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93–030 PDF 2015

S. HRG. 113–559 

HIGH FREQUENCY AND AUTOMATED 

TRADING IN FUTURES MARKETS 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MAY 13, 2014 

Printed for the use of the 

Committee on Agriculture, Nutrition and Forestry 

( 

Available via the World Wide Web: http://www.fdsys.gov/ 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

DEBBIE STABENOW, Michigan, Chairwoman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

SHERROD BROWN, OHIO 

AMY KLOBUCHAR, MINNESOTA 

MICHAEL BENNET, COLORADO 

KIRSTEN GILLIBRAND, NEW YORK 

JOE DONNELLY, INDIANA 

HEIDI HEITKAMP, NORTH DAKOTA 

ROBERT P. CASEY, Jr., PENNSYLVANIA 

JOHN WALSH, MONTANA 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

PAT ROBERTS, Kansas 

SAXBY CHAMBLISS, Georgia 

JOHN BOOZMAN, Arkansas 

JOHN HOEVEN, North Dakota 

MIKE JOHANNS, Nebraska 

CHARLES E. GRASSLEY, Iowa 

JOHN THUNE, South Dakota 

CHRISTOPHER J. ADAMO, Majority Staff Director 

JONATHAN J. CORDONE, Majority Chief Counsel 

JESSICA L. WILLIAMS, Chief Clerk 

THOMAS ALLEN HAWKS, Minority Staff Director 

ANNE C. HAZLETT, Minority Chief Counsel and Senior Advisor 

(II) 

(III) 

C O N T E N T S 

Page 

HEARING(S): 

High Frequency and Automated Trading in Futures Markets ............................ 1 

Tuesday May 13, 2014 

STATEMENTS PRESENTED BY SENATORS 

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, Chairwoman, Committee on Agriculture, Nutrition and Forestry ............................ 1 

Cochran, Hon. Thad, U.S. Senator from the State of Mississippi ....................... 2 

Panel I 

McGonagle, Vince, Director of the Division of Market Oversight, Commodity 

Futures Trading Commission, Washington, DC ................................................ 3 

Duffy, Terrence, Executive Chairman and President, CME Group, Chicago, 

Illinois ................................................................................................................... 5 

Kirilenko, Andrei, Ph.D., Professor of the Practice of Finance, MIT Sloan 

School of Management, Cambridge, Massachusetts ......................................... 6 

APPENDIX 

PREPARED STATEMENTS: 

Thune, Hon. John ............................................................................................. 24 

Duffy, Terrence ................................................................................................. 27 

Kirilenko, Andrei .............................................................................................. 31 

McGonagle, Vince ............................................................................................. 38 

DOCUMENT(S) SUBMITTED FOR THE RECORD: 

Duffy, Terrence: 

CME Globex Risk and Volatility Mitigation Tools-Appendix A .................... 54 

QUESTION AND ANSWER: 

Duffy, Terrence: 

Written response to questions from Hon. Charles Grassley ......................... 62 

Written response to questions from Hon. John Thune .................................. 63 

Kirilenko, Andrei: 

Written response to questions from Hon. Charles Grassley ......................... 67 

Written response to questions from Hon. John Thune .................................. 68 

McGonagle, Vince: 

Written response to questions from Hon. John Thune .................................. 70 

(1) 

HIGH FREQUENCY AND AUTOMATED 

TRADING IN FUTURES MARKETS 

Tuesday May 13, 2014 

UNITED STATES SENATE, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, Washington, DC 

The Committee met, pursuant to notice, at 10:03 a.m., room 

328A, Russell Senate Office Building, Hon. Debbie Stabenow, 

Chairwoman of the Committee, presiding. Present or submitting a statement: Senators Stabenow, Brown, Klobuchar, Gillibrand, Donnelly, Casey, Cochran, Chambliss, and 

Thune. 

STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR 

FROM THE STATE OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

Chairwoman STABENOW. Good morning. This Senate Agriculture, 

Nutrition and Forestry Committee will come to order. 

Thanks very much to our witnesses today for their information, 

expertise. We thank all of our members being here at this very, 

very important hearing. 

For centuries, commodity markets have been about connections 

between buyers and sellers. But those connections have changed— 

the days of ‘‘the pit’’ as the main form of trading are gone. 

Today, the most important connections are fiber optic—information can be transmitted at nearly the speed of light. Powerful computers with complex programming have the ability to execute many 

thousands of trades in the time it takes two traders to use hand 

signals. 

While advancements in technology have improved the markets in 

many ways, we are also faced with new challenges, which we are 

here today to discuss. As markets and trading change, so must the 

oversight. To put it simply: the men and women who have the public trust to oversee these markets must have the tools and resources to keep up with the markets they are overseeing. 

With high-frequency trading in the news lately, it is important 

to remember there are significant differences between the securities and futures markets—both structural and regulatory. While 

the markets are linked, as we saw during the Flash Crash, some 

of the concerns raised about equities markets are not applicable to 

the futures markets. 

Today’s hearing will focus on some of the changes brought about 

by technology. Just as automated trading can take many forms, including algorithmic trading and high frequency trading—there are 

2 

many different perspectives on the costs and benefits of these strategies. We will hear some of those perspectives today. 

We will also ask some questions: Has automated trading improved price discovery in futures markets? Does automated trading 

make it easier to manage risk for our farmers, ranchers and end 

users; or does it create risk? Are the regulators, exchanges, and 

other market participants sufficiently managing these new challenges? 

These markets have changed dramatically over the years. For a 

21st Century market, we need a 21st Century regulator. That 

means the CFTC needs the right authority and the right tools to 

ensure that markets are working. That means they need enough 

people, and it means they need up-to-date technology. 

This hearing is not only a matter of oversight, but part of the effort to reauthorize the Commodity Futures Trading Commission, 

and affords us the opportunity to evaluate what changes might be 

necessary to protect our markets. 

Thank you to the witnesses who have come here today, who represent an important cross-section of views. As we move forward, we 

will continue to listen to the concerns of all market participants, 

including farmers and ranchers; pension funds and mutual funds; 

and proprietary firms and consumer groups, to best ensure stability 

in today’s futures markets. 

Now, I will turn to my friend and the distinguished the Ranking 

Member of the Committee, Senator Cochran. 

STATEMENT OF HON. THAD COCHRAN, U.S. SENATOR FROM 

THE STATE OF MISSISSIPPI 

Senator COCHRAN. Madam Chairman, thank you for convening 

the hearing. 

