A CFTC technology advisory committee has set out a range of proposals, including the introduction of price collars and a "kill button", to help check high-frequency trading.
The CFTC (Commodity Futures Trading Commission) Technology Advisory Committee has offered up recommendations covering pre-trade practices at trading firms, clearers and exchanges as the watchdog seeks to tighten up rules in the wake of the May 6 flash crash.
At yesterday's meeting, Commissioner Bart Chilton, said: "I've been calling high frequency and algo traders cheetahs because of their incredible speed. While technology in trading is great, and it really is, I'm concerned about being able to keep up with the cheetahs from a regulatory perspective. Cheetahs are fast because they are predators. I want to make sure that cheetah traders aren't preying on slower commercials that are using these markets to hedge business risk."
The panel acknowledges that the only way to independently enforce any sort of specific regulations on quality assurance for trading firms would be to have a "virtual army" who have complete access to all trading firms intellectual property at all times - something that "would be prohibitively costly and virtually impossible to implement".
Instead, it calls for trading firms to be forced to demonstrate to exchanges the "existence of reasonable measures in their processes and systems" and suggests the establishment of a standard process by which firms submit and maintain documentation of their implementations.
Trading firms should have pre-trade quantity limits on individual orders and price collars so that orders where the price is off from the market would be automatically rejected internally. Execution and message throttles should be put in place to cut off algorithms and, as a fail-safe, every firm should have a kill button to simultaneously cancel all existing orders, and to prevent the entire firm from placing any new orders.
The committee also says clearing firms should take "reasonable measures" to make sure their trading customers are implementing these controls. It concedes that firms will not want their proprietary code examined so clearers will have to rely on written certification.
Meanwhile, exchanges should put in place their own pre-trade quantity limits, price collars and message throttles as well as set up order cancellation polices to let clearing firms and their clients opt to automatically dump orders should they be disconnected from the exchange network.
The Securities and Exchange Commission, meanwhile, has been mulling the imposition of fees on high frequency traders designed to encourage liquidity and discourage large numbers of order canceallations. Speaking at a Reuters summit, SEC chair Mary Schapiro said: "Fee structure has played a big role in how the markets have evolved and how high-frequency trading has evolved. The idea of a fee on cancellations is one that we have been very informally talking about internally with certainly no proposal to look at or contemplate."
Read the recommendations and presentations from the CTFC meeting here.