July 14, 2010
I thank Commissioner O’Malia for putting together this meeting and thank the advisory committee members for giving of their time and expertise in an effort to help the Commission come to grips with one of the most contemporary issues in commodities trading today.
Despite comments to the contrary, common sense tells us that computer-generated trading—controlled by algorithms that spitfire trades in nanoseconds—contributed to the free-fall we witnessed in markets on May 6, and to the subsequent bounce-back. I am not suggesting that computer technology was the impetus—the culprit if you will—for the flash crash. I am just saying that the markets would not have dropped so far so fast, nor would they have rebounded without this type of trading. It is a volume and a speed thing, so to speak. Compare this type of trading with how the markets operated in the past, when trading was transacted “by hand” in trading pits on exchanges using the open outcry method. Back then, if you were a trader with something to sell, you shouted out your price. Now, more than 80 percent of trading is entered into with computer keyboard strokes. It is fast. It is efficient. However, it is so fast that when things go wrong like they did on May 6th, they go very wrong, very fast.
We need financial technology in commodities trading. I saw an advertisement at an airport yesterday. It said, “Not connected means not in business.” That is so true. We need this technology, but we need to understand it more fully. Technology has changed the trading world for the better in many ways. Nevertheless, we must ensure that technology works for us and not against us.
When I was a teenager, a friend of mine and I took his folks’ car and we went to a long straight stretch of deserted highway and he drove that car really, really fast—I won’t even say how fast—let’s just say . . . really fast. Faster than I have ever gone in a car. We really did not understand what we were doing, and needless to say, we shouldn’t have done it. Maybe some of you have heard of the “Tango,” a cool, fully electric car—an electric car—that can accelerate to 150 miles-per-hour in just a few seconds. I bring up these two examples—my friend and I speeding down the highway and the Tango—to illustrate the point that, just because the mechanisms are available so that you CAN do something doesn’t mean you SHOULD do it. Even if the technology is exciting and innovative, if used improperly or unwisely, it’s not a good thing.
The CFTC and other federal financial regulators need to work hard to keep pace with our industry’s technologies in order to keep watch over the kind of high volume; high frequency trading that comprises such a large part of the market today. We need to be nimble, quick, and look around the corner to make sure we’re constantly thinking about what can happen. I’m not suggesting that we are at a place where we should limit the use of this type of trading, just that we need to be open to understanding more about how going so fast can impact markets. And when we know more, we need to consider what, if anything, should be done do to ensure that markets are efficient and effective. That is one of the reasons this advisory committee is so important.
Thanks again to all of you for being here. I am glad to see such a diverse group of experts representing traders, industry and especially consumers. I look forward to your comments today.
Last Updated: July 14, 2010