SPEECHES & TESTIMONY

Remarks of CFTC Chairman J. Christopher Giancarlo before the Women in Derivatives Forum, Washington D.C.

June 12, 2018

Good afternoon, everyone.  It is a pleasure to speak to Women in Derivatives.

Thank you to Petal Walker, my former CFTC colleague, for hosting this event.  Petal is one of the most well informed lawyers in America on the impact of blockchain technology on derivatives markets.

And, thank you to Sarah Summerville, the Head of the CFTC’s Office of Diversity and Inclusion, for her help with my participation today.  Sarah is the human translation of the French phrase savoir faire; she knows how to handle any situation with grace and discretion.

Recently, in the Wall Street Journal (reporter Herminia Ibarra, May 20, 2018), there was a discussion about how women could succeed faster in business.  The number one step was networking – exactly what you provide with this organization. 

There is opportunity, advancement, and professional success through mobilizing professionals and through sharing ideas and experiences.  Networking is the key, and Women in Derivatives shows how this can happen in a complex, demanding, and difficult field.

I am reminded of a comment by Margaret Thatcher, “If you want something said, ask a man; if you want something done, ask a woman.”  Surely, the “Iron Lady” would have loved Women in Derivatives.

And, Lady Thatcher understood another important truth:  grit predicts success.  You probably know the work of Angela Duckworth, a professor at U Penn.  She advises the World Bank, NBA and NFL football teams, Fortune 500 CEOs, and others.  She has formed what she calls “the Grit Scale” – a scale that measures passion, endurance, and perseverance.   And, there is a lot of grit in this room:  accomplishment over adversity, commitment instead of defeat, courage over concession.

So, I am pleased to join you as colleagues, colleagues with grit, wisdom, drive, boldness, and intensity.  This is a room full of trailblazers, milestone makers, and daring doers.

In fact, I am joined by two colleagues who make sure your interests are front and center every day:  Maggie Sklar and Erica Richardson.  Would you both stand up?  Maggie is my Senior Counsel.  Erica is Director of the CFTC’s Office of Public Affairs.  Thank you both for your service and your hard work.  You have both made major contributions to the CFTC and the markets we oversee.

Yet, global derivative markets know no gender.  They demand competence, professionalism, and vision.  And, these are defining hallmarks for Women in Derivatives.  You need accurate information.  You want the resources to get the job done.

Therefore, today, I would like to use this forum to share for the first time about some important data analysis we have done at the CFTC.

As you know, the financial crisis of 2008 was the defining moment of the last decade.  The global turbulence was shocking … frightening.  We are still confronting the ripple effects. There is still a search for proper levels of transparency, liquidity, and responsibility. 

For me, as a supporter of the swaps reforms in the Dodd-Frank Act, it has always been how to balance systemic risk reduction with strong and broad based economic growth. How do we oversee derivatives markets in a way that fosters market vibrancy but mitigates systemic risk, that supports market innovation, but prosecutes misconduct and that is market intelligent while remaining independent and objective?

This last point is very important to me: Regulators cannot be effective, if they are not conversant with current market developments.  To that end, one of my first steps as CFTC Chairman, with the strong support of Petal Walker and her boss, Commissioner Sharon Bowen, was to create within the Division of Market Oversight a new unit called the “Market Intelligence Branch” or “MIB”.  The goal of MIB is to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends – such as the impact of new technologies, asset classes and trading methodologies - to increase our knowledge of evolving market structures and practices and promote efficient and sound markets.

It is some recent work of MIB that I want to share with you today.  The work that I will discuss is part of MIB’s broad review of trading conditions in the markets we oversee.  The work is a broad look at large intra-day price movements in US commodity futures markets, what that research calls “sharp price moves.”

The work, which will be posted soon on the CFTC website, concludes that:

1.         In large part, the U.S. commodity futures markets are operating well.  They remain, in core areas, highly efficient and incorporate new information quickly. 

2.         Neither the frequency nor intensity of sharp price movements appear to be consistently increasing over time; and 

3.         Most importantly, sharp price movements are linked to volatility, market fundamentals, and news releases – our research does not show signs of weakness or fragility in the futures markets causing disruptive price movements.

Okay, before we go through the analytical findings in more detail let me back up and review methodology.  This was a very data-intensive effort – MIB staff analyzed 2.2 billion transactions from 2012 through 2017. The data included 16 different futures contracts from all 4 major commodity market sectors: agricultural, energy, financial, and metals products. All data used for this project was sourced internally from the trade data provided to us by our exchanges, so it was a valuable use of the regulatory data the CFTC collects.

The primary metric used in the analysis was the 100 largest price movements in each contract – this is what we identified as “sharp price movements.” Our staff identified the top 100 price movements by calculating the largest percentage price movements in a rolling 3-minute window, using the volume-weighted average price in each minute. Once those values were calculated, they were ranked from largest to smallest and the 100 largest movements were retained for further analysis.