The Committee continues to explore today reauthorization of the 

Commodity Futures Trading Commission. It is an important opportunity for us, therefore, to hear from industry users of futures markets to get their suggestions, if there are needs that we should 

know about, to help improve the integrity of the process and the 

technology as well. 

Over the years, we have seen commodity trading evolve from a 

person-to-person transaction into sophisticated, complex trades 

that span the globe and take only fractions of a second to complete. 

Automated trading has allowed the marketplace to grow and become more efficient. 

But in light of these advances, it is important that we ensure the 

CFTC is discharging its responsibility as the primary regulator of 

futures markets. 

There have not been reports of rampant abuses in the futures 

markets relating to high frequency trading, but we need to be sure 

that we have a framework of regulations and legal provisions in 

the statutes that guards against abuses and protects the integrity 

of this important marketplace. 

Thank you. 

Chairwoman STABENOW. Thank you, very, very much, Senator 

Cochran. 

I am pleased to introduce our panel of witnesses that we have 

with us today. First, we have Vincent McGonagle, who is the DirecVerDate Nov 24 2008 17:33 Feb 23, 2015 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\93030.TXT MICAH
3 

tor of the Division of Market Oversight at the Commodity Futures 

Trading Commission where he oversees the registration and oversight of trade execution facilities. 

Since 1997, Mr. McGonagle has served as a variety of roles at 

the CFTC, most recently as a Senior Deputy Director of Enforcement in the Division of Enforcement. We thank you very much for 

your work. 

Our second witness is a familiar face to the Committee. Welcome 

back. Mr. Terry Duffy is the Executive Chairman and President of 

the CME Group. Mr. Duffy has been a member of CME since 1981, 

the Executive Chairman since 2006 and took on the Chairman’s 

role in 2012, also served as Vice Chairman of the CME Group 

Foundation in 2003. 

Mr. Duffy was appointed by President Bush as a member of the 

Federal Retirement Thrift Investment Board, a position that he recently left. Welcome again. We are glad to have you. 

Finally, we have Dr. Andrei Kirilenko, Professor of the Practice 

of Finance at MIT’s Sloan School of Management. Before joining 

MIT, Dr. Kirilenko served as the Chief Economist at the CFTC for 

four years until December 2012, and again, we were much appreciate your expertise and willingness to be with us today. 

We will move ahead. I think all of you know we welcome any 

written testimony. We will ask that your verbal testimony be limited to five minutes so we have enough time for questions, but we 

certainly welcome any additional written testimony you would like 

to leave with the Committee. 

Mr. McGonagle, your testimony please. 

STATEMENT OF VINCE MCGONAGLE, DIRECTOR OF THE DIVISION OF MARKET OVERSIGHT, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, D.C. 

Mr. MCGONAGLE. Good morning, Chairwoman Stabenow, Ranking Member Cochran and members on the Committee. Thank you 

for the opportunity to appear before you today. 

My name is Vincent McGonagle and I am the Director of the Division of Market Oversight at the Commodity Futures Trading 

Commission. I am pleased to appear before the Committee to provide an overview of the Commission’s Concept Release on Risk 

Controls and System Safeguards for Automated Trading Environments. 

Together with a number of rules applicable to trading platforms 

and market participants adopted since passage of the Dodd-Frank 

fact, the Concept Release is a proactive effort to evaluate technology driven changes in derivatives markets. 

Over the past decade, automated order generating and trade 

matching systems have been enhanced. There has been a growth 

of interconnected automated markets and the role of humans and 

markets has changed. 

The Concept Release contains a range of best practices, existing 

commission regulations, and potential concerns around automated 

trading for comprehensive public discussion. 

The Commission solicited public comment on 124 separate questions what catalog existing industry practices. Fundamentally, the 

Concept Release asked whether existing risk controls are sufficient 

4 

to match trading technologies of modern markets. We focused on 

the automated trading environment looking at the progression of 

orders generated by the automated trading system or an ATS to 

the clearing firms that guarantee customer orders and then on to 

execution by trading platforms. 

The Concept Release also addresses the big ATSs themselves. We 

sought comment concerning whether high frequency trading should 

be defined or otherwise classified as a registrant. 

The Concept Release grouped 23 potential risk controls and other 

measures into four general categories. Pre-trade risk controls, posttrade reports, design testing and supervision of standards for the 

automated trading systems, and other measures such as market 

structure. 

Pre-trade with controls are designed to prevent and minimize errors or disruptions from reaching trading platforms. This category 

addresses message rates, execution throttles, and maximum order 

sizes. Pre-trade risk controls could apply to some or all trading 

firms, the ATSs, clearing firms or trading platforms. 

Post-trade reports will confirm receipt of an order or an executed 

trade or otherwise report an error. 

The third category, system safeguards. We looked at safeguards 

for the design, testing, and supervision of automated trading systems. We also asked about kill switches effectively canceling all 

working orders that facilitate an emergency intervention in the 

case of a malfunctioning ATS. 

Turning to market function and structure, we asked whether exchanges should publish market quality indicators describing trading activity and other associated metrics. 

For market structure, we asked whether exchanges should 

amend their trade matching systems. An example listed includes 

whether trading should take place in a batch auction rather than 

the continuous trade matching system. 

We received 43 comments to the Concept Release which raised 

a range of opinions. Some commenters questioned whether certain 

risk controls could slow creation or transmission of orders, creating 

a competitive disadvantage for firms that adopt them unilaterally. 

Other commenters expressed concern about the speed of trading, 

including within exchange order books and suggested steps to reduce any potential advantages that come with speed. 

Other commenters suggested, however, that further regulation in 

this space would quickly become obsolete as technologies evolve. 

Some pointed to industry-led best practices and safeguards rather 

than Commission regulation as an appropriate response. 

The Commission has a responsibility to ensure preservation of 

price integrity within these critical markets. The Concept Release 

invited a public dialogue in order to make an informed recommendation to the Commission as to whether and what further 

role in the market, market participants, and the Commission 

should take in automated trading. 

I will be happy to answer any questions. Thank you. 

[The prepared statement of Vince McGonagle can be found on 

page 38 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Duffy, welcome. 

