A different Bart Chilton was first observed at the Reuters HedgeWorld event in Chicago several weeks ago, where the former CFTC Commissioner and one-time ardent critic of high frequency trading struck a softer tone. This new and gentler Chilton was clearly on display in a recent New York Times opinion piece where he shared his thoughts and paid respect to high frequency trading.
Bart Chilton: . “These are ‘cheetahs’ that need to be slowed down”
Bart Chilton had been known during his tenure at the CFTC for his vocal outbursts and colorful metaphors used to deride high frequency trading. “These are ‘cheetahs’ that need to be slowed down,” was a primary message that was often punctuated with rock-and-roll metaphors. When describing the clogging of the market making computers with quote traffic that was considered manipulative in its intent, Chilton called this “Dancing with myself,” stealing a line from an old Billy Idol song.
Such lucid talk seems to have moved to the wayside as Bart Chilton enters a new phase in his life working for as a senior policy advisor at DLA Piper, one of the larger Washington DC law firms that advocates for clients in the US Capitol.
Bart Chilton may cone down to flash crash manipulation
“The accusation by the New York attorney general last month that a British bank misled some of its customers about the likelihood their orders would interact with high-frequency traders gives a glimpse into a big secret,” Bart Chilton wrote in the article, providing an expectation he might come down on some of the unspoken issues such as flash crash manipulation, early access to market moving government data or little disclosed payment for customer order flow considered illegal by Vanguard and other market watchers.
“Speedy electronic trading is deeply entrenched in modern financial markets and investors’ orders aren’t being filled without them,” Chilton wrote, completing the thought. “In today’s world of global stock trading, high-frequency trading results in highly frequent liquidity.”
Again, Bart Chilton is technically correct. But with HFT trading approaching nearly half of all liquidity on the exchanges, one wonders if the markets are now dependent on HFT for liquidity like the economy is dependent on big banks that receive government protection?
Bart Chilton raising issues with HFT traders for four years
“For four years, I have been raising issues with high-frequency traders, but we should have our eyes open to the positives and negatives,” he continued. “For example, even though the New York attorney general’s complaint and the general public conversation use demonizing words like ‘predatory’ and ‘toxic’ to describe high-frequency trading, study after study has proved that modern markets are cheaper and safer than ever before.”
Interesting to note that Bart Chilton used to be the one using demonizing words and is now taking a more balanced approach. The era of high frequency trading is generally considered to have reduced costs, but the usefulness of this issue is debatable. Market observers such as Larry Tabb have argued in ValueWalk that low transaction costs also lead to a less sticky stock market.
“The real lesson of the recent, and deserved, attention to such trading is this: technology in modern markets is here, will not disappear and is providing significant benefits to institutional and retail investors,” Chilton accurately observes.
The hot potato issue, however, wasn’t addressed. Should computers be given a different legal standard than humans? This, among other HFT issues, strangely remains on the sidelines in most HFT public debates.
“It is still an amazing mystery to me, and shocking to some, that many high-frequency trading firms are not even required to register with the S.E.C. or the Commodity Futures Trading Commission,” Chilton said, sounding a familiar refrain. “That means regulators at times may not have direct access to books and records needed for investigations.”
Another issue to be tackled is that regulators should have a coordinated effort to monitor flash crashes with the ability to link HFT traders to their actual trades and hold predators accountable.
“Critics have said it would be too difficult to define the threshold by which a market participant should be considered a high-frequency trader and therefore regulated,” Chilton said, then exhibited some of his old blunt critique for which he is famous. “That’s nonsense. If a firm is trading directly in our capital markets using computer automation, a privilege in my opinion, it ought to be easy to pull them up on the regulatory radar.”
Bart Chilton working with HFT firms to accept regulation
Chilton is currently employed at DLA Piper as a senior policy advisor and sources say he is working with HFT firms to convince them to accept regulation for their craft. He doesn’t mention, however, regulators defining the difference between market makers and HFT firms, another easy definition that benefits the HFT bandits by remaining undefined.
Another issue Chilton didn’t raise in the op-ed was a transaction tax, something he vocally championed at the CFTC. President Obama put a transaction tax proposal in his budget – a little skim off each buy and sell of stock not much different from that which HFT firms take. But Chilton had previously said such an attempt was nothing more than window dressing.
Reaction to Chilton’s op-ed varied on the perspective. The exchange establishment types and HFT proponents appeared to love it, embracing the one-time HFT nemesis. Aggressive financial reformers weren’t so sure. “It’s easy to conflate electronic trading and decimalization, which did bring down costs, with HFT which seems to have only brought down ethics,” said Eric Hunsader, one of HFT’s most vocal critics.