June 3, 2014
I would like to welcome everyone to our 12th full TAC meeting since I reconstituted it in July 2010. Today we have record attendance, including members of the full Technology Advisory Committee (TAC), and members from the Data Standardization Subcommittee and the Automated and High Frequency Trading Subcommittee.
I am grateful for everyone’s participation. I would like to extend warm thanks to our witnesses who have made a special effort to contribute to today’s discussion. I would also like to thank all of the new members to the TAC and the Subcommittees on Data Standardization and Automated and High Frequency Trading. I am very pleased that we’ve managed to assemble such a distinguished panel of market leaders who will share their knowledge and expertise on the state of technology in the futures and swaps markets.
Today’s agenda will focus on three very interesting topics. First, we will address the issues raised in Michael Lewis’s book Flash Boys to determine whether these issues have any relevance to the derivatives markets.
Second, in light of the evolving and complex market structures related to automated trading, I have put together a panel that will offer ideas about how the Commission should design a 21st-century surveillance system. Nowadays, traders don’t trade on just one market alone—they trade on many markets and the Commission needs to adapt to this reality. So far, the Commission has had little luck in developing its own strategic plan to implement a mission-specific technology roadmap that takes into account this trading reality. Thus today, I would like to discuss the key elements of a 21st-century surveillance system that integrates futures, swaps, and over-the-counter (OTC) derivatives data. I would like to have our witnesses address these cross-market surveillance challenges and identify the key tools that will help the Commission detect fraud and manipulative and disruptive trading.
Finally, I would like to receive an update on the state of Swap Execution Facility (SEF) trading. I am concerned about the low level of participation from buy-side firms in SEF trading. I would like to know whether there are any regulatory impediments that might impact buy-side participation.
Panel I: High-Frequency Trading’s Impact on Derivatives Markets: Answering the Charges of Unfair Advantages by HFT Firms
As to the first panel, Michael Lewis’s book has stirred up quite a debate about high-frequency trading (HFT) and market structure. The book claims that equities markets are “rigged” by HFTs that are front-running other traders’ orders. The book raises other issues, such as HFTs having faster data feeds, exchanges paying brokers to take or provide liquidity, and HFTs co-locating within the exchanges.
I want to address these issues directly and have a frank discussion with all of you to understand how automated and high-frequency trading impacts derivatives markets. I can’t think of a better forum to address these relevant market issues.
I previously provided a list of questions to our witnesses to address the issues raised in Lewis’s book and asked them to look into whether similar practices exist in the derivatives markets. For example, I have asked our panelists to address issues related to data access, order cancellation policies, fees and rebate programs, order types, and co-location policies.
We have four witnesses who will present and offer their opinions of the derivatives market structure and focus on these issues. First, we will hear from Bryan Durkin, Managing Director and Chief Operating Officer of Chicago Mercantile Exchange Group (CME). Next, we will hear from Chuck Vice, President and Chief Operating Officer of Intercontinental Exchange, Inc. (ICE). Then, we will hear from Rob Creamer of Geneva Trading, currently serving as Chairman of the Futures Industry Association Principal Traders Group (FIA PTG). Finally, we will hear from Joe Saluzzi, a co-founder of Themis Trading and member of the Automated and High Frequency Trading Subcommittee, as well as an outspoken advocate for market reforms.
Panel II: Developing a 21st-Century Surveillance Program
For Panel II, I previously posed several questions to our witnesses about designing a 21st-century surveillance system. For example: What are the essential tools and technologies that the Commission should have in place? Should the Commission invest in an order message surveillance system? How should the Commission develop cross-product and cross-market surveillance tools? What is the current trader and firm ID protocol? What additional information, if any, is required to adequately monitor automated systems?
To begin our discussion, I have asked Jorge Herrada, Associate Director, CFTC Office of Data and Technology, to give an overview of Commission data and provide some perspective on our current resources and opportunities. This is the first time that Commission staff has undertaken this type of assessment.
Following Jorge’s presentation, we will hear from Andrew Vrabel, Executive Director, Global Investigations, CME; Steve Joachim, Executive Vice President, Financial Industry Regulatory Authority (FINRA); Rob Creamer, Chairman, FIA PTG; Dave Lauer, President and Managing Partner, KOR Group; and finally, Trabue Bland, Vice President, Regulatory Affairs, ICE.
Panel III: Increasing Buy-Side Participation on SEFs
The witnesses on the last panel will update us on the current status of SEF trading and will share with us some concerns that I have heard from buy-side participants. I would like to know whether the Commission’s rules have created a barrier to trading on SEFs and are forcing market participants to turn to alternative execution solutions. Also, I am looking forward to receiving a market update on recent developments in the execution space.
I have asked Tod Skarecky of Clarus Financial Technology to provide an overview of SEF trading to help us identify the developments in this trading. Following Tod’s presentation, we will hear from Wendy Yun, Managing Director, Goldman Sachs Asset Management and Michael O’Brien, Director of Global Trading, Eaton Vance, for the buy-side perspective. Finally, I will ask Scott Fitzpatrick, Executive Director of Tradition, who is also serving as the Chairman of the Wholesale Markets Brokers’ Association, Americas (WMBAA), to provide his thoughts. Since we have TAC members that operate SEFs, I would greatly appreciate any insight they can provide on SEF trading activity.
With that, I would like to recognize Acting Chairman Wetjen to make his opening remarks.
Last Updated: June 3, 2014