The 3-minute time window was chosen to capture the sharpest price movements in a relatively short period of time. The focus was on fast movements that both human traders and automated trading algorithms could react to. A range of time periods from 2 to 15 minutes were evaluated and the 3-minute interval worked the best for our analysis. Staff purposefully excluded time periods longer than 15 minutes to focus on fast price movements that occurred in short periods of time.

The top 100 price movements were chosen to focus on the most extreme observed changes in each contract. Many analyses like this begin by setting a high threshold based on the distribution seen in the data, usually something like the 99th percentile. This analysis started there as well but what we found was the 99th percentile actually wasn’t high enough for our purposes. Since the dataset was so large, there were still over 1 million data points in each contract above the 99th percentile. Several thresholds were evaluated and the top 100 was the most useful for this analysis. The key benefit to this approach is the ability to uniformly apply these metrics across a wide variety of contracts and compare the results.

Let me distinguish this analysis from other studies that have already been done, both by CFTC staff and external researchers, into specific flash events. That is not what we have done here.  This present work was primarily designed to determine what sharp price movements tell us about the healthy functioning of our exchange traded futures markets.

So, here are the major findings:

1.         There is no clear indication of a wide-spread increase in the frequency or intensity of sharp price movements in recent years; 

2.         Sharp price movements occur more often during periods of elevated volatility;  

3.         News and recurring market data releases are a factor in many contracts we studied; so much so that news events are a topic worthy of further study as well as something to be filtered out of future analyses; 

4.         Some contracts see large movements in overnight trading but not a disproportionate amount when compared to volume traded during day/night.  

So, what is the significance of these conclusions?

Well, I think they are important for a number of reasons, including to dispel at least one contemporary narrative.  That is that recent changes in market structure, particularly the growing presence of principal trading firms and high frequency trading, has in some way made markets less stable. 

MIB’s research does not support his narrative.  Not only has there not been any time trend toward more frequent sort-term price swings, but many of the biggest price swings can be explained, not by the activities of principal traders or HFTs, but by longer-term, heightened market volatility and by the direct revelation of information and news events. 

The analysis tells us that today’s US commodity futures markets continue generally to function well, are able to digest information quickly and readily accommodate heightened volatility. In short, US futures markets remain the premier price discovery mechanism for the world.

This is an important analysis, for which the CFTC’s new Market Intelligence Branch deserves much credit.  Like many research efforts, this one leads to more questions, so further study is planned.  For one thing, important concerns remain about satisfactory liquidity conditions and adequacy of market making outside of actively traded markets, asset classes and centers of liquidity curves.

I hope this information is helpful.  It could become an asset to your work. DMO staff plans to publish this research in the near future so keep an eye out for it.

Let me shift to another source of information.  The Economist magazine has called female economic empowerment the most profound social change of our time. (December 30, 2009).   I am sure many of you have heard of the book, The Confidence Code, by Katty Kay of the BBC and Claire Shipman of ABC News.  They argue that for all the progress, more needs to be done.  Women in the workplace need a “blueprint for confidence,” to get moving “in the right direction.” (p xix)  In their view, women should talk more, demand to be heard, take an equal role in business meetings. 

I am pleased that Women in Derivatives takes a backseat to no one, that your voices are strong, powerful, informed, and persuasive.  As we press forward into the future, we will need that credibility, confidence, and professionalism that already makes Women in Derivatives a model of networking and advancement.

If you will allow me, I would like to close with a tribute to a trailblazing business professional, who was highly influential in my own life – my mother, Ella Jane. 

Let me briefly tell you about her.  A few years after earning her undergraduate nursing degree, she returned few years later to Columbia University in the early 1960s with two young boys on her knee to earn her masters.  Two more sons later, she served as the administrator of a large skilled nursing facility in northern New Jersey.  She worked long and hard hours to succeed in a man’s world.  Still, she always seemed to have time for me and my brothers.  On Monday through Friday, she was up early in pumps and pearls and, yet, on Saturday, she taught her boys to punt a football and, even drop a water ski and slalom.

Thinking back now, mom never showed any pique in response to the certain subtle and unsubtle bias, the double standards and the patterns of conversation and behavior that she must have faced – bias and double standards that I have only come to appreciate as a father of a grown daughter.  As for my mother, she just seemed to overcome it with humor, grace and grit.

In fact, she has not stopped.  In her fifties, she earned her second masters degree from Columbia (in geriatric health); in her sixties, she ran a motor lodge in Vermont; in her seventies, she skied the Rockies; and, today, in her eighties, she just caught a 7am flight to San Francisco to visit her granddaughter.

And on it goes. It takes a strong woman to raise four strong sons. And it takes strong and open-minded men to raise strong and determined women. I know, because my brothers and I each have our own young and aspiring daughters.

I owe my mother so much more I can ever repay.

All I can do is pay it forward.  And, I try to do that each day.

Thank you, Women in Derivatives, for inviting me here today. It has been an honor.

I would be delighted to answer any questions.