I greatly appreciate that Chairman James Newsome has asked me to serve as Chairman of the Technology Advisory Committee. As an economist and former finance professor whose specialty has been derivatives and alternative asset markets, I have had a particular interest in how information technology has influenced market structure and quality. The Commodity Futures Trading Commission has the unique challenge of regulating an industry that has been at the forefront of innovation both in products and services, and the engine of innovation has been information technology. Consider that the widespread use of the Black-Scholes’ model of option pricing only became possible with data manipulation techniques enabled by computing technology, thus opening the door for new products and better ways to manage risk.

Our markets are becoming more technologically sophisticated, with electronic mechanisms for order routing, execution, clearing, and settlement. The Commission has designated 11 entirely electronic exchanges, most recently the U.S. Futures Exchange (USFE), an exchange brought forth by Eurex A.G, the largest electronic exchange in the world. Incumbent exchanges are also evolving, with the percentage of trades done electronically at the Chicago Board of Trade (CBOT) exceeding those done in the pit. The explosive growth of the E-mini contracts traded on the Chicago Mercantile Exchange (CME) is powerful evidence of the viability and potential of electronic markets and their broad appeal to US investors.

The Internet has enabled exchanges to deliver real-time information to customers, and increasingly those customers are looking for the ability to put on positions real-time via the web. Many years ago, Nobel prize winner Merton Miller, a champion of futures exchanges for their efficiency and liquidity, predicted that electronic trading would eventually supplant the trading pits. It does not take a rocket scientist now to see that technology offers great promise for all markets, expanding opportunities while potentially providing broader access to individual investors. ^[1]

Yet, even as information technology has proliferated in use and importance in our industry, regulators must grapple with the impact of the change it enables and the inherent uncertainty such change creates. Fortunately for the CFTC, the Commodity Futures Modernization Act (CFMA) gave us a blueprint for dealing effectively with the rapid change that innovation can bring. Those who crafted the CFMA recognized that the prescriptive regulatory approach and invasive disclosure requirements typical of exchange-style regulation were not meaningful, nor practicable in the more dynamic and competitive markets of today. The CFMA codified core principles that guide the CFTC as it copes with market innovation, including that of a rapidly expanding over-the-counter (OTC) market and an increasingly electronic and global marketplace.

As Technology Advisory Committee Chairman, I look forward to exploring the issues raised by the changes and opportunities made possible by advances in technology, thus providing the Commission with guidance and potential responses to those issues. I also look forward to learning about and discussing the many important questions that have been raised by the impressive membership of the Committee. A sampling of these questions include:

• How do regulators perform market surveillance in a world of electronic trading? Do some of our rules become irrelevant or do we up the ante?
• Should regulators have routine access to instant messages, e-mail, and phone conversations of traders?
• What is the purpose and scope of large trader reporting, particularly with respect to the public dissemination of that information?
• What are the costs and benefits of increased disclosure? Can and should the CFTC require greater disclosure of transaction and position information from 2h(3) markets?
• Does the entry of electronic competitors increase the potential for internalization or payment for order flow? What issues do electronic matching of customer orders by brokers raise from both a legal and economic perspective?
• Information technology has made capital management more efficient, and while cross-product, linked, and global clearing is becoming possible, it challenges regulators to revisit traditional jurisdictional thinking. Are there barriers to capital movement, whether regulatory, contractual, or otherwise, that could be bridged that would enable more efficient use of capital?
• Portfolio margining, a staple methodology in futures markets, has yet to take hold in securities markets, costing market users in both capital and operational efficiency. What actions could or should be taken to move the markets toward a more consistent, portfolio approach to ensure performance and the financial integrity of the markets?