CFTC should target runaway robotic trades, Commissioner Chilton says


By Christopher Doering
Monday, October 25, 2010

WASHINGTON -- Computer-generated algorithmic trades have run amok in markets more than once this year, and U.S. regulators should look for ways to hold traders accountable, a top official on the Commodity Futures Trading Commission said on Monday.

Bart Chilton, a commissioner with the futures regulator, said "mini-flash crashes occur all too often" following a surge in high-frequency trading.

Securities and futures regulators have been trying to determine ways to prevent another event like the May 6 "flash crash" when markets temporarily plunged. The CFTC on Tuesday will unveil new draft rules to clamp down on disruptive trading practices.

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"They don't cause as much of a disruption as that of May 6, but more than once this year, runaway algos have disrupted markets. By that I mean, cost people money," Chilton said in prepared remarks for an energy conference in Las Vegas.

"We should explore ways to hold those who set off runaway robotic trades accountable," he said.

At least one algorithm is know to have disrupted the oil markets this year. Infinium Capital Management said in August it was the company at the center of a six-month probe by CME Group Inc into why a new trading program malfunctioned, racking up a million-dollar loss in about a second on February 3.

The regulatory agency faces tight deadlines to write regulations to implement the Wall Street reforms that Congress passed in July to increase oversight of the $615 trillion over-the-counter derivatives market.

The CFTC hopes to unveil the first drafts of all proposed rules by the end of the year to allow time for public comment and revisions before its July deadline for final regulations.

Some measures have earlier deadlines, including speculative position limits in energy and metals markets, which must be finalized in January. Chilton questioned whether there should be position limits for financial futures.

"Given our experience with the Flash Crash, however, and the key role one financial futures market appears to have led in the domino decline, I'm wondering if it is appropriate to consider limits in these markets as well," said Chilton.

Regulators are trying to ensure that commercial end-users, who are exempt from having to clear trades and post margin, do not face higher costs for hedging with swaps.

Swap dealers and major swap participants will be required to clear most swaps, and will have extra capital and margin requirements.

"It's clear that we need to exercise some caution when we write those definitions (for swap dealers and major swap participants) so that legitimate hedgers are not inadvertently pulled into the categories," Chilton said.

Hundreds of firms are lobbying the CFTC for exemptions from regulations or for favorable interpretations of the new law.

"Others think we should ignore the deadlines Congress gave us and phase this stuff in over years and years. Well, sorry Charlie," said Chilton. "That's not going to happen."

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