5 

STATEMENT OF TERRENCE DUFFY, EXECUTIVE CHAIRMAN 

AND PRESIDENT, CME GROUP, CHICAGO, ILLINOIS 

Mr. DUFFY. Thank you. Good morning, Chairwoman Stabenow, 

Ranking Member Cochran, members of the Committee, thank you 

for allowing me to express the views of the CME Group on a very 

important topic, high frequency trading. High frequency trading 

has been the focus of many negative comments, much of which has 

been based on misinformation when it comes to futures markets. 

First, let me say that I strongly agree with regulators, in both 

the futures and the equities markets, that the futures markets are 

not rigged. To the contrary, the futures markets today are more 

open and accessible than ever before. 

It is important to take a step back and discuss the market as a 

whole. Futures markets have evolved from a floor-based model to 

an electronic model at the demand of our customers who sought 

immediate execution and confirmation. 

CME Group responded to its diverse and global customer base 

including our banks, hedge funds, farmers and ranchers, commercial producers and merchandisers, and other constituents. 

Our innovative implementation of electronic trading opened the 

markets in a profound way. It increased liquidity and tightened 

bid/ask spreads to the benefit of our customers. They rely on deep 

liquid markets to achieve their risk management and investment 

objectives. 

Without doubt, the increased speed of electronic trading has challenged us to ensure that our markets operate with integrity and 

are fair and open to all customers. 

CME Group has been focused on this task for years. We have 

worked closely with this Congress, our regulators, and customers 

to maintain a level playing field. 

We use a central limit order book. The identity of traders and 

firms is protected from disclosure on all their bids, offers, and execution reports. No one can see an order prior to them hitting our 

match engine and being made available on the order book. 

Our market data is sent to everyone at once. While customers 

have several options in terms of how they can receive data from us, 

we do not restrict access. We maintain a complete and comprehensive audit trail of every message, every order, and every trade. 

Orders entered via automated systems and the traders who operate them are identified in the audit trail. This allows us to monitor 

our markets which we do through sophisticated surveillance and 

the monitoring technology backed by experienced investigators. 

CME promotes market stability through industry leading risk 

controls. These include pre-execution risk controls, price banding, 

stop-logic functionality, velocity-logic functionality, and messaging 

volume controls. These controls in all instances automatically reject 

irregular orders caused, for example, by an order entry or a malfunction of an algorithm. 

I would like to talk a little bit about co-location. It is a topic that 

has received a lot of attention lately. In many cases, the coverage 

includes misinformation about how these facilities actually operate. 

Co-location in our market provides equal access. It used to be 

that the benefit of speed from proximity was available only to tradVerDate Nov 24 2008 17:33 Feb 23, 2015 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\93030.TXT MICAH
6 

ers who could buy real estate near an exchange or where he or she 

thought the server would be. 

Because of co-location facilities, every trader has access to co-location. This includes everyone from small retail participants to the 

largest of Wall Street banks. Everyone in our facility connects with 

the same length fiber, so there are no unequal location advantages. 

This is one of the true benefits of our co-location facilities. 

Finally, something that this Committee is deeply aware of, but 

has been largely ignored by the public, is that futures markets are 

very different from equities markets. Many of the complaints 

against high frequency trading in equity markets simply do not 

apply to the U.S. futures markets which have a completely different market structure. 

The multilevel protections I described a few minutes ago are specific to our markets at CME. We think this structure strikes the 

right balance of regulating the market without inhibiting true price 

discovery. 

The balance of regulation and market surveillance, along with 

deep pools of liquidity, give market participants the confidence they 

have come to expect as they rely on our markets to effectively manage their risk. 

I look forward to answering your question this morning. Thank 

you. 

[The prepared statement of Mr. Duffy can be found on page 27 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Dr. Kirilenko, welcome. 

STATEMENT OF ANDREI KIRILENKO, PROFESSOR OF THE 

PRACTICE OF FINANCE, MIT SLOAN SCHOOL OF MANAGEMENT, CAMBRIDGE, MASSACHUSETTS 

Mr. KIRILENKO. Thank you good morning, Chairwoman Stabenow, Ranking Member Cochran, Committee members. I am honored to appear before you today at the hearing on high frequency 

and automated trading in futures markets. 

It is not so long ago that futures were traded by human traders 

in face-to-face markets. An open outcry market was visible to the 

human eye. Traders had names, served designated functions, and 

occupied specific locations on the trading floor. 

It was in the last decade that trading floors have been replaced 

by server farms and the traitors have been replaced by anonymous 

algorithms. Automated markets came with the promise of using 

faster and cheaper technology to drastically lower execution costs 

and improved price discovery for fundamental market participants, 

farmers, ranchers, manufacturers and pension fund managers. 

For investors who want to buy or sell 100 shares or a couple of 

futures contracts, this process seems to have been realized. They 

can do it at narrow bid-ask spreads, greater market depths, and 

prices that can be discovered around the clock. 

Then on May 6, 2010 came the Flash Crash. The events of May 

6, 2010 were blamed on high-frequency traders, a new breed of secretive, hyperactive trading algorithms that take advantage of anyone trying to trade on size. 

7 

Within hours after the Flash Crash, my colleagues at the CFTC 

and I began looking into the trading activity in the mini-futures 

market which provides price discovery for the broad U.S. stock 

market. 

We discover that on May 6, 2010 HFTs, as defined by us, did not 

cause the Flash Crash but did contribute to the extraordinary systemic market event which was triggered by a large sell program in 

the mini-futures executed over a short period of time. 

Systemic implications of high-frequency trading in the mini-futures prompted us to study the inner workings of the HFT industry. We found that over a two-year period the HFT industry remained dominated by a small number of fast and aggressive incumbents. 

These incumbents earned high and persistent returns while taking little risk. For some reason, competitive market forces did not 

seem to fully work and benefits of automated markets may not 

have been fully realized for everyone. 

Instead of competing to provide best execution to customers, incumbent HFTs seemed to be engaged in a winner takes all arms 

race for smaller reductions in latency. 

This explains why many regulators and policymakers decided to 

focus on latency type measures to slow things down, to put in 

speed bumps, or to remove the speed advantage of HFTs. 

The subject of today’s hearing, high-frequency and automated 

trading, lies at the intersection of four highly specialized fields, regulation, finance, technology, and data processing. I have specific 

recommendations for each of these areas. 

In terms of regulation, I recommend creating a broad definition 

of automated brokers and traders, similar to what used be called 

floor brokers and traders in human-based markets. Regulators 

need to regain the ability to be on top of all the active traders and 

their markets. 

