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CME Requests CFTC Approval to Change Rule Barring Wash Trades

CME Group Inc., the owner of the world’s largest derivatives market, asked the Commodity Futures Trading Commission to approve a change to its rule barring traders from engaging in transactions with themselves.

Following discussions with the CFTC’s market oversight division last month, the Chicago-based exchange operator withdrew a notification that it was making the change under its own self-regulatory authority. Laurie Bischel, a CME spokeswoman, confirmed the CFTC request in an e-mail.

The company has faced resistance and criticism over how it handles the transactions, known as wash trades. Bart Chilton, a CFTC commissioner, said last month that CME’s proposal for the transactions needed more review. Chilton, one of three Democrats on the commission, said the agency should take additional steps to vet CME’s guidance and determine if other exchanges will have similar or better policies.

CME is a self-regulatory organization under CFTC guidelines, meaning it can approve changes to its rules without the government agency’s pre-approval. This has allowed futures markets to adapt more quickly to changing trading and market practices versus regulatory systems where government approval is needed prior to adoption of new standards.

The company decided to seek CFTC approval to its wash trade rules “to give market participants certainty that the guidance in our advisory is fully consistent with the Commodity Exchange Act and CFTC regulations,” Bischel said in the e-mail.

Reuters reported the request earlier today.

Increased Focus

Transactions in securities and futures markets are increasingly dominated by trading firms using computers to win the fastest executions. Chilton has said high-frequency firms sometimes place trades with themselves in ways that distort liquidity and transparency in derivatives markets and warrant more regulatory oversight.

The CFTC and U.S. Securities and Exchange Commission increased their focus on high-frequency and algorithmic trading after May 6, 2010, when a U.S. stock-market plunge erased about $862 billion in 20 minutes.

The CFTC is improving its capability to oversee high-frequency traders and can analyze trades occurring in milliseconds, according to Chilton. The agency’s staff has focused on activity at the start and close of trading sessions, analyzing millions of executions. During those periods, high-frequency traders engaged in 100 to 500 trades per second in commodity markets.

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