WASHINGTON, May 14, 2014-- The Senate Agriculture Committee focused on the world of high frequency trading during a hearing Tuesday where Chairwoman Debbie Stabenow sought to clarify how high speed traders affect agricultural futures markets and whether regulators have the capacity to keep up.
Derivatives markets have evolved in recent years to use high frequency trading, a form of automated trading that uses computer algorithms to conduct trades in fractions of a second. The Senate Agriculture Committee is tasked with oversight of the Commodity Futures Trading Commission (CFTC) and its role monitoring the futures markets.
One of the witnesses, former CFTC Chief Economist Andrei Kirilenko, told lawmakers that regulators need to have the appropriate technology to sift through the trading patterns among the new inhabitants of the market place – “the machines.”
“This would require not only a substantial investment in new technology, but an equally, if
not more, substantial investment in human talent,” he said.
Stabenow said she is concerned regulators may not be able being able to keep up with a trading market that has gone from moving in milliseconds to microseconds. “What would the agency do from a technology standpoint if you had additional funds?” the Michigan Democrat asked Vince McGonagle, CFTC’s director of the division of market oversight.
He emphasized the agency’s need for a larger staff. With more employees, he said CFTC could look for more discrete, nuanced information about trades. “We would increase the data we do receive from the exchanges,” McGonagle said.
Kirilenko said a small number of firms dominate high-speed trading in the futures markets and that they should be required to register with CFTC. He suggested a broad definition should be created for “automated brokers and traders” along with a registration process that would require them to keep records and implement certain safeguards.
“It is time to go at least this far, so when the next flash crash or technological malfunction happens, the regulators could go deeper into the market ecosystem to piece things together,” Kirilenko said.
He explained that the high-speed markets have become very concentrated, which “creates a winner-takes-all type of environment.”
Stabenow noted in her opening statement that with high-frequency trading in the news lately, it is important to remember there are differences between the securities and futures markets.
“While the markets are linked, as we saw during the Flash Crash, some of the concerns raised about equities markets are not applicable to the futures markets,” Stabenow added.
The stock market experienced a so-called Flash Crash on May 6, 2010, when the Dow Jones Industrial Average had a dramatic drop and recovery, all within a matter of minutes. The high-speed trading world has received extra attention recently with a 60 Minutes special devoted to the topic as well as book by Michael Lewis, a financial journalist, called "Flash Boys: A Wall Street Revolt.”
CME Group President Terrence Duffy said much of the negative media attention on high frequency trading “has been based on misinformation when it comes to futures markets.”
He also said many of the recent complaints against high frequency trading in equity markets do not apply to the U.S. futures markets, because the two operate differently.
“We think the futures markets strike the right balance of regulating the market without inhibiting true price discovery,” Duffy said.
Stabenow asked Duffy if he thought the CFTC should require risk control standards for all market participants. He said it would be difficult for small participants to manage the cost of additional regulatory standards. “Futures markets are about risk transfer, not about capital formation…What’s more important here is the cost of execution for the participants,” he said.
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