In terms of finance, I recommend that regulators closely examine 

whether competitive market forces are eroding the high concentration of the HFT industry. The competitive market forces are not 

working among the black boxes. Regulators cannot continue to rely 

on industry-suggested solutions and need to step in. 

In terms of technology, I recommend that automated exchanges 

report latency measurements through the market feed. Latency has 

become as important as prices and quantities. 

In terms of data processing, I recommend that automated futures 

exchanges continue to broaden the use of short trading pauses and 

reopening auctions. This functionality is not without a cost but the 

benefits to public confidence especially for the slower public are 

worth it. 

For the public to remain confident in automated futures markets, 

federal regulators need to demonstrate that they have upgraded 

their operations accordingly. This requires not only a substantial 

investment in new technology but an equally, if not greater, investment in human talent. 

Regulators should also ask academia for help dealing with the 

new challenges that they face. We are here to be of use. 

Thank you very much for the opportunity to testify before you 

today. 

8 

[The prepared statement of Mr. Kirilenko can be found on page 

31 in the appendix.] 

Chairwoman STABENOW. Thank you very much to each of you. 

Dr. Kirilenko, let me start with you. You mentioned that some 

have said that we are now in an arms race as it relates to technology. When we look at these markets, on the one hand we do 

know it is different. It is not fragmented like the securities markets. 

On the other hand, we are talking about greater and greater 

technology, and speed, and the whole question of whether or not 

the risk associated with higher trading speeds outweigh the benefits both in terms of managing risk and price discovery. 

What would be your answer to that, looking broadly at the issue 

of speed versus what we are doing in these particular markets in 

allowing people to use these markets to manage their risk and for 

price discovery? 

Mr. KIRILENKO. Senator, thank you very much for your question. 

It is a critical question in these markets. 

What we found empirically by looking at trading in particular, 

very important futures contract is the HFT industry, the HFT 

firms who operate in the industry is highly, highly concentrated. 

What happens when markets become concentrated like this is 

that it creates an environment, a winner takes all type of environment where instead of focusing on the needs of customers, intermediates start focusing on how they out compete their peers, if you 

will, because whoever is one nanosecond late is not going to get the 

trade. 

Therefore, what we might be witnessing is potentially socially inefficient investment in technologies that do not necessarily benefit 

the end users. 

Chairwoman STABENOW. Thank you. Would the smaller retail investor notice if the market slowed down the speed of trading by 

milliseconds or nanoseconds? 

Mr. KIRILENKO. The thing that is very clear that automated markets are bearing the fruit of Moore’s law, if you will. The technology, technological advances much, much faster and cheaper computing power is bearing the fruit of making these prices operate 

around the clock, of having the market quality indicators really improving across the board. 

The bid-ask spread is much tighter, the depth is deeper, the volume is higher. For smaller investors, that may be what it is, they 

may be able to reap the benefits of that. 

However, the issue is that it is not—the small investors when 

they execute a few contracts in futures may be benefitting but their 

pension fund managers who are trying to execute in the size to 

manage risks of their entire portfolio may be paying the cost that 

empirically could be higher. 

It is not necessarily clear how much higher. We need to do at additional work on it. But on the whole the benefits may be 

disproportionally sort of shifting towards smaller trades and the 

few people who are inside the markets instead of a much, much 

broader constituency. 

Chairwoman STABENOW. Thank you. 

9 

Mr. Duffy, you have highlighted the importance of CME’s risk 

controls and I congratulate you on what you have been doing, messaging controls to maintain market stability, and so on. 

Do you think the CFTC should require these standards for all 

market participants? 

Mr. DUFFY. On the risk controls? For all market participants, it 

would be a little difficult to do, Madam Chairwoman. When you 

look at small participants trying to use these markets to hedge 

their crops, if you are going to put the same restrictions on them 

that you are going to do on a large participant, the cost to them 

is going to be extraordinary. 

That is why us as a good exchange, as a designated contract 

market, we oversee those markets for those smaller participants. 

That is why it is critically important. 

When you look at what is going on today and let me just counter 

to what the doctor said a little bit, futures markets are about risk 

transfer, not about capital formation. There is a complete difference 

in what they do. 

Chairwoman STABENOW. Right. 

Mr. DUFFY. Risk transfer is critically important to keep the 

spreads in line so the participants can execute at the cheapest possible price including those that are using them for risk transfer. 

The people that are trading high-frequency which are trading for 

the bid-offer are keeping the spreads very tight does a service to 

the people that are doing the risk transfer. 

High-frequency traders for the most part are there to try to capture bid-offers. Risk transfers are buying bids and selling offers. 

That is what they do and they do it at the most cost-effective rates. 

As far as the risk controls, it is critically important that they are 

all in place. I agree with both the doctor here on that. But what 

is more important here is the cost of execution for the participants. 

Chairwoman STABENOW. Dr. Kirilenko recommended that CME 

build on its success and, quote, broaden the use of short trading 

pauses and other risk controls. Would you agree with his assessment on that? 

Mr. DUFFY. On our risk controls, we, I mean the doctor said it 

in his testimony, the Flash Crash. He was correct that HFTs did 

not create the Flash Crash, and I think there is a little bit of 

miscommunication who actually did create the Flash Crash. 

As you know, there were major macro events going around Europe at a particular time. There were big issues facing this country. 

All of a sudden the market went down precipitously and somebody 

was trying to do a large hedge and then the market fell and that 

happens. 

It came back, and the person who supposedly caused this large 

Flash Crash actually sold on the way back up. I agree with the doctor it was not HFTs and it was not a large asset manager that 

caused it. It was factors from all over the world but our technology 

with the stop logic functionality, we stopped. 

In the securities world, Senator, you may know that Accenture 

went to a penny that day. We do not trade Accenture. Because of 

stub quoting, the Flash Crash allowed markets like that because 

of the market structure to go to a penny, we have what is called 

10 

stop logic functionality which, after so much, the market stops were 

six seconds, replenishes liquidity. 

We have velocity logic functionality. If there is too much velocity 

at one time, we will stop the market. If there is a big directional 

change in the market, we will also slow down the market and 

pause it. 

We have multiple controls in place to make sure these things do 

not happen. 

Chairwoman STABENOW. Thank you. I have additional questions. 

I will wait for additional rounds. 

Senator Cochran. 

Senator COCHRAN. Madam Chair, thank you for convening this 

hearing. Let me ask Mr. Duffy. Are there any changes in the law, 

the underlying law, recommended by the Commission now to try to 

address any kind of activity that should be disciplined more tightly 

or supervised more closely to protect the interests of the users of 

the markets? 

