Exchanges Face Pressure to Disclose High-Speed Trader Perks

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A top U.S. derivatives regulator is calling for the world’s biggest exchanges to explain publicly how they encourage high-speed trading.

Exchanges such as CME Group Inc. and Intercontinental Exchange Inc. should release more information about incentives and other financial perks they offer to lure certain traders to use interest rate, energy and other contracts on their markets, Sharon Y. Bowen, a member of the Commodity Futures Trading Commission, said in remarks prepared for a speech on Thursday.

“My hope is that greater transparency will enhance these programs, including by creating the possibility for more informed choices for investors,” Bowen, a Democrat, said in the speech for an International Swaps and Derivatives Association conference in New York.

Exchanges offering market maker programs should provide a granular level of information to regulators and the public about the fairness of those programs, including who can take part in the incentives, why some traders aren’t eligible and how long the programs last, Bowen she. Exchanges say they typically use the programs to jump-start trading in new products.

Bowen’s comments come as the CFTC inches closer to proposing new risk controls for high-speed and automated trading. The agency has scrutinized high-speed trading firms for the last five years, and sought industry feedback two years ago about potential new rules for supervision, testing and registration requirements.

Build Liquidity

Anita Liskey, a spokeswoman for CME, said the market-maker programs are designed to build liquidity in the firm’s contracts.

“We understand the CFTC will be issuing a new rule designed to further improve transparency, and we look forward to reviewing it and responding,” Liskey said in an e-mail. Brookly McLaughlin, a spokeswoman for ICE, declined to comment.

New oversight is necessary as electronic trading starts to dominate the market, Bowen said. For the most liquid U.S. futures contracts, more than 90 percent of trades use algorithms or other automated strategies, she said, citing CFTC estimates.

The CFTC and the Securities and Exchange Commission have been investigating whether some traders benefit unfairly from better access to data or other incentives. The 2010 flash crash, a series of technological failures and the book “Flash Boys” by bestselling author Michael Lewis fed scrutiny of high-speed and off-exchange trading.

Greater Oversight

Bowen also called for greater oversight of the potential for a high-speed trading firm to trade with itself. Exchanges should disclose information about the proportion of orders that are such self-trades as a way to help investors decide where to choose to trade.

“If the percentage is high enough, many investors may choose not to trade on that exchange at all,” Bowen said.

The CFTC, Federal Reserve and Treasury Department, in a report on the Oct. 15 price swings in the Treasury market, said a higher-than-normal share of transactions was conducted by speed traders using algorithms that resulted in individual firms being on both sides of the same deal. While that type of trading can be illegal because it harms price competition by disguising market interest, the regulators stopped short of alleging any violations.

“We want market makers to provide real liquidity, and trades with and between me, myself and I represent phantom liquidity at best,” Bowen said.

(Updates with exchange comments in sixth paragraph.)

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