Thu, Jul 28, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

CFTC Expected to Unveil New Thinking on HFT

Friday, March 15, 2013

By Mark Melin

A commissioner at the Commodity Futures Trading Commission is expected to unveil a new method of defining High Frequency Trading, an elusive task for US regulators to date.

CFTC Commissioner Bart Chilton is expected to detail the proposal in March 19 speech to commercial hedgers in San Francisco. The proposal is expected to define HFT participants based on their relative market impact only during periods of volatile or otherwise market damaging market behavior. Market participants identified as engaging in HFT who were also responsible for a high percentage of a negative market move could face fines or other regulatory actions, according to sources who have seen the presentation.

Defining HFT has always been a problem, particularly with regards to differentiation with market marketing activities – the linchpin in a successful and liquid market. It is unknown how such a definition could differentiate between legitimate hedging interests and HFT based on volume in a negative market move, among other early questions.

Key Concern

One inner fear among knowledgeable market observers is the flash crash. Even the most sophisticated of managed futures algorithms would not likely benefit in a flash crash type volatility due to the time horizon variable (assuming trades were not invalidated). Managed futures rarely utilize HFT tactics, a strategy more commonly associated with proprietary trading operations.

The concern with HFT relative to a flash crash is that HFT could significantly increase negative market momentum. A key point to consider is the triggering of cascading stop orders, which generates a certain volatility profile that can be detected by the "electronic eye" of computer-based market making systems. While it wasn't widely reported, such electronic volatility detection systems were said to pull market bids and offers during the flash crash of May 6, 2010, exacerbating if not the key contributor to the event. Certain elements within the managed futures industry have been mapping crash potential scenarios relative to the US debt crisis. Among the worst case situations is a flash crash fundamentally sparked by a lack of confidence in US debt instruments.

The cause or motivating factor of future market crashes is unknowable, yet the goal to create stable market environment endures. While the exact details of Commissioner Chilton's proposal are at this point unknown, focus appears to apply around the apparent concept of deterrence (fines and penalties for violators) along with a definition of the activity based on when the time period that matters most, during times of volatility or market crisis.

If ultimately adopted, the proposal would push the CFTC to the forefront among US regulatory agencies to accomplish the task of defining HFT to a certain degree.

Would you like to know the difference between HFT and managed futures strategies? The author is available to chat Tuesday and Thursday from 4-5 PM CST. Click here to visit www.uncorrelatedinvestments.com (requires free registration).



 
This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: California-based manager launches long/short equity hedge fund with unique algorithm[more]

    Benedicte Gravrand, Opalesque London for New Managers: SJL Capital LLC, an investment advisory firm based in California, has launched its maiden fund, the SJL MarketDNA Hedge Fund LP. The fund, which began trading

  2. Manny Roman to move from Man to Pimco[more]

    Benedicte Gravrand, Opalesque London: Emmanuel (Manny) Roman, an investment world veteran, has been hired by PIMCO, the large US bond fund house, as chief executive officer. PIMCO's current CEO Douglas Hodge will assume a new role as managing director and senior advisor when Roman joins P

  3. HFR: Hedge funds post strong gains in mid-July as markets recover from Brexit losses[more]

    Komfie Manalo, Opalesque Asia: Hedge funds posted strong gains through mid-July as the equity markets continued the recovery from Brexit losses. The HFRX Market Directional Index gained +2.17% (+4.22% YTD) and the HFRX Global Hedge Fund Index gained +1.03% through mid-month (+0.19%

  4. News Briefs - Carlyle goes on trial for a financial-crisis meltdown, Private equity and venture capital outperformed public markets in 2015, Pippa Middleton gets engaged to hedge fund manager James Matthews[more]

    Carlyle goes on trial for a financial-crisis meltdown Carlyle Group co-founder Bill Conway was in court on this small island last week recounting one of the most bruising episodes in his private-equity firm’s history: the 2008 collapse of mortgage-bond fund Carlyle Capital Corp. Carlyle

  5. …And Finally - Two men fall off cliff playing Pokemon Go[more]

    From BizarreNews.com: Two men who fell from a seaside cliff north of San Diego told authorities they became distracted while playing augmented reality game Pokemon Go. Encinitas fire Battalion Chief Robbie Ford said one of the men fell about 50 feet down the bluff in Encinitas while the other man fe