High Frequency Trading Regulation - Comment Letters

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On November 17, 2011, CFTC Commissioner Scott O'Malia sent a letter to the Technology Advisory Committee ("TAC") requesting comment from market participants on the definition of high frequency trading (HFT). Since a large share (O'Malia cites a TABB Groups study that estimated HFT's share of trading to be 54 percent), and since Dodd-Frank rulemakings are driving OTC markets toward central limit order books, there have been calls for regulation and surveillance of HFT activities. O'Malia suggests that, before any rules are written, the CFTC must determine what types of trading activity does and does not constitute "high-frequency trading."

O'Malia suggests a seven-part test, which includes:

  • High rates of order submission and cancellation;
  • the use of computer algorithms for decision making;
  • the use of co-location and direct market access;
  • very short time frames for holding positions;
  • high intra-day position turnover rate;
  • the submission of numerous orders that are immediately cancelled; and
  • ending the day with as flat a position as possible.
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FIA Principal Traders Group - December 12, 2011

Definition of High Frequency Trading
December 12, 2011

The comment letter, which was submitted to CFTC Commissioner Scott O'Malia in response to O'Malia's November 14, 2011 proposal that the industry produce a definition of what constitutes "high frequency trading." From the comment letter:

"As proposed in your letter of November 14, 2011, the definition of HFT would require the CFTC to draw arbitrary boundaries which in turn may lead to an overly broad or overly narrow definition. For example, the terms “high”, “numerous” and “very-short”, which are each in the proposal, are inherently arbitrary. Making such arbitrary definitional choices; however, may be unnecessary given the stated goal of the definition. For instance, if a market participant uses an automated trading system (“ATS”) and is directly connected to an exchange; does it really make a difference if he or she enters a thousand orders per day instead of one million orders per day? Does it really matter, for purposes of monitoring trading activity, whether or not a trader holds positions at the end of the day? In fact, it seems quite difficult to devise any meaningful definition for HFT that is not, in significant part, arbitrary."

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SIFMA - December 13, 2011

Definition of High Frequency Trading
December 13, 2011

The comment letter, which was submitted to CFTC Commissioner Scott O'Malia in response to O'Malia's November 14, 2011 proposal that the industry produce a definition of what constitutes "high frequency trading." Specifically, the letter refers to a white paper that SIFMA had recently released on the benefits of HFT. From the comment letter:

"The transition to an electronic securities market, catalyzed by recent regulatory reforms, has significantly benefited all investors. Market quality has improved concurrently with changes in equity market regulation and technological advances, including the rise of computer-based trading. U.S. equity markets are now characterized by robust competition among trading venues and market participants, increased efficiencies due to automation of trading processes, and faster execution speeds. Investors, including retail investors, enjoy more liquidity, narrower spreads, and lower costs in this market than at any time before. Nonetheless, SIFMA notes that there may be valid concerns raised regarding computer-based trading."

The white paper can be viewed [[ |HERE]]

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BG Group - December 5, 2011

Definition of High Frequency Trading
December 5, 2011

The comment letter, which was submitted to CFTC Commissioner Scott O'Malia in response to O'Malia's November 14, 2011 proposal that the industry produce a definition of what constitutes "high frequency trading." BG Group SVP Matt Schatzman responded to th seven questions posed by commissioner O'Malia.

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References

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