CFTC'S Commissioner Chilton: 'Cheetah Traders' Need to be Regulated


Thanks to the ever advancing market technology, the day trading of the nineties may as well be fifty years ago. Within milliseconds, highg frequency traders can get in out and out of positions.

Commissioner Bart Chilton of the U.S. Commodity Futures Trading Commission (CFTC) has dubbed these high frequency traders as "Cheetah Traders" and says they need to be regulated. The Flash Crash last year has intensified this push. According to CFTC, about 50 percent of European trading and about a third in U.S. markets is high frequency trading. I caught up with Chilton who is in Europe for the next couple of weeks delivering a series of presentations on the need for High Frequency Regulation.

LL: One of the biggest concerns over financial regulation overhaul is to make sure the US and the rest of the world are all on the same page in terms of rules and regulations. What kind of update can you give my readers in terms of the progress?

BC: We dialogue constantly with fellow regulators. There is a general consensus that we need to avoid a regulatory race to the bottom, where trades might migrate to an economy with the lowest common denominator when it comes to rules.

LL: Are there any stumbling blocks right now between the US and Europe in terms of certain rules or regulations?

BC: We recognize that Europe’s financial reform measures won’t be identical to those of the U.S. There are sovereignty issues and areas unique to each country. But, stumbling blocks? No. Regulators on both sides of the Atlantic are working hard to harmonize financial market rules to the extent possible.

LL: What reform measures are critical to harmonize? What can't be harmonized?

BC: It's of course most important to harmonize, to the greatest extent possible, the basic thrust of derivatives reform legislation, that is, clearing requirements for swaps transactions. This is at the heart of the discussions surrounding the concept of extraterritoriality generally—we need to ensure that market participants have very clear guidelines for which rules they have to comply with in which arena.

That's critically important to provide that legal certainty. In addition, I'd name two specific rules (in a non-exclusive list):

capital requirements and position limit standards. It's important that, certainly in these two areas that can have immediate and profound effects on market participants trading strategies and bank accounts, that we ensure there is no "race to the bottom" and at the same time institute reasonable and appropriate measures to make markets safe, sound and efficient, and protect against systemic market risks.

LL: Who has the better of the regulations?

BC: It’s really too early to say since hardly anything is in final form yet. At the end of the process, the uniqueness of each our nations may lead to rules that vary somewhat from each other. At this point, though, we learn from each other. Our European friends may have a better idea or two than we do and we’ll be quick to embrace it if we think it could work here. By all appearances, the same is true for them, too.

LL: What would you suggest in shedding light into the dark pools?

BC: Just what was done in Dodd-Frank: bringing the dark over-the-markets into the regulatory light of day. At CFTC, we currently oversee $5 trillion in annualized trading on regulated exchanges. The OTC market accounts for hundreds of trillions—and remember that’s where the problems were during the financial crisis.

Bringing transparency to those markets will make them much safer for the people who use them and the consumers who depend on them.

LL: Should all exchanges be on the same page when it comes to their technology?

BC: There’s room for differences among competitors in any industry.

That’s good. Still, for the sake of those who depend on markets, there must be a foundational set of rules covering the technology.

The computerization of the markets happened so fast that we’re struggling to keep up. But, we’ve seen what can happen if even one of these whiz-bang trading algorithms goes feral. That’s why we need some testing of programs before they go live

LL: What is needed for the exchanges to be keeping up with the cheetah traders?

BC:The exchanges actually have some very impressive technology—state of the art tools and professional staff. In general from an oversight perspective, I think we could use testing of certain programs and perhaps some sort of credentialization certification. It’s also important that there be some accountability for those who set off a runaway program that roils markets, whether it’s innocent or not.

It would be naïve, however, to think there won’t be glitches. We need a system that can look back and adjust to what happened. The airline industry has “upset recovery training” that’s used when something goes wrong. Markets need the same.

LL: What policy options would you like to see enacted?

BC: In addition to what I’ve already said about rules for cheetah trading, I would say more broadly all the measures being implemented under the financial reform ct. It’s a good bill that will go a long way toward helping us avoid another financial meltdown like that of 2008. I’ll just mention one that I think is urgent—speculative position limits.

The issue of speculation has gotten a lot of attention in energy, agricultural and metals markets this year. Many qualified people think it’s contributed to $4 gas prices. Speculation has grown so rapidly in commodity markets that we must place reasonable limits on the sizes of positions any one speculator can have at any one time. Otherwise, we run the risk of consumers paying a Wall Street premium for the things they buy.

LL: How much of a monetary impact does "cheetah traders" have on the exchanges?

BC: High frequency traders create enormous volume on exchanges. Their positions may be relatively small at any one time and they typically have a flat position at the end of the day. But, their sheer speed as they try to pick up microdollars in milliseconds makes for a volume of transactions that was unheard of even ten years ago.

LL: Are there any "unintended consequences" you are trying to avoid when it comes to this regulation reform?

BC: As to unintended consequences, we are listening carefully to market participants in this iterative process of rulemaking to get their input on consequences of proposed rules. We want to make sure that, in this rulemaking process we don't cause harm to what isn't broken. If things work well now, we want that to continue. The new rules will certainly change the swaps regulatory landscape dramatically, and so we need to proceed with very careful scrutiny (and again, listening to participants) to make sure we don't over-regulate or cause unnecessary burdens.


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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."