Senators fret over high-frequency commodity trades

WASHINGTON — Senators are fearful that high-frequency traders are getting an unfair advantage and endangering the stability of the U.S. futures market, the financial exchange for trades of commodities like corn and gold. But industry experts warn against rushing to impose new regulations.

"These markets have changed dramatically over the years – for a 21st century market, we need a 21st century regulator," said Sen. Debbie Stabenow, D-Mich., who called a hearing of the Senate Agriculture Committee she chairs to consider the issue.

High-frequency trading, the practice of utilizing high-speed fiber optic connections and computer algorithms to trade, has become a hot topic in recent months. Some say high-frequency traders have unfair advantages, "jumping the line" before other traders. Industry experts worry about a repeat of the 2010 "flash crash," which saw a precipitous drop in the market. A federal report found that high-frequency trading accelerated and contributed to the crash.

The Justice Department and the Securities Exchange Commission are investigating alleged abuses by high-frequency traders in the equities market. Stabenow said she is concerned about the potential for similar abuses in the futures market, which operates separately.

Some experts say increased regulation of high-frequency trading isn't the answer to ensuring integrity in the commodity futures market.

"What is really driving this is a fear that (electronic trading) could go out of control," said Scott Irwin, professor of agricultural and consumer economics at the University of Illinois Urbana-Champaign. "I don't believe that's a valid concern."

"I think you have to be very careful in evaluating regulatory changes," said Pete Kyle, professor of finance at the University of Maryland.

Instead, Kyle said serious concern should be given to dwindling staffing levels at the federal agency that oversees the futures market, the Commodity Futures Trading Commission.

"They don't have the staff to do what they're required to do," he said.

The commission, which picked up a raft of new responsibilities under the 2009 Dodd-Frank Act , has lost staff in recent years. Its division of market oversight, which is responsible for rules enforcement and market surveillance, is operating with "about 109 employees," down from 130 or so in 2012, according to Vince McGonagle, director of the division.

"We do face substantial staff shortages," McGonagle said at the hearing.

The president of CME Group Inc., which runs the nation's largest futures exchange, told the senators he would welcome increased oversight by the CFTC.

"I don't believe the CME has a credible business if we don't have a credible regulator," Duffy said.