The U.S. Commodity Futures Trading Commission isn’t keeping up with high-speed derivatives trading and needs to invest in tools to detect manipulative and disruptive practices, said Scott O’Malia, a Republican commissioner.
The CFTC lacks the technology necessary to routinely oversee the millions of messages traders send every day to futures exchanges operated by CME Group Inc. and IntercontinentalExchange Group Inc., O’Malia said yesterday in a speech prepared for a Tabb Forum conference in Chicago.
“Without such tools, the commission cannot effectively oversee today’s automated markets,” O’Malia, 46, said in the speech. He said he is discussing with the financial industry how the agency “should design the 21st-century mouse trap to spot disruptive and manipulative trading practices -– at any speed.”
The CFTC and Securities and Exchange Commission have been increasing scrutiny of high-speed trading, while the U.S. Justice Department and New York attorney general are probing whether automated firms get an unfair jump on other traders through computers and data feeds. The trading practice garnered additional criticism last month when author Michael Lewis wrote in “Flash Boys” that high-frequency trading has rigged the market against investors.
The Senate Agriculture Committee, which has oversight of the CFTC, has scheduled a May 13 hearing on high-frequency trading and steps the agency can take to ensure market integrity.
The CFTC last year published the first step toward possible regulations of automated trading when it asked the public for comments about ways to improve market stability. O’Malia, who has scheduled a June 3 meeting of an agency advisory group to discuss high-frequency trading, said the CFTC is starting to consider a new rule proposal.
The CFTC and its enforcement division are reviewing high-speed trading practices in the futures market to ensure they aren’t manipulative, Mark P. Wetjen, acting CFTC chairman, said on April 3. The agency is also reviewing relationships between exchanges and trading firms, he said.
SEC officials, meanwhile, have disputed criticisms that their oversight can’t keep up with high-speed traders. In a May 2 speech, Gregg Berman, one of the SEC’s advisers on high-frequency trading, said the agency’s Midas surveillance system has improved oversight of stock markets.
O’Malia said the CFTC needs also to improve coordination with European regulators on oversight of the swaps market. The U.S. and Europe lack an agreement on data-sharing about the $693 trillion global market and risk fragmenting the market between the regions, he said.
“The commission and foreign regulators have the power to reverse this liquidity fragmentation before it becomes permanent,” he said. O’Malia sent a letter yesterday to Michel Barnier, the European Union’s financial services chief, urging that European regulators conclude that U.S. oversight of derivatives clearinghouses is equivalent to their own. That decision would help global authorities coordinate their regulations, he said.
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