Mr. DUFFY. First, Senator, I am unaware of any particular issues 

or laws that have been changed from what has already been public 

recently that the Commission has put forth. But what I will say is 

critically important, the most important thing is that if somebody 

is acting nefariously in the market to the detriment of the participants, they should be punished to the degree, whatever the law 

will provide for. 

Senator COCHRAN. Well, does the law provide sufficient safeguards to achieve that goal? 

Mr. DUFFY. Yes. It does. 

Senator COCHRAN. Thank you. 

Chairwoman STABENOW. Thank you very much. 

Senator Brown. 

Senator BROWN. Thank you, Madam Chair, and thanks to the 

witnesses. Mr. McGonagle, nice to see you again. Thank you for 

your testimony earlier in our commodities issue. 

As we know, in the world of high-speed trading, time is measured in microseconds, millionths of a second or milliseconds, thousandths of a second. A significant portion of Dr. Kirilenko’s testimony focuses on latency, and I want to ask Mr. Duffy a question 

on latency and recall some of your statements and ask you to sort 

of explain. 

The Wall Street Journal highlighted, quote-unquote, order latency when trade information is routed to the parties to a trade before they post to the rest of the market. 

This informational advantage, if you will, allows high-speed trading firms to see which way prices are heading, as you know, and 

to trade ahead of the rest of the market on a different futures exchange, exploiting arbitrage opportunities in mere milliseconds. 

Your testimony today says that CME’s market data quota is sent 

to everyone at once. On April 23, Mr. Duffy, you told Bloomberg 

that, quote, latencies have been shrunk dramatically, but I have 

heard they may remain important contracts like the crude oil complex. 

Has CME addressed latencies across all futures contracts or are 

these delays just shorter or are they gone completely? 

11 

Mr. DUFFY. All of our market data comes out of one pipe, sir, and 

then the way you decide to acquire that is up to you. There are 

multiple ways to receive market data. It does go out all at once. 

What you are referring to, sir, I believe in the Wall Street Journal article that was written over a year and a half ago is where 

a participant would receive his confirmation of the trade but the 

market data did not hit the tape yet. 

He knew he had the trade. He was the only one who knew he 

had the trade. The rest of the world did not know he had the trade 

yet. That was what the Wall Street Journal article cited. 

We have shrunk that latency dramatically about market data to 

market confirmation. You have to understand, sir, when you have 

multiple messages coming from multiple participants coming out at 

one price, it could slow that particular system down quite, not 

quite a bit, a millisecond, and we have shrunk that dramatically. 

In most cases, sir, the time of market trade and market data 

come out instantaneously. There are situations where there could 

be a lag of a millisecond depending on what the scenario of the 

market conditions are. But that is totally separate from the way we 

distribute our market data. Everybody gets their market data at 

the same, at one pipe. They decide how they receive it. There is no 

differences. 

Senator BROWN. To clarify that, that microsecond or those few 

microseconds or a millisecond of delay, does that advantage one? 

Mr. DUFFY. No, sir, because the only person that knows that he 

has gotten the trade is himself. Correct. In our world, if he was— 

it is not like securities where he can go to an exact market such 

as IBM stock being traded on 13 different venues and potentially 

see a different price than what he received to add to that benefit. 

We do not have that in that world, sir. If you are trading a Euro 

dollar futures contract on the CME Group, you get your price confirmation but the market data had a millisecond lag, yes, you could 

go to another market and execute. It does not mean you are going 

to be right because it is not the same exact market. 

Senator BROWN. You had said earlier that CME had said that 

this issue would be addressed by the end of last year. You say you 

have addressed it? 

Mr. DUFFY. Our issue with market confirmation and market data 

for the participants is down to a millisecond. In most situations, it 

actually comes out at the exact same time. 

Senator BROWN. Mr. McGonagle, if you would comment on this. 

The CFTC was not in the process of examining this issue is my understanding when it came to light last year. Do you have comments 

on the back-and-forth of Mr. Duffy and me or CFTC’s role? Dr. 

Kirilenko, if you would weigh in too and your thoughts about this. 

Mr. MCGONAGLE. Thank you, Senator. In evaluating the concept 

or at least this conversation surrounding latency, Commission consideration could focus on sort of the quality of the information access, how much information about particular trading in particular 

contracts are their latency issues on a contract by contract, the 

Commission could certainly consider that. 

The Commission is also considering, as part of the Concept Release, the idea, this concept and regulation about impartial access. 

12 

All market participants should have the same ability to access the 

markets equally. 

Whether or where the latency might cause some disruption in 

that ability of market participants to get information, I think could 

be something that the Commission could consider. 

Mr. Duffy is talking about the ability to trade. That information 

about the trade is important information and we want to make 

sure that in evaluating these markets that the information is readily available to all market participants without disadvantage. 

Senator BROWN. Dr. Kirilenko, your thoughts. 

Mr. KIRILENKO. Thank you very much, Senator, for an excellent 

question. 

Your concerns and the public concerns about latency are fully 

justified. That is why I recommend that instead of, either the public deserves much greater transparency about what is going on inside his market. I think the latency should be reported in some 

form. 

There are various types of latencies so that the automated exchanges which, as we know, measure it with great precision could 

be held accountable and the public could understand what is actually going on. 

It may or may not be an issue but at least the public would 

know. We could also see whether different policy measures that are 

being suggested and implemented actually do have an impact as 

people think they do. 

An automated exchange is a highly, highly complex automated 

system. It has latencies because any automated complex system 

has latencies in it. Latency is not a number. It is not a millisecond. 

It is typically a distribution and not a bell-shaped one. The public 

needs to understand that and also needs to understand what to 

look for and how to measure what is being going on. 

Senator BROWN. Thank you. 

Thank you Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

Senator Chambliss. 

Senator CHAMBLISS. Thank you very much, Madam Chair, and 

let me just say off the top that with respect to your concern about 

the difference in the risk that participants in the market taken as 

well as Senator Cochran’s question, there is a major difference between one of our farmers and ranchers who is driving from field 

to field and during the course of that checks the market and wants 

to make a trade and the a major integrated company who is going 

to be trading hundreds of millions of dollars on contracts. 

We thought we had made the right kind of changes in DoddFrank but frankly we did not. I am going to be dropping a bill 

today that we have worked with industry, with CFTC as well as 

members of this Committee on—and I will be talking to the chairman about it later—that seeks to correct the end-user exemption 

that needs to be granted particularly to our farmers and ranchers 

who they deal in a different world than a major integrated company. So we will talk more about that later. 

