Ex-CFTC Head Urges Tougher Technical Oversight By Regulators

Regulators should take a more active role in overseeing exchange technology following a string of recent glitches, according to the previous head of the U.S. futures regulator.

Stock- and derivatives-market authorities should consider more direct oversight and ongoing audits of electronic trading systems to guard against outages and potential risks to the financial system, said Walter Lukken, former acting chairman of the Commodity Futures Trading Commission.

"Regulators need to follow the risk," said Lukken, who now heads the U.S. clearinghouse unit of NYSE Euronext (NYX). "This is something that people are giving very serious thought to at the regulatory level and at the industry level."

A series of recent outages and mishaps has afflicted financial exchanges. CME Group Inc. (CME), the world's largest futures market operator, in early September mistakenly inserted thousands of orders, aimed for a test environment, into live trading on its electronic Globex system. The matter prompted an examination by the CFTC.

Euronext, the European share-trading market run by NYSE Euronext, last month saw some trading halted for about 40 minutes in a separate snafu. And on Tuesday, London Stock Exchange Group (LSE.LN) grappled with a shutdown at its Turquoise share-trading market that may have occurred under "suspicious" circumstances, according to the company. All three matters were attributed to human error.

Concerns over the robustness of trading systems were sharpened by the May 6 "flash crash," when a slowdown in some pricing information flowing from exchanges prompted some major traders to scale back activity, potentially exacerbating the session's dramatic volatility.

Traders' and exchanges' quest for broader electronic-trading capabilities and faster execution speeds over the past decade has made markets more efficient and competitive, Lukken said, but the evolution has also brought "drawbacks." For instance, far more data are now available for regulators to parse and more venues to monitor.

"I don't think regulators fully thought that through," said Lukken, who led the CFTC from June 2007 to January 2009.

Lukken said regulators will likely always be playing catch-up--it isn't realistic to expect agencies to become experts on every trading system, he said. But they also need to avoid getting bogged down in the minutiae of technical details, which could obscure broader dangers to market stability, he said.

The CFTC in July proposed new rules requiring exchanges and trade-clearing facilities to formulate and maintain recovery plans should a natural disaster disrupt the markets.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; Jacob.bunge@dowjones.com

(Sarah N. Lynch contributed to this article.)

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