Regulators and lawmakers may have been too quick to blame high-frequency trading for Monday's late-day selloff in the petroleum futures complex, Larry Tabb, founder and CEO of TABB Group, said Thursday.
"Markets are complex," Tabb said on the sidelines of a US Senate Banking Committee hearing on computerized trading. "There's a lot of buying interest and a lot of selling interest and if something all of a sudden gets in the way of one or the other ... you wind up with these air pockets."
On Monday, October crude tumbled from $97.85/barrel to $94.83/b within a minute at 1:54 p.m. EDT.
US Representative Edward Markey, a Massachusetts Democrat and ranking member of the House Natural Resources Committee, has called on the US Commodity Futures Trading Commission to look into the role that high-frequency trading had on the drop. CFTC Commissioner Bart Chilton, a frequent critic of high-frequency trading, has said the CFTC is investigating the drop.
Tabb, a member of a CFTC working group that unveiled a proposed definition of high-frequency trading in June, stressed that while he did not know what was behind Monday's price drop, those blaming high-frequency trading did not either.
"I think [high-frequency trading] absolutely is being demonized," he said. "I think in certain cases there are reasons to demonize it, but in reality every single order than makes it to the market is managed through some sort of high-tech, high-speed routing infrastructure."
Tabb said the CFTC working group is having a "very difficult time" finalizing its high-frequency trading since the lines between traders and strategies have blurred as technology has become more mainstream.
"Increasingly, more and more long-only investors are using and vetting high-frequency strategies in their algorithms so it becomes very difficult to say, 'You're an HFT and you're not an HFT,'" he said.
During the hearing, Senator Jack Reed, a Rhode Island Democrat, said recent issues over high-frequency trading and other computer-assisted trading strategies have weakened confidence in markets. He said the rules over trading have not kept pace with the evolution of markets.
Dave Lauer, a consultant with Better Markets, a financial reform advocacy group, testified that since the May 2010 flash crash there have been "no substantial changes to market structure to prevent another one." The flash crash was caused by a single large trade of roughly $4.1 billion in the S&P E-Mini Futures Market.
