CFTC plans more scrutiny over algorithmic trading

OREANDA-NEWS. July 24, 2015. Commodity Futures Trading Commission (CFTC) later this year plans to propose new rules to boost oversight over algorithmic traders that have claimed a growing share of energy futures.

About 80pc of the trading volume in natural gas contracts now involves algorithmic traders on at least one side of the transaction, CFTC chairman Timothy Massad said today. Those traders use computer models to buy and sell hundreds of times per second to capitalize on minute price movements.

Proponents of algorithmic trading say it adds liquidity to markets, cuts transaction costs and lowers price spreads. But US financial regulators have scrutinized these high-speed trading practices over concerns that faulty algorithms could rapidly destabilize financial markets.

"Algorithmic trading has dramatically increased in our markets, and that changes the way we regulate, changes the way we do surveillance," Massad said after a speech focused on CFTC's actions in the five years since the Dodd-Frank financial reform law was enacted on 21 July 2010.

The CFTC will propose rules that would regulate automated trading, Massad said. Among the ideas the agency is considering is to require more pre-trade controls to prevent faulty orders from going through and setting standards for the development, testing and monitoring of trading algorithms. Registration requirements could also cover algorithmic traders.

"I do not think any of this will frankly surprise anybody," Massad told reporters.

The higher trading volumes created by algorithmic trading can also make it more difficult for regulators to spot manipulative behavior. Massad said CFTC needs more resources so it can provide oversight to markets with large amounts of algorithmic trading. Small trading periods can now contain "billions and billions of data points" to review, he said.