Implementing financial regulatory reform country by country without international harmonization would ‘open the door for regulatory arbitrage or trading migration to the least or most poorly regulated trading environments,’ warns a commissioner at the US Commodity Futures Trading Commission (CFTC).
Bart Chilton, in remarks prepared for delivery at the Goldman Sachs Global Commodity Conference in London yesterday, said technology and speed have made the need for market harmonization necessary.
‘If the flash crash had taken place in the morning on May 6, when EU markets were open, it could have instigated a global economic event,’ he observed. ‘As it took place in the mid-afternoon, it was primarily limited to US markets.
‘Folks screaming at each other in trading pits are quickly becoming a thing of the past. Instead, computers are screaming at each other all day and all night – most times regardless of time zones around the world.
‘To the extent that we can approximate harmonization, we will be better off individually and collectively. The EU doesn’t have to do what the US does. The US does not have to do what Brazil or Japan or India does. That said, solid but appropriate regulation globally will lead to greater confidence and greater opportunities for consumers, businesses, markets and economies.’
Chilton also said regulators should consider a ‘kill switch’ for high-frequency trading (HFT) programs if they ‘become feral’, such as the programs that hit the market during the flash crash last May. He said HFT accounts for roughly half the trades in the EU and a third of the trades in the US, adding that market participants are global. ‘The third largest trader by volume on the Chicago Mercantile Exchange is based in Prague,’ he explained.
He further suggested that trading programs be tested by exchanges before they are allowed to go live, and that after a market problem, regulators and exchanges should simulate the problem, much as the airline industry studies the causes of an airliner crash.
Chilton warned the audience of potential risks posed by growing speculation in commodity futures contracts. ‘We need speculators. Without them, there is no market,’ he said. ‘But the sheer size of excessively concentrated speculative interests has the potential of moving markets, of influencing true price discovery. That can make life difficult for the commercial hedgers who use markets to manage commercial business risks.’
Speculative contracts have increased 64 per cent in energy commodities and at least 20 per cent in metals and agricultural commodities between June 2008 and January 2011, he added.
Chilton was echoing the remarks of CFTC chairman Gary Gensler who last week told the European Parliament in Brussels, Belgium that financial market reform would require a comprehensive, international response.