The U.S. Commodity Futures Trading Commission risks hurting markets if it is too aggressive in flexing its regulatory muscle to rein in high-frequency traders, exchanges and participants are expected to tell the agency on Wednesday.
The U.S. futures regulator's technology committee will hold the first in a series of public meetings with exchanges, clearinghouses, trading firms, and other groups as it considers how to adapt to the rapidly evolving world of algorithmic and high-frequency trading.
Lightning-fast computer strategies that determine how, when and what to trade have added liquidity, depth and transparency to markets, reducing overall costs, the chief operating officer of the world's largest futures exchange said in a statement -- part of a 181-page information packet released by the CFTC ahead of the meeting.
Careful consideration should be given to any decision to impose restrictions or limitations on algorithmic and high frequency trading that would be harmful to the marketplace and result in less efficient and less liquid markets, said Bryan Durkin, chief operating officer and managing director with CME Group Inc.
High-frequency trading (HFT) accounts for about 35 percent of U.S. futures volumes -- a number that some expect will reach 60 percent by the end of the year.
The CFTC's arcane technology has been outpaced by the state-of-the-art hardware and software used by the traders it polices. It finds itself grappling with the complexities of sub-millisecond trades and terahertz processors as technology becomes an even more vital component of the futures and derivatives markets.
The futures regulator still relies on fax machines to receive some trade information, an anachronism it can no longer afford as it grapples with a five-fold surge in U.S. futures trading volume over the past decade and prepares to take oversight of even larger over-the-counter derivatives markets.
This new committee can play a vital role assisting the Commission's efforts to better oversee the evolution of the derivatives markets, said Commissioner Scott O'Malia, who will lead the committee, in a statement ahead of the meeting.
O'Malia told Reuters last month the CFTC will look hard at whether to impose new rules to limit strategies used by high-frequency and algorithmic traders that threaten to distort prices.
The meeting marks the first time the committee has met since it was mothballed in 2005 and resurrected in May of this year.
O'Malia has asked the committee's members to submit papers on a host of topics, including rules and standards for swap execution facilities and trade data repositories that will figure prominently in the CFTC's oversight of over-the-counter derivatives markets, soon to be granted by Congress.
The CFTC also wants to look at how to make better use of technology for surveillance and enforcement.
The mammoth task became more high-profile in May, when a flash crash hit the stock market, driving the Dow Jones index down some 700 points within minutes, shaking investor confidence worldwide.
While there are many benefits to high-frequency trading, there can be pitfalls, said John Bates, chief technology officer for Progress Software who founded Apama, a platform used for algorithmic and high-frequency trading.
Technology can make it easier to carry out market abuses such as fictitious spoof trades, Bates said.
Algorithms may meet scenarios they have never been prepared for, Bates said, noting algorithms likely accelerated and accentuated the May 6 market plunge.
Rather than restricting the use of algorithmic trading, the CFTC should improve its oversight, he said.
Utilizing the same technology used in HFT for real-time surveillance and monitoring gives regulators 'Ferraris as police cars' to be able to keep up with the high-frequency markets, Bates said in a document released by the CFTC.
(Editing by Sofina Mirza-Reid)