Regulators are trying to catch up with the "cheetahs." That's the nickname bestowed upon high-frequency traders by Bart Chilton, a commissioner at the Commodity Futures Trading Commission, the federal agency trying to oversee the ultra-fast, computerized buying and selling of securities and derivatives.
They are not even close.
"We don't even know who is out there, and as a pedestrian first step, they simply ought to be registered so we at least know who they are," said Chilton on Wednesday at a daylong CFTC advisory committee meeting designed to lay the most preliminary groundwork for the CFTC to eventually monitor, and perhaps regulate, high-frequency trading.
Meeting participants began with the basic question: What exactly is high-frequency trading?
The Washington meeting came just over two years after a freak stock market crash on May 6, 2010, caused the Dow Jones Industrial average to lose 1,000 points in a matter of minutes (and recover its losses shortly thereafter). A joint report from the CFTC and the Securities and Exchange Commission later found that high-frequency traders helped cause the event, dubbed the "flash crash."
High-frequency trading has been suspected of playing a role in several subsequent, smaller-scale stock market events, including the botched March 2012 initial public offering of BATS, an electronic exchange whose own technical troubles caused Apple's share price to plummet 9.4 percent in about five minutes that day. BATS officials later denied that the plunge was caused by high-frequency trading.
Critics argue that since the flash crash, the SEC and the CFTC have done too little to regulate or even fully monitor high-frequency trading -- which, by most estimates, accounts for more than half of stock trading activity in the United States.
The Huffington Post asked the SEC in April when it expects to have full oversight capability over high-frequency trading across all markets. Declining to offer a concrete timeline, spokesman John Nester said the commission is reviewing "different types of trading strategies" and "whether proprietary trading firms should be subject to any affirmative or negative obligations with respect to their trading."
As for the CFTC, Chairman Gary Gensler implied in his opening remarks Wednesday morning that his agency is in the process of expanding oversight of high-frequency trading. "The Commission is continuing to adapt our oversight to changing market structure, including emerging trends related to electronic trading," he said. "Regulators cannot assume that the algorithms in the markets are well designed, tested or supervised. To give hedgers and investors confidence in markets, our regulations have to adapt to markets that are increasingly moving from man to machine."
Gensler's comments preceded a series of panel discussions in which experts heatedly debated how to define high-frequency trading for regulatory purposes.
"'High-frequency trading' has many connotations," said Greg Wood, a panelist and director of algorithmic execution at Deutsche Bank Securities. He offered a definition of the practice as "a form of automated trading that employs algorithms for decision making ... without human direction" and that utilizes "low-latency technology that is designed to minimize response times," "high-speed connections" and "high message rates -- orders, quotes or cancellations."
Ultimately, the meeting settled on a broad draft definition.
Most of the attendees were not officially affiliated with the CFTC but had been invited by the commission to offer their thoughts as "stakeholders" -- that is, participants in the stock market with expertise of one sort or another in high-frequency trading. They included Irene Aldridge, managing partner of high-frequency trading firm Able Alpha Trading; Joseph Saluzzi, co-founder of institutional brokerage firm Themis Trading and a vocal critic of high-frequency trading; Larry Tabb, founder of market research firm Tabb Group; and Sean Castette, chief information officer at Getco, a leading high-frequency trading firm.
The debate over how merely to define high-frequency trading illustrates just how far the CFTC has to go before it can rein in a practice that Saluzzi said is giving mom-and-pop investors concerns "about the trust and confidence in this market."
As Andrei Kirilenko, a CFTC economist who appeared at the meeting, put it, "Trading has evolved tremendously and now occurs at such speeds it's not entirely clear that risk management [efforts] ... have actually caught up."