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RGM executive cautions CFTC on approach to regulating High Frequency Trading

RGM executive cautions CFTC on approach to regulating High Frequency Trading

30 March 2012 12:30am EDT

Washington, D.C.--March 29, 2012--The Commodity Futures Trading Commission should rely on empirical evidence rather than “suspicion, emotion, rumor and anecdote” when designing new regulatory policies to address changes in the technology of trading, Richard Gorelick, the chief executive officer of RGM Advisors, said in a March 29 statement.

Speaking at a meeting of the CFTC’s Technology Advisory Committee, Gorelick urged the CFTC to move “beyond the preoccupation with HFT” and focus instead on potential risks and undesirable behaviors across all market participants, and then take “thoughtful and concrete steps based on real evidence.” He also urged the CFTC to look at all trading firms using automated trading systems with direct connections to exchanges, rather than narrowly focusing on firms that engage in high-frequency trading strategies. “We maintain that anyone trading should have proper risk controls in place and should be subject to proper market surveillance--no matter at what frequency they operate,” said Gorelick, who is a member of the CFTC’s Technology Advisory Committee as well as a member of the FIA Principal Traders Group.

“I have consistently supported a regulatory environment that promotes fair competition, encourages innovation, enhances transparency, manages systemic risk, lowers costs for investors and hedgers, and gives regulators the tools they need to detect and deter abuses. Most importantly, I believe that any inquiry into the performance of our markets should be driven by empirical evidence of what’s actually going on in the markets.” 

The full text of Gorelick's statement follows:


Thank you members and staff of the Commission for inviting me to participate in this important discussion. I am the CEO of RGM Advisors, a principal trading firm based in Austin, Texas.

The Commission has several initiatives on automated or “high frequency” trading. This Technology Advisory Committee has touched on related topics in every meeting since its relaunch almost 2 years ago. The recently announced TAC sub-committee on HFT has been broken into 4 working groups to answer a number of related questions. The CFTC staff has recently announced a technical roundtable to be held next month on identifying specific types of automated trading. Chairman Gensler has also talked about an expected concept release concerning the testing and supervision of market participants with direct market access.

It’s important that we get some clarity on the goals of these various activities, how they relate to each other, and what the role of this group will be.

I have consistently supported a regulatory environment that promotes fair competition; encourages innovation; enhances transparency; manages systemic risk; lowers costs for investors and hedgers; and gives regulators the tools they need to detect and deter abuses. Most importantly, I believe that any inquiry into the performance of our markets should be driven by empirical evidence of what’s actually going on in the markets.

While opportunities like this Technology Advisory Committee for market participants and members of the public to provide feedback to regulators are important, the basic ground-rules for these processes should include an expectation that participants bring data to support their assertions. But even with such a basic expectation, none of us have access to the types of data that the Commission does. Right now, the Commission, through its own records and through the exchanges, has unique access to fully attributed audit trail data on every single order and trade in the futures markets.

Therefore, an essential first step is for the Commission to analyze the full wealth of market information available to it. If the Commission does not believe that it has the technology or the expertise to archive or evaluate such data, this group is well suited to advise the Commission.

To safeguard the public interest, two things warrant examination: 1) what is the overall quality of our markets, and 2) are there anomalous or improper activities taking place in these markets?

There are many established metrics and methodologies for examining market quality, including measures of liquidity, price efficiency, volatility and cost. We have previously provided to the Commission summaries of existing empirical research, that consistently shows lower trading costs, tighter bid-ask spreads, greater liquidity, reduced short-term volatility, and improved price discovery over recent years.

These improvements correlate with the transition to modern electronic markets, the emergence of automated professional traders, and yes, the advent of high frequency trading – however defined. But don’t just take my word for it. It is appropriate for the Commission itself to look at the data independently to get to the bottom of what it says about market quality.

The second issue is to surveil the audit trail for improper market behavior such as disruptive or abusive trading practices, and where it is found to enforce rules against it. Unfortunately, right now, discussions of improper market behavior are largely being driven by suspicion, emotion, rumor, and anecdote. That is the wrong way to make good public policy. Rather, why not look at the data, get the evidence, investigate, and take appropriate action?

One of the great virtues of public electronic markets is transparency. Sunshine is the best disinfectant, so I urge the Commission to shine the light on what’s really going on in the markets before engaging in finger pointing. Only after determining “what” is actually going on in the markets can there be a thoughtful consideration of “who” is doing it. By contrast, the working assumption seems to be there’s something nefarious going on with HFT, we just don’t know what it is, or even how to define it. We assume the “who” when we don’t even know the “what”. This is putting the cart before the horse, and skipping over the important work of drilling down into the data to understand the evidence.

Where to start? At the TAC meeting in December, I suggested, consistent with the recommendations of the FIA’s Principal Traders Group, that the Commission define a group of “Direct ATS Participant” -- firms that use an automated trading system that’s directly connected to an exchange. Instead of starting with a narrow group defined by arbitrary thresholds, by starting with this broad universe and then sorting and filtering based on relevant criteria, regulators would get a more complete picture of how automated trading is affecting the markets. By focusing on one narrow segment, they may miss an opportunity to address real issues.

Recall that an automated trade by a mutual fund was an important factor in the flash crash. It therefore does not make sense to turn a blind eye to some market activity by defining it away in an overly narrow or arbitrary fashion at the outset. Moreover, it would be a real shame to have spent such considerable time and effort attempting to study HFT, only to realize that we still don’t have a full understanding of what is going on in the markets. That is why we have long- maintained that anyone trading should have proper risk controls in place and should be subject to appropriate market surveillance—no matter at what frequency they operate.

Mr. Chairman, hopefully the activities being set in motion by the Commission today will offer an opportunity to move beyond the preoccupation with HFT, focusing instead on potential risks and undesirable behaviors, and to take thoughtful and concrete steps based on real evidence that will strengthen our markets.





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