"Traditional risk controls and safeguards - that relied on human judgment and speeds - must be reevaluated in light of new markrt structures," are the initial findings from the CFTC regarding the prevalance of high-frequency trading in futures markets. As USA Today reports [5], efforts to reduce trading order-processing times could "lead to a competitive race to the bottom" where positions outpace risk systems and potentially lead to systemic threats. "In a trading environment where a single algorithm can submit hundreds of orders per second, risk management systems operating at slower speeds could allow an algorithm that is operating in unexpected ways to disrupt one or more markets," CFTC notes - citing Knight as evidence such a debacle.
All the signals are that the top US financial regulator may impose new restrictions to halt breakdowns and to avoid high-speed trading which "could provide opportunities for information advantage."
Via USA Today, [5]
A top U.S. financial regulator Monday proposed an outline for overseeing high-frequency trading in futures markets, signaling it may impose new restrictions to halt breakdowns that have disrupted financial exchanges and raised questions about public confidence in trading markets.
Saying that "traditional risk controls and safeguards that relied on human judgment and speeds ... must be reevaluated in light of new market structures," the Commodity Futures Trading Commission release posed a series of questions about possible new regulations on futures trading via lightning fast computers.
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"In a trading environment where a single algorithm can submit hundreds of orders per second, risk management systems operating at slower speeds could allow an algorithm that is operating in unexpected ways to disrupt one or more markets," the release said.
The CFTC also questioned whether high-speed trading "could provide opportunities for informational advantage" that pose fairness threats to slower traders.
Additionally, the agency questioned whether the increasingly powerful computers and trading techniques that power high-frequency trading enable users to receive and trade on market-moving information faster than other market participants. The CFTC is exploring whether such head starts could "have an adverse impact on market fairness."
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The agency also said it also wants to explore how social media reports are used in derivatives market trading, and whether the information is "verified ... prior to its use."
Of course, we've heard this before and with trading volumes at 15-year lows, we suspect the 'industry' will be lobbying hard; but this is a positive step (only 3 years after the CFTC started to look at HFT [6]).