07-13-2010
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CFTC Launches Technology Advisory Committee
John Bates
07-13-2010 09:57 PM
Yesterday the CFTC, the regulator in charge of Futures and Optionsmarkets, announced details of a new Technology Advisory Committee (TAC), chaired by thevery capable Commissioner Scott O'Malia. See article here:
http://www.reuters.com/article/idUSN126207520100712
I am absolutely delighted to be included in the group of expertsthat the CFTC has called together to form the TAC. I am joined by anextraordinary group of some of the industry's top executives from banks,brokers, trading firms, exchanges and clearing firms as well as some veryimpressive academics. On Wednesday, July 14th (tomorrow as I write) we willmeet to discuss the impact of high frequency and algorithmic trading on themarkets, including whether algorithms may be implicated in the May 6th 'flashcrash'. From this, we'll discuss what recommendations we have for regulation ofand/or best practices for algorithmic and high frequency trading.
High frequency and algorithmic trading are essential for efficientexecution and alpha generation in a complex, multi-asset, fast-moving world. However,there are a number of accusations that have been made against these forms oftrading, including that they may aggravate volatility and may even have causedthe ‘flash crash'. I believe evidence from the TAC participants will exoneratethe accused.
I am hoping that our meetings will result in solutions that not onlyhead-off future ‘flash crashes', but also help exchanges, banks and brokers tobetter monitor and police trades. The proactive use of real-time monitoringsystems can alert regulators to problems before they become a crisis.Monitoring technology can 'see' major price and volume spikes in particularinstruments, how often they happen and maybe even why, and whether a pattern inmarket behavior caused them. It can also tell how much trading is potentially marketabuse, for example, insider trading might be detected by correlating unusualtrading incidents with news releases and market movements. (The FSA, forexample, thinks that 30% of trading around acquisitions is insider.)
It is now possible to apply high frequency techniques to not justtrading - but also to market monitoring, surveillance and pre-trade risk checks- for regulators, exchanges and brokers. The technology is out there (withproven approaches built on next generation platforms such as CEP) and itneedn't be expensive. The CFTC's TAC is a positive step in the right direction.I look forward to the meeting and will let you know how it goes! Follow me onTwitter @drjohnbates where I'll Tweet when possible.
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