US regulator reviews high-speed trading
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.
Frequently Asked Questions about this Article…
High-speed trading (often called high-frequency trading) is computer-driven trading that executes orders in fractions of a second, unlike traditional human-centred, floor-based trading. The article notes markets have transformed from human-led to automated systems that can move very quickly, prompting regulators to reassess old risk controls.
US regulators, led by the CFTC, are reviewing high-speed trading after a series of market-disrupting technology glitches — including the May 2010 "flash crash", runaway trades tied to faulty computers at Knight Capital, and a recent multi-hour Nasdaq trading halt. These events prompted concern that existing safeguards designed for slower, human trading may no longer be adequate.
The CFTC’s concept release is a public document soliciting feedback (more than 100 questions) about automated and high-frequency trading. It asks whether the government should impose risk controls, whether high-speed trading firms should register, how to define high-frequency trading, and whether industry practices should be federalised.
The article says regulators are considering imposing risk controls but have not decided. The CFTC’s release explicitly solicits input on whether the government should impose such controls, reflecting a move to evaluate whether traditional safeguards need updating for modern, electronic markets.
The concept release addresses whether high-speed trading firms should register, meaning the CFTC is exploring the idea. The document seeks public comment on registration requirements but does not announce any regulatory changes yet.
According to the article, electronic trading on futures exchanges rose from about 50% in 2009 to nearly 92% last year, illustrating how rapidly trading has shifted to electronic and automated platforms.
The May 2010 "flash crash" was a sudden market plunge of nearly 1,000 points in minutes that then rebounded. It matters to everyday investors because it highlighted how automated systems and very fast trading can create extreme short-term volatility and market disruption, which in turn has drawn regulatory scrutiny.
Investors should monitor CFTC and regulator updates, public comments on the concept release, and any proposed risk-control or registration rules for automated traders. The article suggests these reviews could affect market stability and trading rules, so staying informed can help investors understand potential changes to market behaviour and safeguards.
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