CME's Durkin Warns Against Driving Off High-Frequency Traders

A senior executive of CME Group Inc. (CME) on Thursday cautioned regulators against constricting the business of high-frequency trading firms, warning that their absence could make financial markets less stable.

Rather than crimping their activity in any response to last year's "flash crash," electronic traders should be encouraged into more markets to make them more efficient and easier for investors to use, said Bryan Durkin, CME's chief operating officer.

"The reality is that speed is going to continue to be a characteristic of our financial markets," Durkin said in prepared remarks Thursday at an event hosted by Georgetown University.

"Very careful consideration should be given to any decision to place restrictions on these traders that would be harmful to their participation and result in less efficient and less liquid markets," he said.

High-speed electronic trading firms typically use their own capital to rapidly trade in and out of stocks, options and futures with the goal of profiting on small shifts in prices. They have been credited with making markets cheaper to trade in by contributing liquidity for other investors, and are the busiest clientele of exchanges, but the secrecy around their strategies and speed of operation have drawn concerns.

The role of such firms was underscored by the blistering sell-off in stock and derivatives markets on the afternoon of May 6, 2010, when some major firms elected to stop trading altogether, citing unreliable market data that confused their systems. Their departure left the rest of the market with fewer potential buyers to slow the rapid deterioration in security prices.

Regulators have weighed new rules for automated trading firms that do major business in U.S. markets, which could require some to continue trading in times of turmoil. Also under consideration are closer scrutiny of trading algorithms used by high-speed firms, and methods to better track their activity.

Durkin said such traders have been unfairly vilified following the flash crash, while their good points are ignored. "There is considerable evidence that high-frequency traders increase liquidity, narrow spreads and enhance the efficiency of markets," he said.

The liquidity provided by powerful, computer-backed trading groups and other traders is "the best defense against disruptive markets," Durkin said. "I want to make sure we all are mindful not to chase liquidity away."

Durkin also challenged regulators' conclusion that a single large futures trade in contracts linked to the S&P 500 stock index was the key factor that set in motion the flash crash. The sale of 75,000 S&P futures by a single firm--identified in media reports as Waddell & Reed--actually was a series of hundreds of smaller orders carried out over a 20-minute period, before the worst of the market drop and through its recovery, he said.

The orders came in as part of a "commonly used" trading algorithm that aimed to break up large trades into smaller pieces, according to CME's analysis of the trading.

"We did not find any trading activity that appeared to be erroneous or that caused the break in the cash equity markets," Durkin said Thursday.

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

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