Big stakeholders in the U.S. futures industry appear confident that its regulator will see the value in high-frequency trading as the regulator ramps up scrutiny of the rapid-fire technique.
The Commodity Futures Trading Commission said here last week it will propose a rule to ensure market participants have equal access to data. The move, aimed at high-frequency traders, is another small step for a regulator that had so far said only that it was looking into the issue, which has caused a stir in the cash equities markets.
High-frequency trading is where banks, hedge funds, and proprietary firms use algorithms to make markets and earn thin profits from tiny market imbalances. It is estimated to account for some 40 percent of all U.S. futures trading, and remained a profitable business during the worst of the financial crisis.
While critics warn high-frequency trading could threaten market stability and disadvantage some participants, defenders have emerged in force over the past year to argue that all investors benefit from the liquidity, narrower spreads, and cheaper and easier trading that it yields.
High-frequency traders are actually providing a tremendous liquidity elevator that goes up and down with the markets, said Joseph Murphy, president of the Americas for R.J. O'Brien, the largest independent U.S. futures brokerage, with about $2 billion of client assets.
I think there will be a higher degree of monitoring this type of trading. But if they try to regulate it, it will leave and trade somewhere else, he added in an interview on the sidelines of the annual Futures Industry Association (FIA) conference here.
The U.S. Securities and Exchange Commission is knee-deep in high-frequency trading, which accounts for some 60 percent of cash equities trading volume. The regulator this year issued a comprehensive paper on it and other market structure changes, and public comments have poured in.
In futures markets, where many of the same firms trade, high-frequency strategies -- and any regulatory concerns -- are different, given the vertical structure that doesn't allow traders to move positions between exchanges. There are also far fewer trading venues than in equities, and there exists a far larger over-the-counter marketplace.
Still, the impact of high-frequency trading on markets was one of four topics on the agenda of a meeting of international regulators hosted here on Wednesday by the CFTC. And the topic was raised on several conference panels.
The more knowledgeable the CFTC becomes about liquidity in the markets, the less chance they'll do something egregious, said David Dugan, chief operating officer at Chicago-based Buttonwood Group Trading, a proprietary high-frequency trading firm. We have a great market, and the government will see that proprietary firms have no interest in destabilizing it.
Gary DeWaal, group general counsel at Newedge, one of the world's largest futures brokerages, said the regulator needs to address some issues associated with high-frequency trading, adding: I don't think the fundamental thing is a problem.
If there's a rogue trader or somebody who put a couple extra zeros on an order, or the algorithm went screwy, yes that's a problem. So let's try to deal with those issues, DeWaal said. But let's not just say 'high-frequency trading is a bad thing.' That's wrong.
The CFTC, headed by Gary Gensler, may be under pressure to show that it too is investigating an issue to which the SEC has devoted much time and resources over the past year, and that has attracted the attention of some U.S. lawmakers. The FIA, independently, is also looking into high-frequency trading.
I look at this as people wanting to be sure to understand the ways in which proprietary algorithmic traders are interfacing with the market, Craig Donohue, CEO of CME Group Inc
I think it's more about education than it is about any particular set of concerns, Donohue added. I have yet frankly to hear any real significant concerns that have flowed from this evolution that has happened.
(Reporting by Jonathan Spicer; additional reporting by Mark Weinraub and Ann Saphir; editing by Steve Orlofsky)