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May 10, 2012

CFTC Misses Another Chance to Rein in High-Frequency Fraudsters

High frequency traders are predators damaging if not destroying many existing financial markets. Trading volume is dropping because investors view the markets as unfair, giving advantages to the insiders and those making money selling special access and benefits to those insider who take advantage of everyone else. 

In regulating the $700 trillion over the counter market, the Commodity Futures Trading Commission has the opportunity to prevent these abusive and unfair trading activities from ever gaining a foothold in the new transparent derivatives market. Regrettably, the CFTC has failed to prevent this curse from infecting the new derivatives market structure that they are creating. 

Failing to rein in these predators and allowing anti-competitive practices at the expense of American businesses and families is going to damage the new derivatives markets. The CFTC is going to have to face these predators sooner or later and it should have done it now.

The commission should have explicitly prevented exchanges from selling privileged access to their direct data feeds, which allows high-frequency traders to front-run other market participants. The losers in the marketplace are the institutional investors and commercial businesses that can’t compete in an anti-competitive, two-tier system for data access.

The commission has had other opportunities to crack down on abusive HFT abuses through other Dodd-Frank rulemaking, but has failed to act to protect market integrity essential for financial reform.

Better Markets has consistently advocated to the CFTC and Securities and Exchanges Commission to crack down on HFT. Our comment letter on the proposed enacted today on exchanges is attached below, which is critical because these “designated contract markets” have developed from open-outcry pits, which were dominant only a few years ago, into sophisticated electronic systems in which masses of data flow at real-time speeds. That is why stopping HFT is so critical.

We argued to the commission that: 

  • Certain practices associated specifically with HFTs must be included as abusive practices which must be prohibited by exchanges.
  • Risk controls must incorporate, not only market pauses and halts based on circumstances which indicate imminent threats, but also “speed limits” which can prevent those threats from arising in the first place.
  • Data recording and reporting must be broadened to encompass information that is relevant in the world of HFTs.
  • Pre-trade data must be available to market participants on a fair and equitable basis, with no one granted privileged access in exchange for payments or volume commitments.

As we wrote in our comment letter (attached below): “High-frequency trading opens the door to schemes which take advantage of market rules and processes which bear no relationship to price. These behaviors and their consequences have already been experienced in the equities markets, which provide fair warning of potential issues as derivatives markets mature.”

We also addressed HFT in other letters:

Anti-disruptive practices

Proposed order on anti-disruptive practices



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