Opening Statement, CFTC Technology Advisory Committee
Chairman Gary Gensler
March 29, 2012
I’d like to thank Commissioner O’Malia for his leadership in convening this Technology Advisory Committee subcommittee meeting on automated and high frequency trading. I also want to thank all the members of the committee for their willingness to share their advice and knowledge with the Commission on these crucial issues.
Financial reform means the Commission must continue adapting our oversight to changing market structure, including emerging trends related to electronic trading.
In the markets, one thing we can be quite sure of is that means of communication and technology will continue to advance and affect our markets. This was true in the 19th century when the telegraph led to the introduction of the ticker tape. This also was true in the early 20th century when telephones first allowed a central quote system where market participants could get instantaneous bid and ask prices. It was further true during the last decade when the futures markets went from largely open outcry to now approximately 90 percent electronically traded.
Where market makers used to be on the floor of the exchanges, they now often sit at computers miles away or even on another continent. While market participants used to be involved in each of their trades, they now often rely on algorithms to execute their trades. Humans are much more frequently relying on the judgment programmed into machines to initiate and execute their trading strategies. The markets have evolved to where we increasingly find machines competing with each other.
Regulators cannot assume that the algorithms in the markets are well designed, tested or supervised. Our regulations have to adapt as the markets increasingly move from man to machine. Only through adaptive regulation can hedgers and investors have confidence in the markets and market integrity.
This year, the Commission will continue working to adapt our oversight to changing market structure, including emerging trends related to electronic trading.
The Commission has already taken a number of steps, and the work of this committee will help inform us as we move forward. As it relates to both trading and clearing, the Commission has proposed that there be pre-trade filters to protect the markets and the clearing system.
In our proposed rules on Designated Contract Markets and Swap Execution Facilities, the trading platforms are required to put in place effective risk controls, including pauses and/or halts to trading in the event of extraordinary price movements. We also sought and received many helpful comments on possibly requiring additional risk controls, such as price collars or bands, limits on maximum order size, stop loss order protections and kill buttons.
This month we finalized a rule that strengthens the risk management procedures of clearing members. The rule requires clearing members that are futures commission merchants, swap dealers, and major swap participants to establish risk-based limits on their customer and house accounts. These risk filters and procedures will help secure the financial integrity of the markets and the clearing system.
In addition, the Commission finalized internal business conduct rules that include risk management provisions requiring swap dealers to have policies and procedures to detect, identify and promptly correct deficiencies in operating and information systems. These risk management procedures are required to be tested and reviewed. Taken together, these requirements are important enhancements to protect our rapidly changing markets.
Further, I expect the Commission will consider putting out for comment a concept release concerning the testing and supervision of automated market participants, especially those with direct market access. These concepts will be designed to address potential market disruptions that high frequency traders and others who have automated market access can cause.
And the Commission also is looking to propose a rule on the reporting of ownership and control information for trading accounts. These rules would enhance the Commission’s surveillance capabilities and increase the transparency of trading to the Commission.
I’d again like to thank Commissioner O’Malia for his work, as well as our Chief Economist Andrei Kirilenko for all of his contributions to these efforts. The work of this committee will be very helpful in informing the Commission as we move forward on adapting our oversight to changing market structure.
Last Updated: March 29, 2012