SEC Risks Harm With Clampdown on High-Frequency Trading, CME's Chief Says
Regulators would harm U.S. equities trading if they toughened restrictions on computer-driven strategies that have largely replaced human market makers, CME Group Inc. Chief Executive Officer Craig Donohue said.
Market efficiency has been improved by the process known as high-frequency trading, Donohue said in an April 21 letter to the Securities and Exchange Commission. In January, the SEC published a paper asking whether fast trading strategies yield better or worse prices for investors, and this month proposed a rule that would ease tracking and monitoring of large firms’ transactions.
Donohue, whose company runs the world’s largest futures market, joined the CEO of New York Stock Exchange operator NYSE Euronext who said in an interview this week that high-frequency trading has helped markets. Lawmakers including Senator Ted Kaufman as well as broker TD Ameritrade Holding Corp. have criticized the practice, saying it harms the ability of investors to get the prices they see quoted and undermine confidence in the markets.
“Any attempt to place significant restrictions or limitations on HFT would be harmful to the marketplace,” Donohue wrote in his letter to the SEC. Firms could “shift the trading they currently conduct in the United States to Europe and other foreign jurisdictions that are already well-equipped to handle additional growth in both equities and futures.”
65% of Equities Volume
High-frequency trading represents about 65 percent of equities volume, according to research firm Aite Group LLC in Boston. In futures, proprietary trading firms that use their own money to buy and sell contracts rapidly account for 25 percent of volume. Aite expects that to increase to 40 percent by 2015. Other firms also use high-frequency-trading strategies to transact customer orders.
Chicago-based CME, the largest futures exchange operator, doesn’t operate exchanges subject to SEC oversight. The company’s four markets -- the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange and the Commodity Exchange -- are regulated by the Commodity Futures Trading Commission. CME said it submitted a letter to the SEC to comment on topics that are also important in the futures industry.
Andreas Preuss, CEO of Eurex Zurich AG, which operates the Eurex derivatives market in Frankfurt, said at a conference on March 11 in Boca Raton, Florida, that high-frequency trading strategies are “not only an integral but very substantial part of all of our businesses.” Eurex is owned by Deutsche Boerse AG and SIX Swiss Exchange AG.
This trading “has substantially deepened the liquidity available” at the CME, Donohue said at the same conference. High-frequency trading firms “make us change our technology and improve it all the time,” he said.
HFT to Continue Gains
“The percentage of trading volume attributable to HFT will likely continue to increase in the future,” driven by advances in technology, Donohue told the SEC.
The prospect of financial-services businesses shunning the U.S. was raised after passage of the 2002 Sarbanes-Oxley Act, which toughened accounting standards, and in January 2007, when New York City Mayor Michael Bloomberg and Senator Charles Schumer said U.S. regulations should be streamlined to compete with the U.K.’s Financial Services Authority, which was considered friendlier to companies.
The New York mayor is owner of Bloomberg LP, the parent company of Bloomberg News.
NYSE Euronext Chief Executive Officer Duncan Niederauer said in an interview on April 21 that disparate regulatory treatment of financial services companies didn’t result in a “huge flood of activity that migrated away” from the U.S., though he said Sarbanes-Oxley did cause some companies not based in the U.S. or U.K. to choose to list their stock on the London Stock Exchange instead of U.S. markets.
To contact the reporter on this story: Nina Mehta in New York at firstname.lastname@example.org.