US regulators have signalled they may move to more strict oversight of high-speed trading and impose risk controls in response to a series of market-disrupting technology glitches.
A "concept release" from the Commodity Futures Trading Commission comes as regulators are struggling to cope with a technological revolution that has transformed trading from a human-centric endeavour to one driven by computers that execute orders in fractions of a second - sometimes with disastrous results.
One of the most harrowing episodes was the May 2010 "flash crash", when the US sharemarket plunged nearly 1000 points in minutes, then whipped back up. Other high-profile glitches ensued, including the runaway trades linked to faulty computers at Knight Capital last year. Technical problems halted trading in Nasdaq-listed stocks for more than three hours two weeks ago.
All these disruptions were cited in the CFTC's document, which took nearly two years to complete. The commission unanimously approved it before releasing it to the public for comment. The document solicits input on more than 100 questions, including whether the government should impose risk controls on the industry.
CFTC commissioner Scott O'Malia asked whether the government should "federalise" industry practices.
The CFTC is the US's top derivatives regulator and oversees contracts for the future delivery of a wide variety of commodities, including oil and corn. In the futures market alone, the volume of electronic trading on exchanges has shot up from 50 per cent in 2009 to nearly 92 per cent last year.
"Traditional risk controls and system safeguards, many of which were developed according to human speed and floor-based trading, must be evaluated in light of new market realities," CFTC chairman Gary Gensler said.
The release addressed whether high-speed trading firms should register with regulators. But speed was a theme, especially as it relates to the strategies embraced by automated trading firms, including high-frequency traders.
The commission is trying to determine an appropriate definition of high-frequency trading and whether risk controls for that type of trading should be different from the ones on other types of automated trading.