of Geneva
Trading and a representative of a Futures Industry Association
(FIA) traders’ group.
“Any regulatory effort to improve market infrastructure
must, at a minimum, preserve the market quality improvements
that have occurred as markets have become more automated and
competitive,” the FIA group said in prepared comments.
Among the issues the CFTC asked about in its report was the
use of “kill switches” to halt automated trading programs if
they are malfunctioning. The switches can be an “effective last
resort” but should be used only in extreme events, the group
said.
It is important for the CFTC to assess a number of potential
regulatory changes in light of the high-speed trading
environment, including its definitions of banned practices like
front running, said Caitlin Kline, derivatives specialist for
Better Markets, a group that says it fights for the public
interest in financial markets.
High-frequency traders are “effectively are able to see the
future” when they digest information faster that other
investors, she said.
CFTC staffers are reviewing responses to the report and will
make a recommendation on the next steps the committee should
take. The deadline for comments is Feb. 14.
