CFTC Weighs High-Speed Trader Registration for Oversight

The main U.S. derivatives regulator is debating whether requiring a new registration for high-speed traders would give overseers better access to information collected by exchanges including the CME Group Inc.

The Commodity Futures Trading Commission, which regulates futures and swaps markets, is considering whether the additional reporting and record-keeping requirements would improve the agency’s direct surveillance of trades, Vincent McGonagle, director of the CFTC’s market oversight division, told senators today.

“If there is a registrant, they’ll have enhanced reporting responsibilities to the agency, we’ll have a better idea about who these entities are,” McGonagle said at a Senate Agriculture Committee hearing in Washington. He said the agency is determining whether the extra category would capture traders not already registered in a different capacity.

The Senate panel held the hearing amid regulatory scrutiny of high-speed trading firms, which drew broader public attention when “Flash Boys” author Michael Lewis accused them of using technological advantages to rig stock markets and harm other investors.

The CFTC last year asked for feedback on possible new regulations for high-speed and automated trading, including whether firms should be required to register. McGonagle said the agency’s staff is reviewing the comments and considering whether to recommend additional rules -- including the registration requirement -- to commissioners, who must vote to approve any new requirement.

Registration Category

Andrei Kirilenko, the agency’s former chief economist, said at the hearing that registration would allow regulators to more easily investigate future problems in the market. He urged creating a broad registration category for automated brokers and traders.

“It’s time for the HFT crowd to stand up and be counted,” Bart Chilton, a former Democratic CFTC commissioner and senior policy adviser at DLA Piper LLP, said in a statement. “Unless HFTs step up to the plate and support thoughtful regulation, there could very well be some moment of negative political and policy inertia which really harms the HFT business.”

Terrence Duffy, executive chairman of CME Group, said at the hearing that the exchange, which also acts as a regulatory overseer of futures markets, already has data on high-speed trading firms. He said the registration wouldn’t improve information about the market.

Participant Information

“We have information on every market participant,” Duffy said. “Every order and every person is identified with all their activity in CME Group.”

The CFTC has sought a budget increase to help improve technology to oversee electronic markets. McGonagle said additional funds would allow the agency to receive more data from CME Group and the other exchanges without a lag time.

“We would look for messaging data, more discrete, nuanced information about these particular trades that could inform us on our regulatory obligations, as well as how we conduct enforcement,” McGonagle said.

Kirilenko is the co-author of a study that concludes high-frequency traders earn consistent profits, often at the expense of smaller and retail participants. The research, released again last month with co-authors Jonathan Brogaard of the University of Washington and Matthew Baron of Princeton University, was based on proprietary transaction-level data collected at the CFTC about trading in the E-mini S&P 500 futures contract from August 2010 through August 2012.

‘Arms Race’

The researchers concluded that a small number of firms are consistently profitable and benefit by trading faster than their rivals. Those few firms competing for ever-faster trades can lead to inefficient investments in technology by “driving an arms race” and warding off new participants in the market, according to Kirilenko.

“With limited competition from new entrants to engage incumbent HFTs, we may not be seeing the gains in market quality that we would otherwise see,” he said in the Senate testimony. “The reasons for such high concentration might be benign, but the regulators should not just believe it to be so. They should get a solid understanding of why competition may not be working among the black boxes and take the steps to encourage it.”

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