October 12, 2010
Good Afternoon. I would like to welcome everyone to the second meeting of the CFTC Technology Advisory Committee. During this meeting, we will continue our debate regarding high frequency and algorithmic trading, and focus on improving market transparency through the deployment of Swap Execution Facilities (SEFs) and Swap Data Repositories (SDRs).
I would like to thank my fellow Commissioners for their participation, and I would like to welcome our Committee members. All of you have taken time out of your busy schedules to participate and contribute to the technology discussion today, and we appreciate your participation.
I would also like to thank our presenters, many of whom are Commission staff who have been working very long hours on their respective rulemakings. I greatly appreciate your participation and presentations, which I know will contribute to our debate today.
Since our last meeting in July, the Congress passed and the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This statute provides vast new authorities to this Commission, most notably the comprehensive regulation of the over-the-counter swaps markets calling for mandatory exchange trading and clearing of standardized swaps.
In addition, we also have the benefit of a presentation by CFTC Economist Dr. Andrei Kirilenko regarding the market events of May 6th 2010. Dr. Kirilenko will also present his related academic paper co-written with several other authors, including Dr. Kyle, a Committee member.
In developing the agenda for this meeting, I focused on some of the most challenging technology-related questions facing this Commission today in light of recent events and our new jurisdiction.
The first topic on high frequency trading is not only obvious, but also a continuation from our first meeting where we sought to identify and establish the appropriate controls on high frequency trading.
The May 6th staff report identifies the various roles computer trading strategies played in the massive sell-off, and highlights the interconnectedness of the futures and equity markets. The staff report essentially concluded that a large sell order in a very turbulent market set off a chain reaction in the markets. In doing so, it exposed significant and systemic flaws in: (1) our market structures; (2) the stub quote system; and (3) the resultant breaking of trades. When a regulator steps in and breaks trades, we have no choice but to question whether we have failed in some manner. I also believe the payment for order flow practice warrants further investigation.
Another element of our first panel will focus on the new statutory authority intended to reign in manipulative and disruptive trading strategies. Bob Pease, who is the CFTC team lead for the related rulemakings, will educate the Committee on these new authorities. Though the inclusion of these topics in one panel should not be read to mean that the there were nefarious intentions at play on May 6th, it is appropriate that we use this forum to discuss the options available to the Commission in dealing with computer aided trading strategies that are disruptive to futures and swaps markets.
Our third panel will focus on how swap execution facilities can improve pre-trade transparency in the marketplace. Understanding our technological options and constraints with regard to the new swap trading venues is essential to developing a flexible and lasting market design that is responsive to innovation and product evolution.
Finally, our fourth panel will address the technological challenges relating to post-trade transparency and the Commission’s ability to meet these challenges by deploying an effective surveillance program to see across markets, trading platforms, and clearing entities to ensure risk is well managed and markets continue to serve their fundamental mission of price discovery and commercial hedging.
On Sunday, 60 Minutes fortuitously ran a story on high frequency trading that referenced the May 6th staff report and its relationship to computer based trading systems. I would like to quote Larry Leibowitz, the Chief Operating Officer of the New York Stock Exchange, who appeared in the 60 minutes story. I believe Mr. Leibowitz accurately captured our mission here today when he said, in reference to high frequency trading:
“We have to do a better job… We have to make changes that make sense that give people more confidence in the market. Add more transparency. And make people feel like this is a place I can trust my retirement savings to.”
I hope today’s discussion will provide specific recommendations as to how we can all do a better job and make appropriate changes to instill confidence in our markets.
The CFTC’s 30 rule-making teams are working toward recommending rules and creating standards for the swaps markets and today’s hearing can help guide the Commission and the teams going forward.
Last Updated: January 18, 2011