[Congressional Record (Bound Edition), Volume 159 (2013), Part 6]
[Extensions of Remarks]
[Pages 8213-8214]
[From the U.S. Government Publishing Office, www.gpo.gov]




   INTRODUCTION OF THE PROTECTION FROM ROGUE OIL TRADERS ENGAGING IN 
                 COMPUTERIZED TRADING, OR PROTECT, ACT

                                 ______
                                 

                         HON. EDWARD J. MARKEY

                            of massachusetts

                    in the house of representatives

                         Thursday, June 6, 2013

  Mr. MARKEY. Mr. Speaker, today, I am introducing the Protection from 
Rogue Oil Traders Engaging in Computerized Trading, or PROTECT, Act. I 
am introducing this bill because we need some common-sense rules and 
regulations on this growing element of trading. High speed traders are 
pursuing increasingly creative and potentially risky strategies, and if 
we've learned anything from the last decade, it's that Wall Street 
shouldn't be left to experiment without some regulatory supervision.
  High speed trading, better known as high frequency trading, is 
trading driven by computer algorithms that place buy and sell orders 
automatically. Once set in place, these algorithms run until they are 
taken offline, and they can be programmed to trigger trades by just 
about any event: by a commodity's price ticking up several trades in a 
row, by small differences in the price of a commodity between different 
exchanges, even by the appearance of certain key words in social media. 
These algorithms operate at terrifically fast speeds--they can trigger 
trades in milliseconds or even microseconds. As Futures Magazine 
reported back in 2011, ``the main activity of HFT is speed. While some 
such algorithms exist, the majority of high-frequency traders are 
making a bet like everyone else and attempting to gain an edge through 
speed.''
  High frequency trading is becoming the dominant form of trading in 
our commodity futures markets. Prior to 2006, the New York Mercantile 
Exchange did not even allow electronic trading to occur while the 
markets were open. Yet, high frequency trading has exploded over the 
last seven years. According to one estimate by Sandler O'Neill and 
Partners L.P., high frequency trading was responsible for 47 percent of 
trade volume in futures markets in 2008 and now generates 61 percent of 
futures market volume. That's a torrid increase in only a few years, 
and it occurred despite commodity prices crashing during the 2008 
financial crisis.
  High frequency trading is changing the composition of our markets, 
and it's imperative that regulators have the ability to keep up with 
that change. Twenty-three years ago, I authored and helped enact the 
Market Reform Act of 1990, which gave the Securities and Exchange 
Committee the power to regulate practices that caused excessive 
volatility in our equities markets. As I informed former SEC Chairman 
Elisse B. Walter in January via letter, I believe the Market Reform Act 
empowers the SEC to take steps to regulate high frequency trading in 
equities. In response to my letter, the SEC confirmed that the Market 
Reform Act provides a ``valuable source of authority'' regarding 
excessive volatility and that the Commission is contemplating using it 
and other authorities to regulate high frequency trading in the 
equities markets.
  Unfortunately, the rising role of high frequency trading in futures 
has not been fully appreciated until recently, and the Commodity 
Futures Trading Commission does not currently have explicit 
authorization to regulate high frequency trading in futures. As a 
result, the only protection we have at present is Wall Street's 
willingness to self-regulate. And as we all viscerally experienced 
during the last six years of a financial crisis and devastating 
recession prompted by risky Wall Street investments, when Wall Street's 
experiments blow up, Main Street catches on fire.
  The PROTECT Act will ensure that CFTC has the power to step in when 
necessary to protect Main Street companies and consumers from trading 
explosions caused by high frequency trading. This bill requires all 
futures traders making use of high frequency trading

[[Page 8214]]

to register with the CFTC. It mandates that futures traders using high 
frequency trading technology establish reasonable safeguards on their 
systems. It prohibits simultaneous purchase and sell orders for the 
same commodity contract in significant quantities using high frequency 
trade technology. These so-called ``wash trades'' can be used to 
manipulate markets and generate an artificial appearance high levels of 
trading activity are occurring. It empowers the CFTC to establish rules 
and regulations on high frequency trading to address fraud, 
manipulation, or disruptive practices or that are otherwise ``in the 
public interest.'' And it raises penalties for market manipulation from 
$140,000 for companies to $10,000,000 or triple the total amount of 
proximate losses. Given that our futures markets involve trillions of 
dollars in trades, it's critical that the scale of the penalties match 
the size of the market.
  High frequency traders are racing to develop ever more sophisticated 
technology because a technological advantage in this field can be worth 
millions of dollars. Yet, the commodity markets do not exist just for a 
few firms dabbling in high frequency trading--they are important tools 
for hedging and price discovery, and we should not allow the market's 
proverbial tail to wag the dog. Moreover, the actions of a few Wall 
Street HFT firms do not just affect Wall Street. High frequency traders 
can exact a hidden tax on other market participants by inserting 
themselves between buyers and sellers, and portions of that tax are 
then passed along to consumers. And when our markets crash, retirement 
accounts can be depleted, businesses can go bankrupt, and people can 
lose their jobs.
  As the CFTC says on its website, ``The CFTC's mission is to protect 
market users and the public from fraud, manipulation, abusive practices 
and systemic risk related to derivatives that are subject to the 
Commodity Exchange Act, and to foster open, competitive, and 
financially sound markets.'' It is critical that the CFTC have the 
power to regulate high frequency trading so that rogue traders do not 
get in over their heads and damage the rest of the economy. The PROTECT 
Act will ensure that some common-sense rules can be set over high 
frequency trading in our futures markets, and I urge all of my 
colleagues to co-sponsor this critical legislation.

                          ____________________