Mr. McGonagle, CFTC officials have stated in the past that high 

frequency trading firms should be required to register so that you 

know who they are. Now, what information specifically could be 

13 

gathered from a registration regime that is not available to the 

Commission today? 

Mr. MCGONAGLE. Thank you, Senator. Currently market may be 

registered to the extent that they are an automated trading system 

or fall within some definition of what people have for high-frequency trader but they might otherwise be registered with the 

Commission in some other capacity. 

In evaluating a new registration regime, we want to take into 

consideration whether we have already captured the types of traders that we are interested in terms of obligations that they might 

have for information reporting, the level of responsibility back to 

the agency. 

One proposal or suggestion that we have in the Concept Release 

is whether we should classify floor traders, use the floor trader definition for high-frequency traders. That is something we are considering at the staff level with respect to a recommendation back to 

the Commission. 

But if there is a registrant, they will have enhanced reporting responsibilities to the agency. We will have a better idea about who 

these entities are and the question is whether we already have that 

information in a usable form and whether this additional registration requirements, the benefits of those requirements otherwise fit 

within a regulatory structure. 

Senator CHAMBLISS. Mr. Duffy, you just heard that answer and 

you talked a little bit about the information that CME Group collects on firm’s identities. Would registration in and of itself generate more information than what you receive on a trader today? 

Mr. DUFFY. No, Senator, it would not. I mean, today we have information on every market participant, every order; and every person is identified with all of their activity in CME Group. 

We tag traders in two different tags, basically what is called Tag 

50 for a regular trader, and then for an automatic trading system 

we have another tag number for it. We have all that information 

today that is accessible today to the CFTC. 

Senator CHAMBLISS. Okay. Again, Mr. Duffy, in your testimony, 

you stay, and I quote, ‘‘many of the recent complaints against highfrequency trading and equity markets simply do not apply to the 

U.S. futures markets’’. Would you elaborate a little bit on the differences. 

Mr. DUFFY. Thank you, Senator, I would be happy to. 

As I said in my testimony, when you enter an order into the 

CME system, no one knows you entered that order but yourself 

until it hits our match engine, and then the order, the transaction 

is complete. 

In some of the allegations on 60 Minutes and in the book about 

Flash Boys, if you recall, the allegation was there was an order 

sent to a particular entity. Everybody could see it and then they 

race to the 13 other exchanges that traded in front of it and then 

offered a price a penny higher. 

Well, that would be literally impossible in our world the way the 

market structure handles it because no one knows about that order 

but us. Also in a vertical silo which is what we operate in the futures market, people do not have the ability to go outside of our 

14 

walls to go race customers to different venues to beat them to that 

trade. 

As I said, what is critically important, if, in fact, that is going 

on in the securities world, that should be punished to whatever the 

law would allow people to punish them for because that is completely unacceptable. 

But in our world, we do not see how that possibly can happen. 

Now, someone says, could front running happen in your business? 

It can happen in the way they described it in 60 Minutes. People 

can always act nefariously on behalf of a client and do something 

that we obviously police for on that activity. 

Senator CHAMBLISS. If that did happen, if you had a front runner, if you do not pick it up on the front end, are you going to pick 

it up eventually? 

Mr. DUFFY. We will pick it up through patterns. We will pick it 

up through many different surveillance systems, Senator, that we 

have put in place over the last several years. We feel very comfortable that type of activity is not going on in our marketplace. 

Senator CHAMBLISS. Thank you. 

Chairwoman STABENOW. Thank you very much. 

Senator Donnelly. 

Senator DONNELLY. Thank you Madam Chair, and thanks to all 

the witnesses who are here today. 

Mr. Kirilenko, are there latencies that continue today that you 

see in the markets on a constant basis? 

Mr. KIRILENKO. Thank you very much, Senator, for this question. 

Again, I think that you are fully justified in thinking of latency 

as an important indicator that really needs to be measured and be 

made available to the public. 

There is some reason preliminary work that indicates that latency is not a number that it is a distribution of numbers, and 

there is a significant degree of randomness in the way latency accumulates within the system. 

Therefore, when we think of time priority, we need to think of 

it, this time priority being not as exact but somewhat random depending on how a message hit the exchange, depending on how 

long it took for risk safeguards to process it, depending on where 

it hit the bus and so forth. It may be delay even more or less. 

Latencies do accumulate within the system. 

Senator DONNELLY. Mr. Duffy, in your markets, do you keep an 

eye out for latencies? 

Mr. DUFFY. We do, sir. As I said earlier, we are down two microseconds on certain issues but there is also a speed of light issue 

that there is not much anybody can control. 

If your server is sitting in Chicago and you want to make a trade 

from Los Angeles, there is a difference between Los Angeles and 

Chicago as there is from New York to Chicago and conversely both 

places. 

There is a potential speed of light issue that I do not think anybody could overcome unless they figure, I do not know how they 

could figure that out. I think the doctor is right. There are inherent 

latencies in all technologies. 

Senator DONNELLY. If you see a latency issue occur, is that then 

made public that everybody knows it or how does that work? Do 

15 

you work to just fix it and keep it in effect within the house or does 

that then become public that, hey, we found that there is this latency here; this is what we are trying to do? 

Mr. DUFFY. I can tell you, Senator, that when we took our systems from trading in minutes to seconds to milliseconds to microseconds, I do not think we put out press releases or anything else 

along the way. We just continued to make the market more efficient. 

You know, to tell you a quick story, when you look even at the 

insurance business, there are commercials on television today, you 

can get a quote from your insurance company for 15 minutes or 

less and then the next commercial a guy says you can get it in two 

minutes or less. 

Speed is something that the American public and the world is 

very used to and wants more of it. There are certain limitations to 

all speed and I do not think there is anything you can do about it. 

We have narrowed it down to the smallest of millisecond. 

Senator DONNELLY. Do those latencies that are there, does that 

create an opportunity for any of the HFT firms to get a market advantage? 

Mr. DUFFY. No, I do not believe it does because if they, first of 

all, you have to be right a market regardless. You do not have anywhere else to run where the price is different. Where HFT’s could 

potentially benefit, as I said earlier, is in a fragmented marketplace where there are 13 different venues of trade for the same 

product that might have an arbitrage inherently built in them, 

well, that is where their speed could actually have an advantage. 

