HFT Defined by CFTC as Subset of Automated Trading
October 30, 2012
In a meeting chaired by CFTC Commissioner Scott D. O’Malia in Chicago on Tuesday, a Technical Advisory Committee defined high frequency trading as a sub-set of automated trading that employs algorithms, low-latency technology and high speed connections.
More than a year ago, O’Malia asked the TAC subcommittee to come up with a HFT definition that could be used by the CFTC in dealing with the technical issues confronting with the commission.
In presenting its final recommendations, the Advisory Committee provided what it characterizes as “a mechanical description of high frequency trading that is deliberately neutral regarding types of trading strategies and how they interact with the marketplace.”
This recognizes that there are many types of market activity that can be potentially labeled as HFT and provides the basis for a regulatory definition as opposed to a popular definition of HFT,” TAC noted.
The committee also utilized carefully chosen language that has recognized legal interpretation.
Specifically, the Commission stated that HFT was a form of automated trading that employs: (a)algorithms for decision making, order initiation, generation, routing, or execution, for each individual transaction without human direction; (b)low-latency technology that is designed to minimize response times, including proximity and co-location services; (c)high speed connections to markets for order entry; and (d)recurring high message rates (orders, quotes or cancellations) determined using one or more objective forms of measurement, including cancel-to-fill ratios.
Any definition of HFT should acknowledge that various types of Automated Trading can exhibit mechanical characteristics of HFT, the commission noted. “However, for automated trading to be considered HFT it needs to match the cumulative criteria that comprises the definition, including recurring high message rates determined using one or more objective forms of measurement.”
The committee last met to hammer out a HFT definition on June 20. The more recent recommendations are intended to further studies into types of trading strategies that rely on the mechanics of HFT, and further studies into abusive practices that should be highlighted through increased surveillance and prohibited.
Committee members, some of whom had to participate by phone because of Hurricane-Sandy related travel problems, included Sean Castette,Getco LLC; Colin Clark, NYSE Euronext; Chris Concannon, Virtu Financial LLC; Joseph Saluzzi, Themis Trading; Larry Tabb – Tabb Group; and Greg Wood – Deutsche Bank Securities Inc.
O’Malia said he hoped to have the next TAC meeting Q1, 2013, “ with recommendations to the Commission on the HFT Subcommittee’s efforts as well as a gap analysis of existing market controls and regulations.”