High-Speed Trades Will Face CFTC Policies to Curb Disruption

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The main U.S. derivatives regulator as early as next month will take its biggest step yet to impose new curbs on high-speed trading to limit market disruptions.

Timothy Massad, chairman of the Commodity Futures Trading Commission, said on Wednesday that the agency will lay out requirements for testing and supervising automated algorithms to ensure they can be stopped in emergencies. The CFTC’s proposals, more than two years in the making, will also probably mandate registration for standalone trading firms.

The proposals would be the most significant step by the CFTC to increase oversight of automated trading, which has become a common way derivatives are traded in many markets. The CFTC and the Securities and Exchange Commission have been investigating whether automated and high-speed trading need additional scrutiny since the 2010 flash crash in equities and a series of technological failures spurred questions about the resilience of markets.

The requirements may also include restrictions on incentive programs used by exchanges CME Group Inc. and Intercontinental Exchange Inc. to encourage trading as well as measures to curb how often a high-speed firm winds up being on both sides of the same trade, which was highlighted by regulators in a report on price swings in the Treasury market last October.

“We are concerned about the potential for disruptive events and whether there are adequate measures to ensure effective compliance with risk controls and other requirements,” Massad said in remarks prepared for a conference on the Treasury market in New York.

Flash Events

More than 40 percent of futures traded in agricultural, metals, energy and Treasury markets use automated trading strategies, Massad said.

The proposals may not represent a wholesale change to the industry. Massad said some of the policies will be consistent with best practices already followed by many firms and will build on what CME and ICE require.

“Chairman Massad’s remarks reflected many of our recommendations on risk management in automated trading,” said Heather Vaughan, a spokeswoman for proprietary trading firms that are part of FIA, a trade group for the futures industry. “It’s encouraging that the commission recognizes that rules need to address the practice of automated trading, rather than the type of firm using it.”

The agency has scrutinized high-speed trading firms for the last five years. It sought industry feedback two years ago about potential new rules for supervision, testing and registration requirements. The new proposals are subject to public comment periods and may be months or years away from finalization.

Massad said there has been an increase in “flash” events in derivatives markets similar to the swings that occurred in Treasuries on Oct. 15, 2014. There have been 35 rapid moves and recoveries in West Texas Intermediate crude contracts this year, according to data released by the CFTC. Since 2010, there have been been similar swings in other commodities, such as an average of more than five such events a year in the last five years in the corn market, the agency said.

Massad said the regulator hasn’t tried to determine a trigger for the volatility.

“I welcome such analysis, but I think it’s difficult to do,” he said in the speech. “In some cases there might be an obvious cause, but I suspect there are many times where there is not.”

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