But when you have a product that is traded all under one roof, 

it is very difficult to have an advantage. 

Senator DONNELLY. When we talk about the equities market 

where it happened and you mentioned, hey, there are 13 different 

markets, they can see and then try to get ahead of it. When the 

orders are placed in your markets, people from other firms and 

such cannot see that is happening before hand? 

Mr. DUFFY. First, to be clear, I did not say that. 60 Minutes and 

Michael Lewis said that. 

Senator DONNELLY. All right. Understood. 

Mr. DUFFY. In our markets, what I had said is that when you 

enter an order nobody knows who put that order in but yourself 

until it hits our match engine. 

Senator DONNELLY. Okay. Mr. Kirilenko, when you look at these 

markets, what is the biggest danger that you see still now existing 

in his trading? 

Mr. KIRILENKO. I think these markets are incredibly complex, 

interconnected, automated systems. Perhaps the biggest danger lies 

in this interconnectedness where a trade executed in one part of 

the market could be transmitted across the entire universe very, 

very quickly by automated technologies, by algorithms that police 

for a small price discrepancies and the whole system becomes affected by that. 

I think the interconnectedness and inter-linkages between these 

markets I think is what is the biggest issue. I think individually 

exchanges and regulators looking at them are aware of some of the 

16 

things that they are facing. But I think this inter-linkage is something that requires a lot more attention. 

Senator DONNELLY. Okay. Madam Chair, thank you and thanks 

to all the witnesses. 

Chairwoman STABENOW. Thank you very much. I do believe we 

have Senator Casey coming, but at this point, I am going to proceed and if Senator Cochran has questions as well. 

Mr. McGonagle, could you talk from the standpoint of the CFTC 

and what is next at this point? Are you considering proposing a 

rule on automated trading practices and how do you think that the 

CFTC will proceed? 

Mr. MCGONAGLE. Thank you, Chairwoman. The Commission currently has taken, we have taken the comments back at the staff 

level. The staff is evaluating those comments in order to come up 

with a recommendation. 

While the Concept Release is not a rule writing, it can be a precursor to a rule. Our expectation is that we will evaluate each of 

these measures that we have put forward and become back to the 

Commission with a recommendation. 

But we need to do a thoughtful and diligent review of these 

issues to see whether or where the Commission action is warranted. A rule could be recommended but we are not at that stage 

at this moment. 

Chairwoman STABENOW. Mr. Duffy, interesting when you were 

saying the public wants higher speeds. I do not know if that is really true or not. 

This whole thing is quite extraordinary in terms of speed, and I 

do not know from a public standpoint if people really are asking 

for more speed. I think they want confidence and they want markets that they feel are stable and that they can use appropriately. 

But my question both to you and to Mr. McGonagle relates to the 

ability of the CFTC to keep up. If we are going to see this moving 

faster and faster at a time when the CFTC does not have the technology that is comparable to what is happening in the private sector. We have given tremendous responsibilities to the CFTC without adding the additional staff necessary to help with that. 

If we are going to say that this should be a model where it is 

not about direct regulation but more about working with the industry in a self-regulating mode, there has to be some capacity for 

oversight here that is equal to what is happening in the marketplace. 

I’m wondering, Mr. McGonagle, just from your standpoint, what 

would the agency do from a technology standpoint, what would you 

be able to do if you had additional funds? 

Mr. MCGONAGLE. Speaking specifically to the automated trading 

system environment, additional technology funds could, for example, be used. We need to supplement the staff that we have. We 

have very well-qualified staff who are conducting examinations and 

surveillance. But we would need to increase those staff levels so 

they can perform the analytics on the data that we receive. 

We would increase the data that we do receive from the exchanges. The exchanges have a wealth of information that is available to them on a buy exchange basis. We pull in trade order data 

on a T+1 the day after basis. But we would look for messaging 

17 

data, more discreet, nuanced information about these particular 

trades that could inform us on our regulatory obligations as well 

as how we conduct enforcement. 

We would see multiple benefits just in increasing technology in 

this one particular area. I mean, the Commission’s resource needs 

I think have been pretty well documented. We do face substantial 

staff shortages within DMO and within other divisions that I have 

worked at, Division of Enforcement. 

We do appreciate consideration of our resources but I defer more 

to the Commission in terms of how we could allocate resources, additional resources, if provided. But we certainly have significant opportunities that we could address if we had more people and we 

had more technology. 

Chairwoman STABENOW. Mr. Duffy, you and I have talked about 

this before, about user fees and so on. I am wondering, from your 

standpoint, would you support using funds gathered from enforcement cases to pay for agency expenses like technology and staff? 

Secondly, what if the agency funded itself with broader-based 

fees, not only on transactions but looking at other things, without 

harming the market? 

Mr. DUFFY. A couple of things if you do not mind. From an enforcement issue, today I believe all of that money has to go into the 

general Treasury of the United States and then gets allocated 

through their appropriations process. 

I think that is to keep away from the conflicts of interest of any 

particular entity feeling that participants are only being pressured 

or fined in order to fund an agency. But I do believe that there 

could be a small portion of enforcement findings to help fund an 

agency which would make sense. 

Now, what that percentage is would be up for the government to 

always decide. But if you looked at 10 to 20 percent, in that neighborhood, you could probably fund the CFTC in full if you were to 

use that portion of the enforcements to do so. 

I am not suggesting it is a good idea or bad idea but I think that 

should be at least looked at. 

Second of all, on what Mr. McGonagle said, we do have a wealth 

of information that we could share with the Commission, which we 

do share with the Commission. 

To give you an example, when the doctor referenced the Flash 

Crash, I testified before a Committee here in the Senate and we 

had every trade broken down in three hours and gave it to the 

CFTC in the same night. 

I testify two months later. The SEC still did not have their information because they do not have a consolidated audit trail. That 

is a big problem for that world. 

We have done a lot to help with the enforcement and protection 

of our marketplace. What is the most important thing for us is to 

have the credibility and to have the public confidence in the marketplace. 

To give you an example why I think that not speed is important 

but market efficiency is important, in the agricultural community 

alone when you look at the marketplace over the last year when 

the price of corn almost went in half, we were able to provide deep, 

18 

liquid pools of liquidity for farmers and ranchers and others to use 

that as a hedge vehicle. 

To protect that because their input costs are so high, because of 

land, fees, and other things. That was a great benefit these futures 

markets provide. I did not want to leave without saying that. 

