CFTC investigation to define HFT

The Commodity Futures Trading Commission (CFTC), the US derivatives regulator, has formed a new subcommittee of the Technology Advisory Committee (TAC) to focus on automated and high frequency trading (HFT) and provide a workable definition of the practice.

The Commodity Futures Trading Commission (CFTC), the US derivatives regulator, has formed a new subcommittee of the Technology Advisory Committee (TAC) to focus on automated and high-frequency trading (HFT) and provide a workable definition of the practice.

Commissioner Scott O’Malia, TAC chairman, said the new subcommittee’s role will be to develop recommendations for delineating HFT in the context of electronic and automated trading. O’Malia hopes the definition will serve as an first step towards assessing the “presence and impact of HFT in CFTC regulated markets”, so that the watchdog can consider regulatory and policy responses.

“I think the Technology Advisory Committee, through advice and guidance from this new subcommittee on automated and high-frequency trading, will provide a much needed holistic approach to identifying the criteria the Commission needs to incorporate into any further decision-making regarding automated trading and HFT,” said O’Malia.

The subcommittee will spawn four separate working groups tasked with identifying issues associated with automated trading. The working groups will focus on: defining HFT; examining whether there are multiple categories of HFT; analysing oversight, surveillance and the economic of HFT; and understanding how high-frequency traders behave as compared to other automated systems.

O’Malia has tasked CFTC chief economist Andrei Kirilenko to chair the subcommittee and is keen to examine distinctions in trading activity and how such distinctions should be tagged by the exchanges.

The Commission wants individuals interested in participating on this subcommittee to contact Kirilenko with their application. Candidates should be qualified representatives from industry, exchanges, academia, international regulatory or advisory bodies, government agencies or experts who develop, design, or operate automated trading or HFT systems.

While some 70% of US equities trades are currently thought to be executed by HFT firms, the practice is not usually associated with derivatives. But studies by financial research firm TABB Group suggest upwards of 60% of futures contracts currently traded on the CME Group’s Chicago Mercantile Exchange were traded by HFTs.

The UK government’s Foresight project is also investigating HFT, with aims to advise policymakers on the potential impact of computerised trading on financial markets.

The Securities and Exchange Commission has requested HFT firms provide details of their trading algorithms – a measure similar to recent proposals due to be issued by the European Securities and Markets Authority before the end of Q1 2012.

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