The Commodity Futures Trading Commission (CFTC) is taking steps to review high-frequency trading (HFT) in the futures, swaps and options markets three months after the collapse of MF Global Holdings Ltd., which took with it an estimated $1.2 billion in customer funds (see NGI, Nov. 17, 2011).

Speaking to the New York Law School last Tuesday, CFTC Commissioner Scott O’Malia announced plans to create a subcommittee to focus on defining and identifying HFT within these markets and its associated risks to market stability. The subcommittee would fall under the Commission’s Technology Advisory Committee, which O’Malia chairs.

In the early part of the decade, HFT trades had an execution time of several seconds, whereas by 2010 this had decreased to milli- and micro-seconds. Until recently high-frequency trading was a little-known topic outside the financial sector.

O’Malia has asked the CFTC to call for public nominations for the subcommittee in the Federal Register.

In addition, he called on the Commission to direct staff to hold one or more roundtables on potential vulnerabilities in the current segregation structure (of futures customer funds from proprietary funds), to be followed up by hearings. “I urge the Commission to reconsider the idea of spot checks [for segregation compliance], and the idea of taking appropriate enforcement action against any intermediary that fails such spot checks,” O’Malia said.

Moreover, “I would like to give all customers — whether futures or swaps — the ability to ‘know their intermediary.’ MF Global dramatically changed its risk profile without disclosure to its customers. That is unacceptable. Customers need to have enough information to understand the risk profile of an intermediary and to evaluate risk profiles across intermediaries.”

He also called for the CFTC to bolster is supervision of self-regulatory organizations (SROs). “SROs are the front-line supervisors of intermediaries. In light of MF Global, the Commission should review SRO supervision practices,” O’Malia said.

©Copyright 2012Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.