Sat, Mar 17, 2018
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 (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. Performance - Hedge fund mojo is back with investor hopes at six-year high, These hedge funds produce the most consistently great results[more]

    Hedge fund mojo is back with investor hopes at six-year high From Hedge funds on the heels of a surprisingly strong performance in 2017 are raising hopes for an encore. Investors expect their managers to return 8.5 percent in 2018, according to a Credit Suisse Group AG sur

  2. Investing - Hedge funds amass big bets against world's leading advertisers, Investor Elliott Management buys tiny stake in Wipro[more]

    Hedge funds amass big bets against world's leading advertisers From Hedge funds have amassed bearish bets of more than $3bn against the world's largest advertising companies in an attempt to profit as the industry undergoes ongoing wrenching disruption and slowing growth. Funds i

  3. News Briefs - Investcorp to launch a $100 million PE fund for Omani pension funds[more]

    Bahrain-based investment firm Investcorp will soon launch a $100 million fund dedicated to Oman's Pension Funds as part of its investment plan. 'The Opportunities Fund' will be focused on private equity investments in the U.S. and Europe and will target mid-sized companies across a broad range of se

  4. DoubleLine's Gundlach sees U.S. 10-year Treasury yield rising, weighing on stocks[more]

    From Reuters/ Jeffrey Gundlach, the chief executive of DoubleLine Capital and known on Wall Street as the "Bond King," said on Tuesday the yield on the U.S. 10-year Treasury note will likely move higher and pressure riskier assets including equities and junk bonds. Gundlach, on an

  5. SEC charges Theranos CEO Holmes with fraud[more]

    Bailey McCann, Opalesque New York: The SEC has charged Elizabeth Holmes, founder and CEO of Theranos and its former President Ramesh "Sunny" Balwani with raising more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about t