New regulations proposed for electronic futures trading
— Regulators say new rules needed for modern trading.
The Hollywood image of “the market” being a throng of traders barking “sell” and “buy” orders over the din of a congested room littered with ticker tape is just that; an image. At least for the futures market anyway. With more than nine out of ten futures trades being conducted electronically today, efforts are being made to cope with the change and stem abuse of the system.
The Commodities Futures Trading Commission (CFTC) issued a “Concept Release” last Monday regarding proposed changes in risk controls on electronic and automated trading. This has come due to the massive shift in futures trading behavior in recent years.
“We have witnessed a fundamental shift in markets from human-based trading to highly automated electronic trading,” explained CFTC Chairman Gary Gensler following the release.
“Automated trading systems, including high frequency traders, enter the market and execute trades in a matter of milliseconds without human involvement. Electronic trading makes up over 91 percent of the futures market. The swaps market also is moving toward electronic trading.”
He went on to assert the dedication of the CFTC to continually adapt trading regulations to promote market integrity. Previous regulations have been based on human judgments and speeds which are now out of place when massive numbers of exchange orders can be executed in mere seconds.
“The CFTC already has taken a number of important steps to keep pace with rapidly evolving 21st-century markets,” Gensler continued. “We have adopted rules to implement pre-trade risk filters for futures commission merchants, swap dealers, designated contract markets and swap execution facilities. We also have new rules to prohibit disruptive trading practices and other market abuses.”
This latter detail refers to elements of the Dodd-Frank rule. Dodd-Frank was used for the first time in late July against algorithmic commodity trading firm Panther Energy Trading LLC which was found to have been “spoofing” the market. Since then, several other algorithmic commodities trading firms have been similarly caught.
Troy Vetterkind of Vetterkind Cattle Brokerage and an often-quoted market analyst in these pages has frequently asserted that abuses of the sort of Panther Energy Trading LLC is an every-day occurrence in the cattle futures market. He has also often asserted that the lack of confidence in market participants brought on by algorithmic trading has depressed market participation.
The Concept Release itself also catalogs a number a high-profile instances wherein electronic trading systems caused problems to the markets as a whole, among them being the recent three-hour shut-down of the Nasdaq stock market.
The Release itself is quite long and recommendations are quite specific, but most generally the document identifies key players, potential risks and where said risks exist in the market, potential checks against abuse, additional reporting, and pause/ halt requirements.
“This Concept Release is intended to stir public discussion and debate on how best to protect the functioning of markets for the benefit of farmers, ranchers, merchants and other end users who rely on markets to hedge risk—particularly in light of the reality that the majority of the market is using automated trading systems,” said Gensler.
The Release is available for public comment through Dec. 8. The release in full can be accessed online at cftc.gov with the search term “RIN 3038-AD52.” Comments can be sent in any of the following means:
Online at the CFTC comments page at comments.cftc.gov.
Online at the Federal eRulemaking portal at regulations.gov.
By mail by contacting Melissa D. Jurgens, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street N.W., Washington, D.C. 20581.
The CFTC reminds those who wish to comment that their comments will be posted as received (potentially including personal identifying information) online once the comment period is closed. Only one form of comment is needed. — Kerry Halladay, WLJ Editor