CFTC Says High Frequency Trading Needs More Regulation

The whole idea of high frequency trading seems bogus to many market observers, but in the Wild, Wild West of 21st century Wall Street where anything goes, even a technology obviously designed to give one market participant an edge over others was tolerated.

That said, it looks like the U.S. Commodity Futures Trading Commission is finally taking at least baby steps to rein in rogue high frequency trading. CFTC Commissioner Sharon Bowen noted during a speech on Thursday at a conference that she was proposing pre-trade risk controls for algorithms that control high frequency trading.

Virtu HFT share of equities markets

CFTC Commissioner Sharon Bowen calls for greater HFT regulation

Commissioner Bowen continued to say that stock markets should make public data on the percentage of self-trading done at their venues, or trades in which the same party is on both sides of the trade. Moreover in a move sure to upset the high frequency trading industry, she also suggested the rules should ban firms from getting trading incentives to self-trade.

“Why should you be paid to trade with yourself?,” Bowen said pointedly. “If self-trading accounts for a significant percentage of trades on an exchange, that information may cause investors to change their strategies or where they trade.”

Bowen went on to tell the media at the International Swaps and Derivatives Association conference that she has not yet requested information from exchanges on what percentage of their completed trades are self-trades, but she has has had in depth discussions on the topic with market participants on the CFTC’s market risk advisory committee.

While she said that ideally market participants should create standards for themselves regarding the sharing self-trading information, she also didn’t rule out the possibility of the CFTC coming up with new rules to address the situation of self-serving HFT traders exploiting the system to their benefit.

“It seems to me market forces should want that,” Bowen commented.