High-Speed Trading Perks Said to Be Focus of CFTC ReviewMatthew Leising
The Commodity Futures Trading Commission is seeking detailed information on the incentives that U.S. derivatives exchanges such as CME Group Inc. and IntercontinentalExchange Group Inc. offer to spur trading, according to a person familiar with the matter.
The CFTC wants to know who gets trading fee discounts, how much money they save, and whether programs to reward early adopters of new futures contracts ever end, according to the person, who asked to not be named because the review is private. Attracting firms to a new product such as a financial or agricultural future is profitable for exchanges since once established, they often don’t gain momentum on other venues.
High-frequency trader Virtu Financial Inc. publicly revealed the examination in March, saying the CFTC asked for information on its “participation in certain incentive programs offered by exchanges or venues.” Virtu didn’t give specifics. The fairness of financial perks that exchanges give to high-frequency traders and others have captivated market critics for years, though the debate has mostly centered on stocks, not the futures industry overseen by the CFTC.
Laurie Bischel, a spokeswoman for Chicago-based CME Group, and Alan Sobba of Virtu declined to comment. Kelly Loeffler of Atlanta-based ICE and Steve Adamske of the CFTC didn’t immediately respond to requests for comment.
The derivatives regulator is hosting a public meeting next week to help determine whether high-frequency traders, firms that can buy and sell in millionths of a second, are harming the market. Michael Lewis, in his book “Flash Boys,” argued that exchanges, automated traders and broker-dealers have rigged the U.S. stock market. The CFTC will ask witnesses to respond to those claims regarding the derivatives market.
With the incentive programs, the CFTC wants to know more about whether they are halted once a new contract achieves a certain level of volume, said the person who asked not to be named because the matter is private. If not, that could give early adopters an edge on traders not receiving the discount, the person said.
The review of futures trading follows years of debate over the fairness of incentives in another segment of the U.S. financial system: the stock market. Equity exchanges pay firms to provide liquidity while charging traders who execute against those orders. Jeff Sprecher, the chief executive officer of ICE who purchased the New York Stock Exchange in November, says that system, known as maker-taker, should be abolished.
Sprecher was among a group of about 15 executives from firms including T. Rowe Price Group Inc., Royal Bank of Canada and IEX Group Inc. in a Feb. 6 meeting with the Securities and Exchange Commission to lobby for the elimination of maker-taker pricing, people familiar with the matter said at the time.
The CFTC has jurisdiction over separate territory. Last year, it announced that it’s reviewing practices at high-speed trading firms, requesting public comment on an industry that includes Virtu. The concept release approved by the CFTC in September is a first step toward creating new regulations for the business.
In its filing to list as a public company in March, Virtu said the CFTC wanted information on its participation in incentive programs from July 2011 to November 2013. Virtu said it doesn’t believe it broke the law.
Unlike in the equity market, futures exchanges don’t pay investors who provide liquidity. Instead, they may reduce the fee that an investor pays per contract. Futures markets also have tiered pricing that varies depending on the volume a firm trades over a given period of time.
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