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Yesterday the CFTC, the regulator in charge of Futures and Options
markets, announced a new Technology Advisory Committee (TAC), chaired by the
very capable Commissioner Scott O’Malia. Read the complete article.
I am absolutely delighted to be included in the group of experts
that the CFTC has called together to form the TAC. I am joined by an
extraordinary group of some of the industry's top executives from banks,
brokers, trading firms, exchanges and clearing firms as well as some very
impressive academics. On Wednesday, July 14th (tomorrow as I write), we will
meet to discuss the impact of high frequency and algorithmic trading on the
markets, including whether algorithms may be implicated in the May 6th 'flash
crash'. From this, we’ll discuss what recommendations we have for regulation of
and/or best practices for algorithmic and high frequency trading.
High frequency and algorithmic trading are essential for efficient
execution and alpha generation in a complex, multi-asset, fast-moving world. However, there are a number of accusations that have been made against these forms of trading, including that they may aggravate volatility and may even have caused the ‘flash crash’. I believe evidence from the TAC participants will exonerate the accused.
I am hoping that our meetings will result in solutions that not only
head-off future ‘flash crashes’, but also help exchanges, banks and brokers to
better monitor and police trades. The proactive use of real-time monitoring
systems can alert regulators to problems before they become a crisis.
Monitoring technology can 'see' major price and volume spikes in particular
instruments, how often they happen and maybe even why, and whether a pattern in
market behavior caused them. It can also tell how much trading is potentially market abuse, for example, insider trading might be detected by correlating unusual trading incidents with news releases and market movements. (The FSA, for
example, thinks that 30% of trading around acquisitions is insider.)
It is now possible to apply high frequency techniques to not just
trading – but also to market monitoring, surveillance and pre-trade risk checks
– for regulators, exchanges and brokers. The technology is out there (with
proven approaches built on next generation platforms such as complex event processing or CEP) and it
needn't be expensive. The CFTC's TAC is a positive step in the right direction.
I look forward to the meeting and will let you know how it goes! Follow me on
Twitter @drjohnbates where I'll Tweet when possible.
View all posts from John Bates on the Progress blog. Connect with us about all things application development and deployment, data integration and digital business.
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