June 14, 2011
Thank you for the invitation to be with you. It is an honor, particularly to be on the panel with Commissioner Barnier.
There are two new species of traders that I believe we need to be cautious about in our markets ecosystem. One, regulators are focusing on and have been discussing, and the other needs heightened attention.
The massive passives are the first. These speculators, who have invested hundreds of billions into markets in recent years are far out-weighing the traditional commercial speculator and have extremely large—massive—size, along with a fairly price-insensitive—passive—trading strategy. The massive passive trading strategy isn't a secret and others in markets base decisions upon what they know the massive passive will do, which is to go long, by and large. There are more speculative positions in commodity markets than ever before.
I remind folks that we are not a price setting agency. That said, the extreme volatility accompanied by high prices is a concern that needs to be addressed. These markets impact prices consumers pay for just about everything, from a loaf of bread, to a tank of fuel, to a home mortgage. If that price isn't fair, based upon efficient and effective markets, regulators aren't doing the job needed. Quite frankly, we need to do better. We have a requirement in the U.S. to impose position limits. We have, unfortunately, not done so yet, but we will get there.
I'm encouraged that there is an acknowledgment and desire to do so in the E.U., too. With all of the talk about harmonization between the E.U. and the U.S., I'm hopeful that position limits is an area that won't create any stumbling blocks.
By the way, for those reluctant or unwilling to acknowledge link between excessive speculation and price, today I'm posting (at cftc.gov) more than 50 studies, papers or quotations. Have a party.
The other new species that I think needs more attention are high frequency traders, what I call cheetah traders because, like the mammal, they are extremely fast, fast, fast. The cheetah traders jump in and out of markets at lightning speed trying to scoop up micro-dollars in milliseconds. I'm not saying the cheetahs are bad. Technology in markets has been great, but the existence of this new species, the cheetahs, requires that we adopt specific rules and regulations. On May 1st, a Sunday, we saw a mini flash crash in the silver market—a 12 percent drop in 13 minutes. In natural gas last week, we saw an 8 percent drop in 14 seconds—seconds! I'm not now blaming the cheetahs for either of these events. Our Commission is examining both. Nevertheless, the fact that markets can move so fast with electronic trading sets off alarm bells. Both of these mini flash crashes, by the way, took place after normal trading hours and were not reacting to any time-sensitive news. That's why the cheetahs need testing, some sort of certification, kill switches to turn off cheetah programs should they go feral and accountability for cheetahs if their programs roil markets and cost people money.
So, as regulators, we need to adapt to these two species, the massive passives and the cheetahs.
Again, I'm honored to be here and look forward to the discussion.
Last Updated: June 14, 2011