CFTC Economist Theorizes High-Frequency Traders Can Tame Prices
May 19 2010 - 6:24PM
Dow Jones News
An economist at the Commodity Futures Trading Commission is
trying to determine if some high-frequency trading strategies in
futures contracts tied to the Standard & Poor's 500 index may
moderate price swings like those seen on May 6.
CFTC economist Andrei Kirilenko is working with California
Institute of Technology mathematical finance professor Jaksa
Cvitanic, and the two are looking at a trading strategy known as
"sniping," which entails quickly submitting buy and sell orders of
a certain size and then immediately cancelling them if they cannot
be executed right away. They are theorizing that this trading
strategy actually moderates price swings.
Cvitanic said in an interview that they began the study in June
2009, but they haven't yet begun to analyze the trading data to see
if the theory holds true. Kirilenko couldn't be reached for
comment.
The two economists published their theoretical model on
high-frequency trading in a March working paper. The study is still
in its early stages. But the outcome could be important for
regulators to consider as they examine the reasons why the Dow
Jones Industrial Average fell nearly 1,000 points on May 6 before
quickly rebounding. Regulators are studying, among other things,
what role, if any, high-frequency traders who execute transactions
at lightning speeds may have played.
CFTC Commissioner Scott O'Malia said Wednesday that Kirilenko
will be asked to discuss this paper and others on which he's
working in July at the first meeting of a new technology advisory
committee. The CFTC advisory panel of experts will study
high-frequency trading, co-location services and other technology
issues.
Proprietary trading firms have become an increasingly larger
percentage of trading volume on equities and derivatives exchanges.
A report released by the CFTC and Securities and Exchange
Commission this week suggested that the May 6 price volatility may
have been exacerbated after some electronic liquidity providers
shut down or scaled back trading activity.
CME Group (CME), which lists the E-mini futures contract tied to
the S&P 500, has said that trading of the E-mini didn't spark
the massive sell-off in the equities markets and that
high-frequency traders were not to blame. High-frequency traders
make up about 36% of all volume across CME's various trading
platforms and 40% on the E-mini, according to CME's Executive
Chairman Terry Duffy.
CFTC Chairman Gary Gensler said in March his agency plans to
draft a proposal around co-location services, which allow traders
to place their computers in the same building as the trading
platform.
The SEC, meanwhile, is looking at high-frequency trading as part
of a much broader review of market structure issues including
co-location, dark pools and flash orders, among other things.
-By Sarah N. Lynch, Dow Jones Newswires, 202-862-6634;
sarah.lynch@dowjones.com
(Jacob Bunge contributed to this article.)
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