CFTC Too Broke to Properly Police Flash Traders, Massad SaysBy
Agency head tells House appropriators CFTC needs more money
Massad says industry booming while agency tech falls behind
The top U.S. derivatives regulator said his agency needs more money to keep up with the Flash Boys.
Derivatives trading is “changing and innovating at the speed of light,” while the agency has been underfunded and needs money for technology and expert staff, Timothy Massad, chairman of the Commodity Futures Trading Commission, said during testimony at a House budget hearing on Wednesday. The transformation of the industry was highlighted in Michael Lewis’s book “Flash Boys,” which alleged proprietary traders used hyper-fast connections between markets to pick off investors whose orders sat in dark pools that used slower price feeds.
“The days when the CFTC could conduct market surveillance by observing traders in floor pits are long gone,” Massad told lawmakers who control the agency’s purse strings. “We are in an age of electronic, and mostly automated, trading, which requires an entirely new level of sophistication.”
President Barack Obama’s budget proposal released this week calls for an $80 million increase to $330 million for annual spending at the CFTC, and Massad said he’d spend much of the money on surveillance and data collection and analysis. Massad said Wednesday he only has 50 people currently doing market surveillance. The CFTC -- which hasn’t typically been granted the budget increases Obama has requested since the 2008 financial crisis -- has to build its own “sophisticated analytical tools,” according to Massad.
“You can’t just go to Radio Shack,” he said.
The CFTC has made some improvements in the last year, said Representative Robert Aderholt, the Alabama Republican who heads the appropriations subcommittee that hosted the hearing. There have been some missteps by the agency though, including an issue with its internal accounting, he said. The CFTC budget has benefited from some of the largest percentage increases relative to other federal agencies, said Aderholt.
Massad said his agency’s budget isn’t sufficient to frequently inspect the firms and exchanges it regulates, or to pursue all the enforcement cases that it would like to -- such as spoofing and precious-metals scams. It’s an argument he’s made before, including last year, when his agency came under scrutiny amid allegations that trader Navinder Singh Sarao manipulated the futures market from 2009 to 2014, including on the day of the 2010 flash crash that briefly erased almost $1 trillion from U.S. stock prices.
In November, the regulator proposed a new registration standard to increase its surveillance of high-speed and other forms of computer-driven trading that have surged in recent years. Disruptions such as the 2010 equities crash and harrowing swings for Treasuries in October 2014 spurred questions about the resilience of markets, and led to a debate over the best ways to regulate.
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