New Rules in Futures Markets: Industry Perspectives on HFT and Enforcement

High frequency trading has once again come under fire. But what’s different this time is the populist nature of the attack, with a best-selling author using the full power of his own renown and his publisher’s marketing machine to condemn all forms of HFT as detrimental to market structure. HFT may be a dirty word on Main Street but its role in financial markets is just beginning to be understood. Once the book drops off the bestseller list, cooler heads will ultimately prevail.

Industry efforts to delve into the positive and negative aspects of HFT are constant, with the ultimate goal of identifying how best to monitor and regulate the practice. In futures markets, the Commodity Futures Trading Commission (CFTC) has been at the forefront of these efforts and through its Concept Release on automated trading, it is seeking to gather industry feedback on HFT, risk controls and other related best practices.

There is little near-term likelihood of significant regulatory action that will drive major changes in the way HFT firms are operating in the futures markets. The complexity of the issues, fear of unintended consequences, and political and jurisdictional considerations create daunting obstacles to regulatory action. After all, it is far easier to maintain the status quo than to establish illogical rules that could potentially destroy the US futures market, a market that is the envy of the world.

Even under normal circumstances, the rule-making process at the CFTC (like at other federal agencies) can be slow and deliberative. The current state of turnover at the commission, the unfinished Dodd-Frank agenda and the stress of underfunding will combine to further slow any outcomes from the Concept Release. Absent another major market volatility event (e.g., the Flash Crash), it is doubtful that any significant action will occur in 2014.

At the same time, it’s hard to imagine that with all the media attention and debate that must be occurring at the CFTC and SEC, regulators will remain quiet on automated trading topics for much longer. Advancements in matching speed logic and the ongoing acceleration in trading velocity pose quite a dilemma for regulators.