US regulator proposes new rules for 'cheetah' traders

High-frequency traders should register with the government, do more testing of software and face penalties for every second that they break the law, a top U.S. regulator said on Tuesday in proposing new rules for so-called "cheetah" traders.

Pointing to a string of software glitches, including Knight Capital's $440 million loss in August, Commodity Futures Trading Commission member Bart Chilton said regulators "need to get a grip on what is going on in markets with technology."

The proposals by Chilton, in prepared remarks at the Allegro Customer Summit in Dallas, Texas, came as officials at the U.S. Securities and Exchange Commission are mulling the introduction of new rules to keep computer errors from spiraling out of control.

The SEC has refocused its attention on the issue following a string of high-profile software trading problems this year, from Knight Capital to those that plagued Nasdaq OMX during Facebook Inc's May 18 initial public offering.

SEC examiners are reviewing questionnaires sent to brokerages seeking more information on controls surrounding their automated order-processing systems. Earlier this month, the SEC convened a conference to get ideas from the industry.

One topic that dominated the discussion was the possibility that brokerages and exchanges might be required to deploy "kill switches" if computer errors threaten to wreak havoc on markets.

Chilton said he supports the idea of kill switches.

But beyond those, Chilton said the CFTC needs more fire-power to go after "a rogue cheetah." To do this, he said, the agency should revamp how it calculates fines.

Instead of basing fines on violations per day, he said the CFTC should base them on violations per second a change he claimed will deter companies from breaking the law and be more aligned with how markets operate.

"Under our statute, we can fine a miscreant $140,000 per violation and that used to be sufficient. That dollar figure made sense in yesterday's world of human-to-human trading. But it doesn't work in these markets," Chilton said.

"If you're making millions in seconds, then you should be liable for fines for bad conduct, counted in seconds," he said.

In addition to tougher fines and kill switches, Chilton said high-frequency traders should also be required to conduct more testing, register with regulators and install specialized technology to prevent wash trading, an illegal practice of simultaneously buying and selling the same shares or contracts to affect trading volume artificially.

© Thomson Reuters 2012