Commissioner Chilton Advocates for Transaction Fees for High-Frequency Traders and Massive Passives (with Lofchie Comment)

CFTC Commissioner Bart Chilton delivered a keynote address to the Energy Bar Association in Washington, D.C. on Targeted Transaction Fees ("TTF") concerning end users engaging in speculation.Commissioner Chilton discussed the "financialization" of commodity markets by traders called Massive Passives. This trading strategy, where there is so much Massive Passive liquidity on the buy side that values cannot be based on the fundamentals of supply and demand, is one example of how markets are morphing, according to Chilton. In addition, high-frequency traders, or cheetahs, impose quantifiable costs on small investors and push non-cheetah traders out of the market.

To that end, the Commissioner suggested a new plan: Targeted Transaction Fee. In this plan, true end users are exempt from the fee, but cheetahs have a transaction fee measured by their volume. Chilton argued that this has the two-fold benefit of funding the Commission to oversee the markets and deterring folks from entering into flash-in-the-pan, non-bona-fide trading.

Lofchie Comment: This is at least the second time that Commissioner Chilton has advocated for a transaction tax to fund the CFTC. This time, he proposes to limit the tax to persons who did not qualify as hedgers. The two groups which he believes will be hardest hit by the tax are (i) large passive investors, such as public investment companies and pension plans, and (ii) high-frequency traders. Some of the questions he does not address: (i) how much money would be raised; (ii) how much trading would be driven out of the market by the tax; (iii) how the reduced liquidity and increased expense would affect trading spreads; (iv) how the CFTC would distinguish between persons subject to the tax and those exempt; and (v) how much of the tax would be borne indirectly by retail investors and pension plans.

See: "TTF" - Keynote Address by Commissioner Bart Chilton to the Energy Bar Association, Washington, D.C.