On June 3, 2014 -- the same day that a spirited discussion was held at the Technology Advisory Committee (TAC) of the Commodity Futures Trading Commission regarding low latency trading -- the US Senate confirmed the appointment of three new commissioners to the agency, including its new chairman, Timothy G. Massad.
After the Senate narrowly confirmed Sharon Y. Bowen to be a commissioner by a vote of 48 – 46 during late afternoon, the Senate subsequently approved Mr. Massad and J. Christopher Giancarlo (also as a commissioner) on voice votes. Mr. Massad will begin his tenure with the CFTC on June 5.
Earlier in the day, Commissioner Scott O’Malia chaired a meeting of the TAC, which in addition to sponsoring a panel regarding the impact of low latency trading on derivatives markets, held sessions on developing a twenty-first century surveillance program, and increasing buy-side participation on swap execution facilities.
During his passionate opening remarks, Bryan Durkin, Managing Director and Chief Operating Officer for the Chicago Mercantile Exchange (CME) noted the evolution of markets from floor based to electronic, and observed that the change “…has been the catalyst for the development of more competitive, more efficient, and more transparent markets, as well as substantial improvements and innovation in risk management and regulatory capabilities.”
Chuck Vice, President and Chief Operating Officer of the IntercontinentalExchange Group (ICE), noted that many of the concerns about the equities markets, highlighted most recently in Michael Lewis’ Flash Boys: A Wall Street Revolt, are not present in derivatives markets. These include (1) fragmentation, (2) retail brokers who sell order flow to low latency trading firms and (3) maker taker pricing.
Joe Saluzzi, Co-Founder of Themis Trading, echoed the concerns regarding the fragmentation of equities markets. According to Mr. Saluzzi,
“While we are not sure if any of these practices are illegal, it is clear to us that securities regulators lack the surveillance methods required to police the high speed, low latency stock market.”
Mr. Saluzzi, lamented the failure of regulators adequately to oversee highly automated equities markets. He claims that “regulators have come to a gunfight armed with a very dull knife.” Mr. Saluzzi offered three ideas to improve equities markets’ practices: (1) eliminate payment for order flow; (2) mandate total disclosure of dark pool and smart order router practices; and (3) regulate data feeds.
Earlier Mr. Durkin had noted that, at the CME, “data is sent to everyone at once.” While he observed that persons who execute trades are sent confirmations of their activity almost instantly, these are not data feeds. Data feeds, he said are not provided “exclusively to a particular user segment:”
“While customers have several options in terms of how they can receive data from us, we do not restrict anyone’s access. Having multiple connectivity options makes our markets accessible to a broader array of participants.”
In response to criticism of exchanges providing co-location services, Mr. Durkin also pointed out, “co-location actually equalizes access to the benefits of speed through proximity… unlike several years ago when a firm could gain an advantage by buying real-estate near an exchange or where the server was thought to be located.”
At one point in the discussion, Vincent McGonagle, Director of the CFTC’s Division of Market Oversight, reminded the committee that the Commission has recently sought comments to its concept release on risk controls and system safeguards for automated trading environments. He indicated that staff was “getting close” to make recommendations, particularly in the areas of pre-trade risk controls, registration, system safeguards and obligation of reporting, after sorting through the many comments received by the Commission.
One participant during the discussion, Richard Gorelick, CEO of RGM Advisors, offered two specific recommendations he believes should be instituted, that: (1) co-location should be offered on a fair, equal basis to all potential users, and (2) the terms of liquidity promotion programs should be transparent to the Commission and the public.
After the panel on low latency trading, a discussion followed regarding surveillance systems currently used by the CME and ICE; surveillance systems being developed by the Securities and Exchange Commission and the Financial Industry Regulatory Authority; and ideas for developing more effective surveillance systems.
The final panel of the TAC meeting, involved an assessment of the success of swap execution facilities to date. Initially a statistical presentation was made by Tod Skarecky, Senior Vice President, Americas, for Clarus Financial Technology. He concluded that based on his company’s analysis, there has been a “good adoption across the board for” credit default swaps trading on SEFs with a slow uptrend for interest rate derivatives.
Michael O’Brien, Director of global trading for Eaton Vance, indicated that there would have been a “slow pickup” in SEF trading even in an ideal world. He said that “nothing happens overnight” and cited a number of reasons why his firm has not yet signed up with a single SEF: (1) rulebooks are challenging to read and understand, and firms like his do not have the policies and procedures necessary to be a direct participant; (2) the CFTC’s record-keeping rules may be difficult to follow; (3) costs of connection are high and it is not clear where the markets will be in two years; and (4) there are alternatives, including futures contracts.
Scott Fitzpatrick, Executive Director, Tradition, confirmed that “volumes are not as [we] wanted,” but this is “not unexpected.”
In published remarks following the US Senate approval of the three new commissioners, Walt Lukken, President and CEO of the FIA congratulated the new chairman and the other two commissioners:
“I’m pleased that we now have a full slate of Commissioners to take on the important work ahead for the CFTC… The Dodd-Frank Act greatly expanded the scope of the CFTC’s authority, and there are still many important issues that need to be addressed in the implementation of the law. So it is all the more important that the CFTC have a full complement of Commissioners at this critical moment in history.”
Most recently, Mr. Massad served as the US Department of Treasury's Assistant Secretary for Financial Stability. In this role, he oversaw the implementation and wind-down of the Trouble Asset Relief Program (commonly known as "TARP"). He is a lawyer and previously was a partner at Cravath, Swaine & Moore. Mr. Giancarlo is also a lawyer, and has served since 2000 as Executive Vice President of the GFI Group. He previously was a partner in Thelen Reid Brown Raysman & Steiner. Ms. Bowen, also a lawyer, is most recently a partner and member of the corporate law department at Latham & Watkins. She previously was Acting Chair of the Board of Directors of the Securities Investor Protection Corporation.
For more information, see:
Presentations for the June 3, 2014 CFTC’s Technology Advisory Committee Meeting:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of June 3, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. Mr. DeWaal is a member of the CFTC Technology Advisory Committee.
Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained in this article is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
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