Numerous media sources have reported on a CFTC advisory subcommittee’s announcement that it sought to broadly define “high-frequency trading” when developing rules to govern that trading, citing disagreements over the definition during meetings today in Washington, D.C. Reuters reported that:
High-frequency trading accounts for roughly half of both U.S. equity volume and the futures market, and proponents say it adds critical liquidity. Washington is trying to get a better handle on whether high-speed trading has a destabilizing impact on markets and puts ordinary investors at a disadvantage. Regulators became even more concerned after the “flash crash” on May 6, 2010, which temporarily wiped out about $1 trillion in paper value in the stock market in a matter of minutes. Regulators have said the algos behind rapid-fire trading were a factor, but that they did not cause it.
On February 9, 2012, the CFTC issued a press release announcing that the Commission “has voted to establish a Subcommittee on Automated and High Frequency Trading tasked with developing recommendations regarding the definition of high frequency trading (“HFT”) in the context of the larger universe of automated trading.” According to the press release,
Commissioner O’Malia has decided to breakout four separate working groups, each tasked with identifying specific issues associated with automated trading. The first working group will be tasked with defining high frequency trading within the context of automated trading systems. The second group will examine whether or not there should be multiple categories of HFT. Specifically, that working group will be requested to examine distinctions in trading activity and how such distinctions should be tagged by the exchanges. The third working group will focus on oversight, surveillance and economic analysis, to understand how HFTs behave as compared to other automated systems. The fourth working group will address market micro structure issues to identify possible disruptions that might be provoked by automated trading systems and potential solutions to mitigate such events.
The Commission released the opening statement by Commissioner Scott D. O’Malia before the “Technology Advisory Committee 2.0″ Meeting being held in Washington today. The Opening Statement summarized the Committee’s progress, which included seven public meetings and the issuance of recommendations on data standardization, as well as the establishment of the Subcommittee on Automated and High Frequency as a part of the Technology Advisory Committee 2.0.
The WSJ reported yesterday that:
According to a draft version reviewed by The Wall Street Journal, a subcommittee working group is proposing to define high-frequency trading as a form of trading that uses sophisticated computer programs to make automated decisions in the markets, with no human decision-making involved in individual transactions. The draft also defines such trading as using technology to amplify the speeds at which firms send orders to exchanges and other trading venues, and generating large volumes of messages, orders and cancellations compared with other, slower types of trading.
Thus, definition at its basic level would require (i) use of “sophisticated computer programs”, (ii) that make “automated decisions in the market,” (iii) with no “human decision-making” involved in individual transactions. According to Reuters, some are concerned the definition will include institutional traders:
“You are casting this wide net and really what are you trying to catch here? You’re going to catch everything,” said Joe Saluzzi, co-founder of Themis Trading LLC and a frequent critic of high-frequency trading, who argued that the definition will envelop the institutional investors he represents, who don’t engage in high-speed trading.
Indeed, a more recent WSJ article reported that “[c]onflict broke out over a proposed definition of high-frequency trading” at today’s meeting, citing concerns over sweeping into the definition firms that do not engage in high-frequency trading, but have the capacity to do so.
Beyond the definition, Commissioner Bart Chilton referred to registration and reporting requirements, in a speech made available today on the CFTC’s website. He stated that the CFTC “[doesn't] even know who is out there and as a pedestrian first-step, they simply ought to be registered so we at least know who they are.” Commissioner Chilton also would require “quarterly reports on … wash sales” and stated that “executives must be accountable for such reports.”
This definition of high-frequency trading is expected to guide the rule-making process as the CFTC. According to CNBC, the CFTC has said it will put out a “draft concept release” later this summer on “potential risk controls and system safeguards” for high-frequency trading.
We previously posted back in August, 2011 concerning the SEC’s subpoenas to high-frequency trading firms in connection with the Flash Crash, and will be following these latest developments.