The CFTC’s ‘high-frequency regulation’
June 2, 2012
In a speech yesterday, CFTC commissioner Scott O’Malia coined the term ‘high-frequency regulation’ to warn of the hazards of rapid rule-making without fully understanding or calculating the costs of implementation.
O’Malia been an outspoken critic of the unfolding regulator process, repeatedly pointing to the commission’s lack of resources to complete the break neck schedule set out in Title VII of Dodd-Frank.
One of the missing resources is technology. As O’Malia has noted on several occasions “the Commission was not organized to appropriately oversee the futures and swaps markets”. He said that when he arrived he “was amazed by the lack of sophistication of the Commission’s surveillance and automation capabilities”.
It is noteworthy that O’Malia’s latest comments were delivered at an event organized by MarkitSERVE a company that provides “post-trade processing and workflow for OTC derivative transactions across all major asset classes”. This suggests that private firms are being invited to fill the gaping holes in the CFTCs technical capabilities.
Regulation may not an economic loss on all fronts. Some technology makers stand to benefit from the same regulatory interventions that threaten to burden capital markets with new costs.
The need for private innovation in the execution of regulatory control over financial markets is not new. The NRSRO designation of bond ratings agency is a key example a prudential regulatory arrangement that builds in the participation of private firms.
Commercial technology plays an old role in structuring markets. It will be interesting to observe how they continue to shape market microstructure moving forward under Dodd-Frank. Which companies will gain important roles and who will pay for their services? How will the rules shape the market for these regulator technologies? And how will the market for these technologies reshape the financial markets?
From MarkitSERVE website: “Leveraging our existing platforms and workflow, connectivity and cross-product capabilities, MarkitSERV will provide a universal solution for you to comply with real-time and regulatory reporting, clearing and trading obligations, considerably lessening your efforts and costs. And MarkitSERV will continue to adapt and enhance our services as new regulations evolve globally. / Our value proposition is simple – you should only need to interface with a single middleware component which aggregates connectivity to all your counterparts, execution venues, clearinghouses and trade repositories. You should be able to meet your confirmation, reporting and clearing requirements based on a single trade submission step, and you should be able to rely on us to maintain as much static data as possible to support these requirements, so that you don’t have to.“
In other CFTC news, last week, under O’Malia’s guidance, the Technology Advisory Committee of the CFTC announced the formation of a subcommittee devoted to technology issue in Automated and High Frequency Trading. The subcommittee will be chaired by CFTC Chief Economist, Andrei Kirilenko.
From the CFTC press release: “The Subcommittee will consist of four separate working groups, each tasked with identifying specific issues associated with automated trading. The first working group will be tasked with defining high frequency trading within the context of automated trading systems. The second group will examine whether or not there should be multiple categories of HFT. Specifically, that working group will be requested to examine distinctions in trading activity and how such distinctions should be tagged by the exchanges. The third working group will focus on oversight, surveillance and economic analysis, to understand how HFTs behave as compared to other automated systems. The fourth working group will address market micro structure issues to identify possible disruptions that might be provoked by automated trading systems and potential solutions to mitigate such events.”