March 29, 2012
I would like to welcome everyone to the open meeting of the Technology Advisory Committee.
Today’s meeting is the 5th Meeting of the Technology Advisory Committee (“TAC”) and we have covered a variety of issues, including pre-trade functionality, the SEF Showcase and now high frequency trading. Despite its ubiquitous utilization in our markets, high frequency trading is not as well understood by the public and the relevant regulatory bodies as I believe it should be.
Today’s discussion will cover three different topics. The first panel will discuss the role high frequency trading plays in our markets. Working with our Chief Economist, I have selected 24 individuals to participate in the new Subcommittee on Automated and High Frequency Trading to discuss and advise the Commission on defining and overseeing high frequency traders in our markets.
The second panel will focus on the final recommendations of the Subcommittee on Data Standardization. As I have said before, data is the foundation to our markets. Our ability to capture market data in a universal electronic form is essential to automating our surveillance and oversight programs. I’d like to take a moment to thank each and every member of this subcommittee for dedicating their time to this important endeavor.
The third panel will explore the deployment of technology solutions in the swaps market with a specific focus on evaluating the costs, technological and scheduling challenges posed by fully integrating pre-trade credit checks by October 1, 2012, as a technological substitute for documentation. In particular, I am interested in understanding the agreed upon industry standard and the policy issues raised by such standard. As the Commission continues to develop rules for swap execution facilities (“SEFs”) and Designated Contract Markets (“DCMs”), as well as other pending rules, what issues do we need to resolve?
Technology has been the true driver of change in our markets, and it continues to dictate their evolution. Automated and high frequency trading (“ATS” and “HFT”) strategies have narrowed market pricing and provided liquidity. The Commission’s challenge, however, it to ensure that as the markets evolve, the Commission is able to keep pace and develop oversight and surveillance capacity to ensure markets function in an appropriate manner. There is little empirical economic data regarding the impact of HFT strategies on markets, pricing and overall market behavior. Better data on and a standard definition of these market behaviors must be developed. Failure to develop a complete understanding of the participants and their trading behavior is unacceptable and will undermine public confidence.
It seems that on a weekly basis, there is a news story about ATS / HFT trading. Recently, headlines announced that the FIA Principle Traders Group and the FIA European Principle Traders Association had developed recommendations on internal procedures, processes and controls for the development, testing and deployment of trading software1. Last week, the United Nations Conference on Trade and Development (UNCTAD) published a report which purports to demonstrate an economic correlation between high frequency trading and distorted commodity prices2. We also just witnessed the impact that poor computer coding can have on a market with the unfortunate computer glitch associated with the initial public offering of BATS—on its own exchange. On Tuesday, I read that the European Union (E.U.) is also considering a definition and additional controls on HFT strategies as part of MiFID II. The proposed definition of HFT would apply to any collocated firms that include: 1) a daily portfolio turnover of at least 50%; 2) a ratio of orders to trades that exceeds 4 to 1; 3) most orders being unwound on the same day; or 4) where at least a fifth of the orders cancelled. Marcus Ferber, the lawmaker who is steering this proposal, has also advocated for a 500 millisecond resting period for ATS orders.
There are strong opinions on both sides of the HFT debate, and on both sides of the Atlantic for that matter. In an effort to take the first step and define the practice, last November, I sent a letter to the TAC members asking them for their opinion on a definition of HFT. I have asked Andrei Kirilenko, the Chief Economist of the CFTC, to lead a subcommittee to develop an appropriate definition of HFT with in the universe of ATS. My goal is to have a working description of the attributes of HFT activities in order to better understand the impact they have on our markets. Developing a nomenclature is important if only as a means to study this trading activity on a consistent basis.
Within the ATS/HFT Subcommittee, we have established four 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. Under the leadership of Andrei Kirilenko and fellow CFTC staff Joan Manley, Jeremy Cusimano, George Pullen, Harold Hild, Jorge Herrada, Richard Haynes and JonMarc Buffa, it is up to these working groups to establish their own work schedule and meetings and develop recommendations to the Technology Advisory Committee consistent with the broad parameters of the Subcommittee.
Additionally, I have requested that Securities and Exchange Commission (SEC) Chairwoman Shapiro send staff to participate on the working groups to ensure full coordination by our two agencies We are pleased to have the participation of Dan Grey and Mike Watson of the SEC.
Today, we will hear from four witnesses to kick start our debate on ATS/HFT. I have three goals for today’s discussion that include:
I appreciate the contribution and service of each and every member of the full technology advisory committee and the two subcommittees. I remind my colleagues that everyone, including CFTC staff, already have full time jobs and contribute their time and effort outside of their current responsibilities. I am confident that your contribution will help inform future Commission policy decisions regarding these technology issues.
Again, let me thank everyone for their service and contribution to this Advisory Committee.
1 FIA Principle Traders Group and European Principal Traders Association, Software Development and Change Management Recommendations, Mar. 14, 2012, available at http://www.futuresindustry.org/downloads/Software_Change_Management.pdf.
2 David Bicchetti and Nicolas Maystre , The synchronized and long-lasting structural change on commodity markets: evidence from high frequency data (United Nations Conference on Trade and Development (UNCTAD), MPRA Paper Noo. 37486, Mar. 20, 2012), available at http://mpra.ub.uni-muenchen.de/37486/1/MPRA_paper_37486.pdf.
Last Updated: March 29, 2012