Indiana Grain Company, LLC

Posted: 07/14/10

By: tomgrisafi

CME Group warned on Wednesday against stricter rules for the rapid-fire computerized traders fueling volume at the company’s derivatives exchanges.

The company’s chief operating officer, Bryan Durkin, said high-speed traders improve the way futures markets function and urged the Commodity Futures Trading Commission to study their role before saddling them with regulations.

“We believe that careful consideration should be given to any decision to impose restrictions or limitations on algorithmic and high-frequency trading that would be harmful to the marketplace and result in less efficient and less liquid markets,” Mr Durkin said in a written statement submitted as a CFTC technology committee convened for the first time since the May 6 “flash crash” unsettled investors.

High-frequency trading has exploded as futures markets shift away from crowded trading pits to electronic screens. In the first quarter of 2010 nearly half CME’s volume came from proprietary trading firms, many of which use computers to dart in and out of markets in microseconds.

About a quarter of major global futures volume comes from professional high-frequency traders, and the share is expected to increase, according to Aite Group. CME revenue depends heavily on trading volume.

CME’s venues include the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Mercantile Exchange. Mr Durkin said high-speed traders have added volume and liquidity to these markets, resulting in narrower spreads and more transparent prices.

CFTC staff are reviewing the roles of rapid electronic traders when US equity and stock-index futures markets plunged in minutes on May 6. Mr Durkin said there was no evidence that high-frequency firms made markets more volatile on the date. “Most continued to provide liquidity in the futures markets during extreme market conditions,” he said.

At a committee meeting CFTC regulators acknowledged being behind the curve as computerized trading firms replaced floor-based market makers.

Gary Gensler, CFTC chairman, said: “While market participants have the technology to automate trading, we’re really just now moving towards 21st century technology to have automated surveillance looking at trade practices."

Scott O’Malia, who leads the CFTC’s technology advisory committee, also raised concerns about high-frequency firms executing “wash sales,” prohibited trades that do not change one’s market position. He called them a “totally unacceptable practice”.

But Leslie Sutphen, a managing director at futures broker Newedge Group and board member of the Futures Industry Association’s information technology division, said in some cases traders running multiple algorithms make unintentional wash trades that are impossible to prevent.

“There are instances that come up where a firm ends up trading with itself,” she said.

Source: The Financial Times