U.S. regulators should put on hold CME Group Inc.'s plan toblock traders from engaging in transactions with themselves toensure it sufficiently restricts the illegal trades, said BartChilton, a member of the Commodity Futures Trading Commission(CFTC).

CME's plan to prevent wash trades, in which a party buys acontract from itself, should be put under review for additionaltime and not automatically take effect July 1, Chilton said inremarks prepared for a speech today at the Trading Show Chicago2013 conference. Chilton, one of three Democrats on the commission,said the agency should take additional steps to vet the CMEguidance and determine if other exchanges will have similar orbetter policies.

“Right now there are simply too many unanswered questions thatneed to be addressed from an oversight and surveillanceperspective, and potentially from an enforcement perspective,”Chilton said. “We need to take a deep breath and ensure that weknow, to the best of our ability, what might occur.”

The CFTC and Securities and Exchange Commission have increasedtheir focus on high-frequency and algorithmic trading since May 6,2010, when about $862 billion was erased from stock values in 20minutes before share prices recovered from the plunge. Regulatorshave expressed concern that some firms and electronic exchangesdon't have enough control over trades or technology glitches thatcould roil markets.

Liquidity Distorted

Chilton has said high-frequency trading firms sometimes conducttransactions with themselves in ways that distort liquidity andtransparency in derivatives markets and warrant more regulatoryoversight. He said he's asked the agency to review ifhigh-frequency firms are engaging in the trades to create “fantasyliquidity” and entice other traders into the market.

The CFTC is improving its capability to oversee high-frequencytraders and can analyze trades occurring in milliseconds, Chiltonsaid. The agency's staff have focused on trading activity primarilywhen markets were opening and closing, analyzing millions oftrades. During those periods, high-frequency traders engaged inbetween 100 and 500 trades per second in commodity markets.

“We are going to come into your dens and look and analyze withexperts your algo programs to see if you are violating the law,”Chilton said. “We won't stop at getting your instant messages, youre-mails, or your text messages.”

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