By Peter Schroeder - 05/13/14 11:43 AM EDT
Senate Democrats on Tuesday used the first-ever congressional hearing on high-frequency stock trading to push a funding increase for federal regulators.
Democrats said federal officials need the tools to keep up with the high-tech, high-speed trading practices that are sweeping Wall Street. Several members of the Senate Agriculture Committee specifically advocated increased funding for the Commodity Futures Trading Commission (CFTC).
“We’re going to see this moving faster and faster and faster, at a time when the CFTC does not have technology that is comparable,” said Chairwoman Debbie Stabenow (D-Mich.). “There has to be some capacity for oversight here that is equal to what is happening in the marketplace.”
High-frequency trading has come under scrutiny thanks to a new book from the author Michael Lewis that argues split-second trades are rigging the market against regular investors.
Both regulators and industry officials have said the markets are not "rigged," although regulators say they are monitoring financial markets closely for any signs that some fast-moving traders are enjoying an unfair advantage. CFTC staffers are collecting outside input on what to do about high-frequency trading, and reviewing the suggestions to determine if more rules are needed.
With a bigger budget, CFTC officials said they could collect more data and analyze it more quickly, according to Vince McGonagle, director of the CFTC’s market oversight division.
The CFTC’s budget is currently $215 million, which is below the $280 million President Obama requested in his latest budget. The CFTC officials have long pleaded with Congress for boosted funding to buy technology and hire staff that they say is needed to monitor the derivatives marketplace.
In its budget request, the CFTC seeks to devote 16 percent of its budget request, or $45.2 million, to expanding its technological capacity.
Testifying Tuesday, McGonagle said that since 2011, the amount of entities the CFTC has to monitor has expanded significantly, but staffing for that part of the agency has actually shrunk.
Republicans have resisted funding increases for the CFTC and on Tuesday expressed doubts that high-frequency trading is a problem.
Sen. Thad Cochran (R-Miss.), the ranking member of the panel, said automated trading “has allowed the marketplace to grow and become more efficient.”
And Sen. Saxby Chambliss (R-Ga.) said the CFTC’s budget was not the issue, but the misguided provisions of the Dodd-Frank financial reform law the regulator was given to implement.
An industry official also sought to distinguish between charges lobbed at the stock market and differences with the futures market where derivatives are traded.
Terrence Duffy, executive chairman and president of the CME Group, told senators that while the stock market is made up of multiple exchanges, futures trading is all conducted on one exchange. That means that high-frequency traders cannot obtain order information and then search for a pricing difference elsewhere to pocket profits.
Any claims high-frequency trading creates unfair markets should not be directed toward his line of business, he argued. Instead, the growing use of technology has enabled investors to obtain pricing information and complete trades more quickly, leading to an overall more efficient market.
"High frequency trading has been the focus of substantial negative comments, much of which has been based on misinformation when it comes to futures market," he said. "The futures markets today are more open and accessible than ever before."
However, a former CFTC official turned academic did warn that the arms race to get trade data ever more quickly could provide minimal benefit to regular investors.
Andrei Kirilenko, a professor at MIT who spent time as the CFTC's chief economist, warned that most high-frequency trading is dominated by a handful of firms. As a result, new entrants and other smaller players are investing in technology to compete with each other for a slight edge, and little benefit is trickling down to retail investors or derivative end users.
He recommended that markets publish exactly how quickly trade data is moving around markets, and backed Democratic calls for greater funding for regulators.
"For the public to remain confident that there are no stealthy predators lurking inside our automated futures markets, regulators need to demonstrate that they have drastically upgraded their skills," he said.