Commodity Futures Trading Commission (CFTC) Commissioner’s Speech Suggests High Frequency Trading Rules to Come

May 13th, 2014

Last week, on May 6, 2014, CFTC Commissioner Scott D. O’Malia delivered a keynote address on the current state of the derivatives market.  Commissioner O’Malia focused on three areas requiring oversight or regulation, including cross-border harmonization, “unworkable” regulations passed by the CFTC negatively impacting the market, and high frequency trading.  The CFTC’s plans to regulate high frequency trading are notable, considering the attention the issue is currently receiving from the media, other regulators, lawmakers and European counterparts.

Commissioner O’Malia acknowledged that although Michael Lewis’s new book, Flash Boys, has drummed up momentum to tackle this issue, the CFTC Technology Advisory Committee (TAC) has been examining high frequency trading since 2010, when the “flash crash” occurred.  The CFTC also created a Subcommittee on Automated and High Frequency Trading in 2012.

In response to Lewis’s book, however, the next TAC meeting on June 3, 2014, will evaluate the book’s findings, including issues with data feeds, pricing, co-location, direct market access and cancellation policies.  Commissioner O’Malia remarked, “I am committed to using TAC resources to continue examining the issues surrounding automated trading so that the Commission has all the facts and information before taking regulatory action to improve market structure.”  Commissioner O’Malia also pointed out that CFTC staff are already working on a proposed rule.

The success of high frequency traders has highlighted several shortcomings and gaps in the CFTC’s ability to thoroughly regulate the derivatives market. Commissioner O’Malia said that the CFTC currently lacks a strategic technology plan and therefore has an “incomplete picture of today’s highly automated markets.”  Commissioner O’Malia also stated that the CFTC lacks the ability to regulate order messages because of the absence of an order message data collection analysis system.  Finally, Commissioner O’Malia pointed to the need for cross-product and cross-market analytical tools.  These areas of need will be discussed at the next TAC meeting following the meeting on June 3, 2014.


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Commissioner O’Malia’s Speech –

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