"The Changeling"

Opening Remarks at the Futures Industry Association's Panel on the Evolution of Commodity Markets, Boca Raton, Florida

Commissioner Bart Chilton

March 14, 2012

Good afternoon. There is no denying it; we don't live in simple times. Most of us live extremely, exceedingly complicated lives with emerging personal and business technologies. Technology has made us more efficient and effective at many things, but less complicated?  That is certainly debatable.

It is sort of like that old episode of Star Trek, “The Changeling,” where the crew of the Enterprise encounters a space probe called Nomad that was designed to explore the galaxy.  However, Nomad had collided with an alien probe—a probe that was to obtain and sterilize soil samples.  The collision changed Nomad and transformed its mission into finding and sterilizing imperfection.  And of course, biological units (like people) have imperfections. So, Nomad was sort of a problem.  Kirk got it to destroy itself.  The point, and I do have one, is that there were two seemingly fine technologies that, when combined, created something that was a major problemo for people—biological units.

It is one thing to have a phone with a task list, camera and Angry Birds, but we are way beyond that.  Heck, Apple advertises there are more than half-a-million applications.  There are more than 160 million financial market transactions each and every day.

As we all know, these are global markets churning away, burning up the fiber, high frequency traders—or cheetahs as I call them because they are so fast—splitting nanoseconds across the trading universe in an effort to scoop up micro dollars.

So, we live in a Changeling world—both our personal and business lives are technology dependent, complex, and continually evolving.

Cheetahs, HFTs, are relatively new in the evolution of trading. Get this: the term high frequency trading isn’t even mentioned in the 2000-plus pages of Dodd-Frank.

I think the cheetahs are not only fascinating and remarkable, but have an important role to play in our markets.  I just think we haven’t done enough, as regulators, to ensure that we are keeping an eye on what is going on with technology and with cheetahs.  I’m worried that we may witness even more technology issues in markets. And, as few and far between as the technology issues have been, they do exist and they are significant. I think there are some steps we should take, although I won't go into those now. Let's just say technology is neat and cool and can make things better. However, to assume that all technology is good without question is naive as a general matter and dangerous for a regulator.

The second Changeling in evolving markets is the securitization or equitization of the futures markets. Between 2005 and 2008, we witnessed more than $200 billion coming into futures markets by non-traditional speculators. This is a major change in the manner in which these markets have traditionally been utilized. Rather than the "in-and-out" trading that we were familiar with from traditional speculators (those folks who took the opposite side of airline fuel hedges or farmers' crop risk management transactions), we've got an evolving phenomenon. Large investors now use our nations' price discovery markets just like our parents used to use the stock market: they buy and hold. I've called these traders Massive Passives for their size and trading strategy, although admittedly, not all of the traders only go long and while they may be fairly price insensitive, they aren't immune to prices. This massive "long" presence has, in some form or fashion, an upward effect on pricing. Don't get me wrong, of course we need speculators. The markets don't exist without them. For example, there are 12 managed money long positions for every managed money short position in crude oil right now.

Just like the cheetahs, I think there are things we should be doing, but we can save that for later.

Suffice it to say, our evolving markets are Changeling all the time. That's why I'm so appreciative of the opportunity to talk a little bit about these issues today.

Thank you.

Last Updated: March 14, 2012