On August 23, the Wall Street Journal wrote an article titled “Regulator Moves on Trading.” While it was very well written, it didn’t give any background information on why the CFTC is so behind on addressing electronic trading issues.
The CFTC has a long history of being late to the party on a majority of major issues, while being reactionary on issues that have cost hundreds of millions to the trading community. Unfortunately, in Washington many fingers are pointed and no one ever seems to be held accountable.
In 2012, CFTC Commissioner Scott O’Malia gave a speech at New York University’s Law School. He said that he was putting together a committee to learn about high frequency trading (HFT) and that until he had time to learn about it he could not comment on the good and bad points. He also acknowledged that commission oversight had not kept pace with electronic trading.
I gave him a ride up to Penn Station. During our trip, I told him that I was happy he was looking into this but asked why the CFTC was so late to the party, considering the flash crash had happened a few years before. He didn’t have an answer. This was also during the MF Global meltdown, which was another major failure of the CFTC. The commission did not handle this in an efficient way, and cost many traders their livelihood, which is an entirely different topic that I would be happy to speak about.
In full disclosure, during our trip to Penn Station, we did speak about how he would like me on the HFT subcommittee. I told him there would be some people that would not want someone with my background on the committee. I traded for 22 years, was president of a local clearinghouse for 13 years, sat on the NYMEX board for seven years and was on the Executive Committee for a year. I understood what the issues were, which is why some people would not have wanted the risk of having me on board. It was not surprising that when the names of the members of the subcommittee came out, I was not on it.
If you look into the background of three out of four of the commissioners, you will see that they do not have trading, clearing or exchange experience. They are all government appointees. As much as I personally like Scott O’Malia, growing up on a small farm doesn’t make you a commodities expert. It’s a scary reality that the regulators have no experience with the products they are regulating.
Go to www.CFTC.gov and read the bio’s of the commissioners yourself. With energy being one of the biggest products traded on exchanges, there is not one commissioner with an energy trading background. I also find it interesting that the one commissioner that does have a strong finance background, Gary Gensler, is the only official who stepped away from the MF Global collapse, stating he was too close to Corzine. After Corzine got off, it came out that Gensler was not that close and should never have been taken off the issue.
As I’ve stated in the past, for the future health and safety of the commodities industry, the CFTC needs to be rebuilt with people that truly understand the markets and exchanges. Right now it’s filled with lawyers who only understand how to write rules and regulations. How can you make regulations for something you have never done?
When I was a board member and trader at NYMEX, I used to feel like banging my head against the wall when I would see the CFTC come in and blow the easy cases and settle others. They never asked the right people the right questions and weren’t feared or respected. I have offered my help many times to Scott O’Malia and Bart Chilton (See CNBC interview).
Crude Oil Speculation
After every major commodity event that has experienced major press, Washington and the CFTC have made a statement they are going after energy speculators. For example, a few years ago moments before President Obama announced the release of the SPR, crude had a massive sudden selloff. Washington announced that it was time to go after the speculators and that they were going to look into who had gotten the information beforehand.
I sent an email to Commissioner Chilton telling him that this was an easy fix that they could actually do something about to find out what happened – get in touch with the Chicago Mercantile Exchange (CME) and ask for the info from their electronic trading platform, CME GLOBEX. The data would show who put the orders in, the time, price and where they cleared. An answer would have been given immediately. There was never any follow though or announcement about what the outcome was.
For the record, I have warned the CFTC that the cleared swaps will be an issue with the exchanges. On many of the swaps there is no volume and a settlement price is just a given price at a given time. I was a member of the NYMEX board when the ClearPort Trading system was put into place (and it wasn’t put into place for the reasons people think and in time there will be issues). While clearing systems are strong, since so many clearing houses have gone out of business the system is not as secure as it once was. The CFTC not only needs to concentrate on the trading community, but make sure all exchange clearing systems and price dissemination are safe from companies, countries and individuals that seek it harm (data terrorism).
I believe the next “Too Big to Fail” will come from the commodities cleared derivatives market. In years to come when they have a cleared swap blowup and they say they’re going to look into it, you heard it here first. To prevent this from happening, the CFTC needs to get more staff with trading and clearing experience on board. Otherwise, they will keep making the same mistakes they’ve made in the past.
I’d like to see a strong CFTC that watches out for the trading community it oversees. I’m hopeful that Washington is finally turning the corner and the new rules that the commission is coming out with will finally be effective.