High-frequency trading firms conduct transactions with themselves in ways that distort liquidity in derivatives markets and warrant regulatory review, according to U.S. Commodity Futures Trading Commission member Bart Chilton.
So-called wash sales, in which a party buys a contract from itself, are occurring even though they violate regulations set by the CFTC, CME Group (CME) Inc. and Intercontinental Exchange Inc., Chilton said in a speech prepared for a National Grain & Feed Association conference today in San Francisco.
“In voluminous instances these cheetahs are engaged in this activity,” Chilton said in the remarks, likening high- frequency traders to the world’s fastest mammals. “When they do so, it might appear to be liquidity, but it is not. It isn’t really there. It’s fantasy liquidity.”
The CFTC and Securities and Exchange Commission have increased their focus on high-frequency and algorithmic trading since May 6, 2010, when about $862 billion was erased from stock values in 20 minutes before share prices recovered from the plunge. Regulators have expressed concern that some firms and electronic exchanges don’t have enough control over trades or technology glitches that could roil markets.
The SEC on March 7 voted unanimously to propose rules requiring exchanges and other electronic-trading venues to maintain technology systems against disruptions and report any outages. It was the first planned update of standards in 22 years.
The CFTC also has been considering whether to issue a so- called concept release, a step prior to formal rulemaking that could lead to new testing, supervision and oversight requirements for high-frequency and automated trading.
In the speech, Chilton said that wash trades require review. “We need to ensure that we have the correct policies and procedures in place.”
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