The head of the world’s largest futures market exchange told lawmakers on Tuesday that high-frequency trading isn’t a big problem — at least not in his neck of the woods.
Terrance Duffy, president of CME Group, said the futures market is dominated by one exchange — his — which makes it fundamentally different from the stock markets.
High-frequency traders in the equities market can essentially use their speed to conduct surveillance on stock exchanges. If an order comes for a block of Apple stock to the New York Stock Exchange, then a high-speed trading firm can bid up the price on the BATS exchange by a penny or two.
Firms that do that “should be punished,” Duffy told the Senate Agriculture, Nutrition and Forestry Committee.
But he said he agreed with regulators, including Mary Jo White, the head of the Securities and Exchange Commission, who insist that the markets aren’t rigged.
The Senate panel held its first hearing on whether there should be new regulations targeting fast-moving, algorithmic trading firms, which drew fire after “Flash Boys” author Michael Lewis accused them of rigging the markets and harming other investors.
The hearing focused on high-frequency trading in the futures markets, where price contracts for commodities like orange juice and corn are traded.
Sen. Saxby Chambliss (R-Ga.) said that should be new regulations added to the sweeping Dodd-Frank financial reform act to protect farmers and ranchers.
“We thought we made the right changes to Dodd frank, but we didn’t,” he said.
The biggest threat to the system is how interconnected the markets are, said Andrei Kirilenko, an MIT professor and former economist for the Commodity Futures Trading Commission.
Smaller investors might be able to reap the benefit of HFT firms, which can shrink the gap between bid and ask prices, Kirilenko said. Pension funds, which invest in larger blocks, may have higher costs, though, he said.
Vince McGonagle, the CFTC’s director of market oversight, didn’t offer any specific recommendations in his testimony and said new guidance could be forthcoming.