July 14, 2010
Today’s inaugural meeting of the CFTC – Technology Advisory Committee will address the necessity of applying appropriate risk management and best practices for high frequency and algorithmic trading.
As futures and equity markets evolve, the speed and trade volumes are testing the boundaries of our existing risk management functionality. This requires closer examination by the Commission to determine what new or enhanced pre and post trade risk controls are required to ensure the price discovery and risk management mission is zealously protected.
I would like to thank my fellow Commissioners for their interest and participation and I would like to extend a warm welcome and my sincere thanks to our Committee members for their participation today and willingness to join the Committee. I would also like to welcome our three presenters, who will help inform our debate today.
This Committee has been reestablished after 5 years to provide advice and counsel on technology matters to the Commission. We have assembled 24 individuals representing a cross-section of the future and derivatives industry to participate on this Committee.
The Commission will face significant technological challenges in implementing the House-passed Dodd-Frank Bill, which provides the Commission with vast new authorities and responsibilities over the OTC swaps market. It is estimated that the OTC market is 10x the value of the regulated futures markets and the Commission is about to be hit with a tsunami of trade data.
Up until now, the Commission has had oversight responsibilities over the futures markets and we received the relevant trade data “gift-wrapped” by the exchanges and reporting firms at the end of the day. Under the Dodd-Frank bill, we will have a much larger responsibility to collect data from across markets including trade repositories and swap execution facilities and in a form and format that will be useful in conducting our surveillance program.
Today’s marketplace has embraced trade technology and invested hundreds of millions of dollars in increasing the capacity and speed of its platforms.
Today, trades execute in 2 milliseconds – 150X faster than the blink of an eye. In the future, we can expect nanoseconds to be the standard by which trades are executed. A nanosecond is 1 billionth of a second (10-9).1
As latency has decreased, trading volume has grown significantly. According to the CME Group, the number of messages has grown exponentially, with up to 200 million messages per day and surpassing 5 billion messages per month.2
I believe this Commission is unified in its commitment to deploy technology and understand the impact technology will have on the markets going forward.
The Commission has recently released draft rulemakings regarding Co-location and the reporting of Ownership and Control data. These rules form the foundation of the Commission’s strategy to adapt to technology-driven evolution in the markets.
Today, we have assembled the best in the business and I look forward to working with this Committee to develop solutions that will enable the CFTC to move into the 21st Century and fulfill the statutory mandate as proposed by Congress.
Advisory Committee Objectives
Over the next two years this Committee will address a series of topics and provide advice on a recommended course of action for the Commission.
Today’s topic for the Committee is: should the Commission or the industry apply “best practices” on high frequency and algorithmic trading?
We are interested to understand which pre and post trade risk management functions should be applied to ensure that markets will continue to serve the essential risk management role and to enable technological evolution to occur without disrupting this mission.
I recognize that just as trading left the pit and migrated to the computer screen, it is inevitable that technology will continue to challenge our existing market designs. We must adapt to a new regime of oversight and surveillance, ensuring that the mission and customers are protected.
Computer trading strategies are only as good as their designers and this element of risk must be accounted for with new pre-trade functionality. There is a limit to what an exchange can do and some of this responsibility must be borne by the traders themselves.
Following the May 6th Flash Crash, there have been many questions asked regarding the role computer trading strategies may have had in the rapid moves in the market during a period of approximately 20 minutes.
Today, the Futures Industry Association will present its paper outlining several best practices that could be applied as an element of granting direct market access.
I am interested to hear from our Committee members whether the proposal is adequate, or if additional controls should be considered.
More specifically, I would like to understand what can be done to prohibit wash sales, which I find to be a totally unacceptable practice, yet the FIA paper believes such trades are inevitable in a high frequency trading regime.
As I noted in the beginning, technological innovations in the market require this Commission to carefully consider applying new management tools. We have assembled a range of market experts and I hope they will not be shy about offering their opinions and alternative solutions.
Before we turn to the presenters, I would like to turn to my fellow Commissioners for their opening remarks.
1 Fast to fastest: Milliseconds (One thousandth of a second: 10-3) to Microseconds (One millionth of a second: 10-6) to Nanoseconds (One billionth of a second: 10-9)
2 B. Durkin, The Impact of Algorithmic and High Frequency Trading on CME Group, Inc. Markets (July 2010), p. 4.
Last Updated: January 18, 2011