Volatility created by high-frequency trading in the cattle market will be one of the key topics addressed this week at the Cattle Industry Convention in San Diego.
CME Group Executive Chairman and President Terry Duffy will be speaking to National Cattlemen’s Beef Association (NCBA) Cattle Marketing and International Trade Committee to address concerns about high-frequency traders who use computer programs to “spoof” the markets by offering and withdrawing contracts within milliseconds in order to influence market prices.
In November, a Chicago jury convicted a trader on six counts of spoofing and six counts of commodity fraud. It was the first criminal case on spoofing, and the first to be tried under the expanded definition of disruptive futures market trading practices in the Dodd-Frank Wall Street Reform and Customer Protection Act. At least two other cases are currently pending.
The NCBA has formally asked Duffy to address its position on several critical areas of interest, including the following points:
1. Livestock contracts must be monitored, measured and controlled through the CME Globex Messaging Efficiency Program. Grain, currency and index contracts have limits regarding messaging; livestock contracts must have the same.
2. A one-second delay between trade actions is imperative to make automatic trading work. Implementing latency will make messaging much more difficult, as there will be greater risk of order execution. High-frequency trading occurs at a rate faster than any human can analyze. Latency would level the playing field so everyone sees the market at the same speed.
3. The CME Group has to be more proactive in identifying spoofing concerns and bringing them to light, rather than waiting until they are reported.
4. In order to better analyze and understand market action, the CME Group must release audit trail data for analysis that includes firm-level generic identification. This would be utilized by industry and researchers to better understand trading behavior that could possibly be damaging.
5. The CME Group has to actively engage in monitoring and acting upon violations or market manipulation.