June 20, 2012 / 4:48 PM / 8 years ago

CFTC may cast wide net with high-speed trading reform

* CFTC advisory committee presents draft definition
    * High-frequency trading definition paves way for reforms
    * Agency working on concept release for market safety

    By Alexandra Alper
    WASHINGTON, June 20 (Reuters) - The U.S. futures regulator
should broadly define high-frequency trading when crafting rules
to better police this area of the markets, an advisory group
said on Wednesday.
    A committee tasked by the Commodity Futures Trading
Commission with studying the topic presented a "working
definition" that would serve as the foundation of efforts to
bring transparency to the hotly debated algorithm-based trading
space.
    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. 
    "Regulators cannot assume that algorithms in the market are
always well designed, tested or supervised," said Commodity
Futures Trading Commission Chief Gary Gensler, who welcomed the
recommendations.
    "To give hedgers and investors the confidence in the markets
they really need and deserve, our regulations have to adapt to
changing market structures, changing technologies, and we are
increasing moving from man to machine."
    One working group for the advisory committee recommended a
broad definition that would describes high-frequency trading as
a strategy that uses algorithms for individual transactions
without human direction.
    It also defines it as using high-speed connections to
markets, and high message rates for orders, quotes or
cancellations.
    "We wanted to keep it easy to interpret but difficult to
game," said Greg Wood, a director at Deutsche Bank Securities
and a member of the advisory committee's working group.
    Some of Wood's team members took issue with the breadth of
the definition. 
    "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.
    Gensler said the CFTC is aiming to release later this summer
a "draft concept release" on potential risk controls and system
safeguards for high-frequency trading to help ensure the safety
and soundness of the markets.
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