August 27, 2010

Statement on High-Speed and Algorithmic Trading

Commissioner Bart Chilton

This week, news articles reported what may be yet another example of high-speed trading run amok. It was reported that an “error” caused the price of oil to spike by a dollar on NYMEX in a matter of seconds back in February. Whether it was truly an error or not, the fact is that high-speed computerized trading has caused tectonic plate shifts in the way market participants engage in financial trading and investing.

But are these new types of high frequency traders (HFTs) truly contributing to fundamental capital formation, risk management and price discovery functions of our markets, or are they "sideline" trading, on the edges of the real markets? There is a good argument to be made that "parasitical trading" doesn't truly contribute to fundamental market functions. While I'm not saying all HFT is inimical to the markets, I think there's a great possibility that some of it is. There may be some Cyber Cowboys out there and they could be giving respectable traders a bad name, while not contributing much to basic market functions.

I continue to say that without HFTs, the Flash Crash of May 6 wouldn't have been so volatile. I'm also not ruling out that these new players may have sought false profits from the Flash Crash by arbitraging using price quotes from market feed delays. I also continue to believe we need to ensure that these delays in price quotes were not instigated by HFTs at a time when exchange servers were not at full capacity due to system upgrade work. I said this several weeks ago and remain concerned that these issues be fully examined to ensure we have looked for all potential smoking guns from these Cyber Cowboys.

In general, we as regulators must get a better handle on overseeing high frequency and algorithmic trading. We know we can have serious problems when prices can change so much and so rapidly, and we have to find ways for the market to pause and "take a deep breath" when that starts to happen. Regulators have a responsibility to step it up and get ahead of the game in this area--otherwise, the American consumer will continue to pay the price for any problems caused by what may be harmful new trading technologies.

Last Updated: August 27, 2010