September 2013 • 29
The influence of HFT in commodities
continues to grow. The article cites a Tabb
Group estimate that HFT now comprises
“about 61 percent of all futures market
volume, up from 47 percent in 2008.”
Some market experts told the
Journal
that a
failure to address this issue could result in
market distortions, increased risks and the
loss of liquidity. Thankfully, the CFTC has
announced that it will investigate the role of
High-Frequency trading in the commodity
markets and evaluate the need for new
regulations to protect market participants
and preserve market integrity. They are not
alone. Lawmakers in Europe have become
so concerned about this issue they have
even proposed limiting or banning HFT in
commodities markets altogether.
As a corollary to these concerns is the
practice of market information gathering
organizations to release data to certain
paying customers minutes prior to the same
information being released to the general
public. A June 12, 2013 CNBC report cites
that contract signed by Thomson Reuters,
the news agency and data provider, and the
University of Michigan, which produces the
widely cited economic statistic, stipulates
that the data will be posted on the web for
the general public at 10 a.m. on the days it
is released. Five minutes before that, at 9:55
a.m., the data is distributed on a conference
call for Thomson Reuters’ paying clients,
who are given certain headline numbers.
But the contract carves out an even more
elite group of clients, who subscribe to the
“ultralow latency distribution platform,” or
high-speed data feed, offered by Thomson
Reuters. Those most elite clients receive
the information in a specialized format tai-
lormade for computer-driven algorithmic
trading at 9:54:58.000, according to the
terms of the contract. On occasion, they
could get the data even earlier – the contract
allows for a plus or minus 500 milliseconds
margin of error.
“In the ultra-fast world of high-speed
computerized markets, 500 milliseconds is
more than enough time to execute trades in
stocks and futures that would be affected by
the soon-to-be-public news. Two seconds,
the amount promised to “low latency”
customers, is an eternity.
For exclusive access to the data,
Thomson Reuters pays the University of
Michigan $1 million per year, according to
ngent
the contract, in addition to a “conti
d by
fee” based on the revenue generate
ewed
Thomson Reuters. The contract revi
009.
by CNBC was signed in September 2
uters
It expired a year later. Thomson Re
and the University Michigan confi that
rmed
the relationship still exists.”
We urge the committee to investigate
the role of HFT and other potentially
harmful or disruptive new trends in
the commodity markets and determine
whether or not additional CFTC authority
is required to address these concerns.
We attached as Appendix “B” the listing of
independent studies showing the harmful
effects of high speed trading on the orderly
operation of commodity markets.
PENALTIES
Current law allows fines of up to $1
million per violation for manipulation or
attempted manipulation and $140,000 for
other violations of the CEA. In practice,
while the amount of these fines vary, they
are often insignificant when compared to
the overall profits of many market partici-
pants such as financial institutions and may
be doing little to deter violations of the
law. In effect, for many large firms, these
relatively miniscule fines just become part
of the cost of doing business. Given this,
the committee should increase fines and
penalties as appropriate in the CFTC
Reauthorization Act in order to more
effectively deter manipulation and other
unlawful behavior.
Additionally, the CFTC is restrained by
the blanket five-year Statute of Limitations.
This restricts the ability of Commissioners
to prosecute violations of the CEA,
including cases of fraud and manipulation.
The existing five-year Statute of Limitations
challenges the CFTC to prosecute cases
despite a limited budget and personnel,
the increasing complexity of the markets it
regulates and the volume of data that must
be collected and analyzed.
Therefore, the
committee should extend the Statute of
Limitations for the CFTC to a minimum
of 10 years.
BANKRUPTCY PROTECTIONS
Following a series of brokerage-house
bankruptcies in the late 1960s, Congress
enacted the Securities Investor Protection
Act (SIPA) of 1970 in order to extend
FDIC-like protections to brokerage clients
and to restore investor confidence. The
Act established the Securities Investor
Protection Corporation (SIPC) to oversee
the protection of customer funds and
investments in the event of a broker-dealer
failure and provide insurance coverage of
up to $500,000 for the value of a customer’s
net equity, including up to $250,000 for
cash accounts.
Unfortunately, Congress failed to
extend SIPA protections to commodity
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