A regulator at the Commodity Futures Trading Commission on Monday called for trading curbs on financial futures such as the Standard & Poor’s 500 E-mini, saying they could help prevent a repeat of the flash crash.
In a speech at the University of Notre Dame, CFTC Commissioner Bart Chilton said the agency has the authority to impose limits on how many financial futures contracts any one market player can hold, though he didn’t offer any details on what kind of limits might be appropriate.
“I think we need some sort of boundary on financial futures as well as futures on commodities of finite supply like energy, metals and agriculture,” he said in remarks. “How and what those confines are I don’t know at this time, but it seems only prudent to institute some type of restrictions to ensure we don’t again see another flash crash or even a mini-flash crash.”
Chilton’s comments about trading curbs on financial futures are notable because until now the agency and its Chairman Gary Gensler have focused only on moving to impose limits on commodities of finite supply such as crude oil. That’s because these kinds of markets are generally more susceptible to manipulation and more easily cornered.
The Dodd-Frank financial law enacted in July requires the CFTC to impose speculative-trading curbs on energy, metals and agricultural contracts across markets where they have jurisdiction. The law doesn’t mention imposing limits on financial futures.
But the May 6 flash-crash report completed by staff at the Securities & Exchange Commission and CFTC recently showed that a large sell order of 75,000 E-mini contracts executed through a computerized trading program helped spark a decline that quickly spread into the stock market. The report has raised questions about whether additional regulations are needed to address algorithmic trading.
The Dodd-Frank law gives the CFTC 180 days from the date it was signed to complete rules on limits for energy and metals, and some additional time to finish limits for agricultural products. The agency is taking comments from the public on how the limits should be structured. On Monday, Chilton said he would like to include financial futures in the public dialogue as well.
“I’m talking about sensible, well-calibrated limits to give us a handle on these markets,” he said.
He also added that he would like to see limits imposed on “robotic algo-trading” and “high-frequency trading,” although he noted that, “like financial futures, it isn’t clear how it would be best achieved.”
Meanwhile, on Friday, a joint advisory committee to the SEC and CFTC will be meeting to discuss the flash-crash report and come up with some recommendations for a regulatory course of action. Gensler has previously outlined some areas he would like to explore, including new obligations for brokers executing algorithms for their clients and greater transparency in the public listing at exchanges of bids and offers.
The agency is also exploring whether it should write rules targeting algo trading through its new powers under Dodd-Frank to crack down on disruptive trading. The CFTC is holding a meeting to discuss those options on Dec. 2.
