Markey: Rules of Road Needed for Wall Street's High Speed Trading

Press Release

Right now, somewhere on Wall Street or in other major financial centers, high-speed computers are trading stocks, commodities, and other financial products at blazing speeds. Yet these trades are happening without adequate controls or federal oversight to protect ordinary Americans from fraud, manipulation or excessive speculation that could lead to price spikes on prices of goods such as wheat or oil.

In response, Rep. Ed Markey (D-Mass) today introduced legislation that would empower federal regulators to tap the brakes on such High Frequency Trading (HFT) practices where they pose a threat to market integrity or to companies seeking to use the futures markets to hedge business risks.

"High Frequency Trading is like a sports car zooming through Wall Street, and without proper controls it can run over the companies who rely on the futures markets and the consumers they serve. My legislation would give the CFTC the power to put in place some commonsense rules of the road that are aimed at controlling excesses that have occurred in connection with this kind of trading. We need to reduce the risk of disruptions in commodity markets that drive consumers' energy or food prices higher," said Rep. Markey. "Increased technological innovations are intended to make markets more efficient and secure, but HFT also has the potential to do just the opposite. We shouldn't allow Wall Street oil speculators and gamblers to put Main Street consumers and companies at risk, when appropriate rules of the road can prevent it."

The Markey bill would empower the Commodity Futures Trading Commission to issue regulations on HFT in the nation's commodity futures markets. In January, Rep. Markey called on the SEC to use the Market Reform Act of 1990 to oversee HFT in the nation's stock markets. The Market Reform Act, which Rep. Markey authored in 1990, gave the SEC authority to prohibit or limit practices which result in extraordinary levels of volatility. The SEC is currently considering using this and other authorities to strengthen oversight over HFT trading of stocks. Markey's bill would give the CFTC new authorities to take similar actions in the futures markets.

Through HFT, Wall Street traders are able to buy and sell stocks and futures at microsecond speed using automated systems that have the ability to destabilize markets. The Executive Director of Financial Stability at the Bank of England estimated in 2010 that HFT firms account for 70 percent of all trading volume in U.S. equities, and HFT is believed to have represented more than 50 percent of global futures trading volume in 2011.

Similar trading practices have now spread to oil and other commodities markets. On September 17, 2012, oil futures plummeted and recovered over the course of a few minutes. It is believed HFT played a role in this flash crash market occurrence. On April 23, 2013, a group of Syrian hackers gained access to the Associated Press' twitter account and tweeted that the White House had been bombed and the President had been injured. Stocks and oil prices nosedived immediately but quickly recovered once AP confirmed it was a hoax.

"Americans understand what happens when Wall Street oil speculators are allowed to go unchecked and gun the markets up or down in a few microseconds. We shouldn't wait for another flash crash or bogus tweet to send our markets into a tailspin. This legislation establishes safeguards which I think would help protect Americans and our economy against the potential dangers of HFT in commodities and futures markets and holds the barons on Wall Street accountable," said Rep. Markey.

Bart Chilton, commissioner of the CFTC welcomed introduction of the PROTECT Act today, explaining that, "High frequency traders have contorted markets and impacted consumers. Congressman Markey has initiated an important and imperative step to ensure they will be monitored and observed which can avoid future market meltdowns. Ed Markey knows that puny penalties have all too often just been a cost of doing business for many fat cat financial firms. His new legislation would change that by ensuring a definite deterrent to committing financial crimes."

Rep. Markey's PROTECT Act would:

Require traders involved in HFT in commodities to register with the CFTC.
Require HFT traders in commodities to establish trading safeguards.
Ban simultaneous buy and sell orders by traders using HFT in commodities.
Give the CFTC power to set forth business standards to limit fraud, manipulation, and other disruptive practices in HFT (e.g. general power to regulate HFT).
Give the CFTC the power to fine HFT traders based on the amount of time of their violation (e.g., if you are violating the regulations for more than a second or two, that can receive a higher fine than violating a regulation for just a microsecond).
Increase penalties for market manipulation from $140,000 to the greater of $1,000,000 for individuals and $10,000,000 for entities, triple the monetary gain to the actor, or triple the total amount of proximate losses. So if a high frequency trader causes $100,000,000 in damages via manipulation, that trader can be fined up to $300,000,000.

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