CFTC Commissioner O'Malia Speaks on High-Frequency Trading, Customer Protection and Implementation of CFTC Rules (Important Speech) (with Lofchie Comment)

CFTC Commissioner Scott D. O'Malia opened public review and discussion on three significant issues in his speech before the Technology Advisory Committee ("TAC") in Chicago, Illinois. These issues are: (i) High-Frequency Trading ("HFT") , (ii) technology used to protect customer funds, and (iii) technology used for FCM and CCP risk management. Commissioner O'Malia said that he intends to put an end to confusion as to the CFTC's requirements by opening public discussion of technology issues.

As to HFT, O'Malia asked TAC members to carefully review the work previously done on the subject and then to prepare policy recommendations to the Commission. As to prior work on the topic of HFT, O'Malia recommended the report by the U.K. Government Office for Science ("The Future of Computer Trading in Financial Markets: An International Perspective"). (The link to the related news item and report are below.)

Commissioner O'Malia further discussed the necessity of having an automated system to verify customer account balances held by FCMs on a daily basis. The Commission's proposed rule only provides the minimum level of oversight which, according to O'Malia, doesn't go far enough in protecting customers.

Finally, O'Malia goes on to discuss Sections 1.73 and1.74 of the Commission's Regulations in order to provide clarity as to what these rules require from a technology perspective, and what must be done in order to establish compliance.

Lofchie Comment: This speech seems significant not only for its content, but also for the speaker. Previously, O'Malia's colleague on the Commission, CFTC Commissioner Chilton had spoken frequently, and generally critically, on high-frequency trading. However, Commissioner Chilton's remarks (link here for an example) arguably have reflected his instincts on the subject rather than the results of CFTC studies or academic studies. In citing to the U.K. report, which is both heavy on the academic and takes a gnerally favorable view of the market benefits provided by high-frequency trading, Commissioner O'Malia is clearly opening up the debate. As to his other remarks, they are consistent in direction with his prior statements criticizing the CFTC's Dodd-Frank rulemaking (link here for an example). Commissioner O'Malia has consistently asserted critic that the adopted rule makings are badly prioritized and badly implemented. Focusing on the technology required to implement the CFTC's rules changes the subject matter of the debate from the purely theoretical to the practical; i.e., can the CFTC's rules actually be implemented and at what cost?

See: Commissioner Scott D. O'Malia's Opening Statement before CFTC Technology Advisory Committee - Chicago, Illinois.See also: Link to News Story that Links to the U.K. Government Report on Computer Trading.