I think that we do have a lot of the things in place to help the 

agency. I cannot put their budget together for them. You know, I 

think it is important for the CFTC to put forth a budget like everybody else does to see where monies are going to be appropriated, 

and then come to you to decide if you can get Congress to agree 

to give some enforcement funding so they do not have to rely on 

taxpayers alone. 

Chairwoman STABENOW. You would agree we have dramatically 

increased their responsibilities? 

Mr. DUFFY. Yes. 

Chairwoman STABENOW. We have not dramatically increased 

technology? 

Mr. DUFFY. Madam Chairwoman, as you know, I am a very big 

proponent of the Commodity Futures Trading Commission. I do not 

believe the CME has a credible business if we do not have credible 

regulator. I want to make sure that they are the envy of the world 

as far as regulation goes. 

Chairwoman STABENOW. Thank you, Senator Cochran, did you 

want to ask a follow-up? I know we have Senator Casey here. 

Senator COCHRAN. No, Madam Chair, and I do not have any 

other questions. Thank you very much for your cooperation with 

our Committee. 

Chairwoman STABENOW. Thank you, Senator Casey, welcome. 

Senator CASEY. Madam Chair, thank you very much. We appreciate your testimony, sir. I am late for your individual testimony 

but grateful for the time you give us with questions. 

I guess I wanted to start with Mr. McGonagle. I want to ask you 

in particular about the recommendations and suggestions you 

would make for us. I know you may have already walked through 

this. 

What do you think we should be most concerned about with regard to the oversight responsibility of this Committee? 

Mr. MCGONAGLE. Senator, particularly as it relates to the automated trading system environment, I think that it would be helpful 

to keep attention on CFTC as we evaluate these issues and come 

forward with a recommendation. 

Our responsibility is to ensure that our markets have integrity, 

and the interaction with this Committee about how we are fulfilling that responsibility I think is important. How we come about 

with our recommendation on the Concept Release, should we articulate that further rules are required, further communication 

with this Committee on those points I think would be helpful. 

Senator CASEY. With regard to rules that are prescriptive in nature, would those kinds of rules leave some of these entities or 

some of the practices out of regulation? What is your sense of that? 

Mr. MCGONAGLE. The concern that we have heard at least in 

comments is that prescriptive regulations in this area can be quickly outstripped by changes in technology. 

19 

Proposals that have come back to the Commission are that we 

should have more of a principle-based approach. I think the challenge that we have is sort of flexibility versus clarity. Principles 

give flexibility but they could be challenged or subject to questions 

surrounding clarity. 

We want to make sure that our market participants have a level 

playing field and that they understand the rules on that field. I 

think that is just a challenge always. 

We have some prescriptive rules in our system of regulations; 

and we have some principle space, particularly supervision rules. 

I think evaluating how those applied in our past history and going 

forward and looking at where in this Concept Release recommendations would be helpful, would help dictate whether we should go 

principles versus prescriptive. 

Senator CASEY. I know one of the things that we have to focus 

on here are best practices but I wanted to ask you. Often we have 

in our oversight responsibility, discharging that responsibility, we 

have a lot of ideas about what an agency should be doing and what 

we hoped they would be doing. 

But we do sometimes engage in what folks at the state and local 

level would say unfunded mandates, meaning thou shall do the following and good luck getting it done without resources. You may 

have already covered this and I just was not able to be here. 

But in order for you to do the job we would hope you could do 

in this area, what, if any, resource means do you have? 

Mr. MCGONAGLE. Senator, if I can talk a little bit then about resources just to give some perspective where the Division of Market 

Oversight is, in 2011 the Division of Market Oversight had a staff 

of about a 126 staff people, responsible for registration obligations, 

enforcement of the rules, our examinations staff as well as surveillance. 

There were 16 designated contract markets within CFTC’s jurisdiction that DMO had control over. Currently, we have 40 registrants, 40 registered entities, a swap execution facility, designated contract market, swap data repositories, and foreign boards 

of trade that have some registration status. 

Another 30 applicants are seeking registration status. DMO 

could be responsible for upwards of 70 different registered entities 

comprising a much broader jurisdictional swap than we saw in 

2011. My current staff load is about a 109. 

In evaluating what our responsibilities are like any agency, any 

business, we would look at our priorities, where do we get the most 

benefit, where can we have the most leverage. 

In looking at the Concept Release, I think of where there are 

areas if we were to make a recommendation that we believe would 

be the most impactful because again our goal here is market integrity and we want to make sure that we are doing our job and that 

the markets are doing their job. 

Senator CASEY. I know I am out of time but maybe I will submit 

some questions for Mr. Duffy, for both witnesses because one question I have was about how we get the balance right between focusing on risky activities but also making sure that we are not over 

regulating so that hedger’s, bona fide hedgers and end users are 

20 

not adversely impacted. But I am out of time but I will submit 

that. 

Chairwoman STABENOW. Thank you. Important questions. 

Senator Donnelly. 

Senator DONNELLY. Thank you, Madam Chair. 

Dr. Kirilenko and this is a little bit off of the direct topic—do you 

see the front running opportunity that has been talked about a lot 

recently in the equities markets, do you see that continuing in the 

equities market? What is the best way in your mind to correct 

that? 

Mr. KIRILENKO. I think the equities market is really quite different in terms of fragmentation. 

Senator DONNELLY. I understand I was just wondering if—— 

Mr. KIRILENKO. Whether or not it is continuing is an empirical 

question, Senator. I think it is a matter for the regulators to really 

understand how their markets are working to really get that consolidated audit trail to really get their staff to understand how it 

works and find the evidence of that. 

I have done little empirical work on securities markets. I am familiar with them but I would like my remarks to be based on experience and facts. 

Senator CASEY. Sure. Well then, Mr. Duffy or Mr. McGonagle, 

both of you are extraordinarily experienced. Are there things that 

you look at and you say, if in a perfect world if they could change 

this or this it might make for more secure equities market as well. 

Mr. DUFFY. You know, I will give you my opinion only because 

I cannot help myself. 

Senator CASEY. That is why I asked you. 

[Laughter.] 

Mr. DUFFY. I run a futures exchange. 

Senator CASEY. Right. 

Mr. DUFFY. I am 35 years running in the futures business. I am 

not a securities expert. But what I do understand is price discovery 

and how price discovery happens, what is the best way to get price 

discovery. 

When you have a fragmented marketplace and you have almost 

half of the U.S. equity market dark in nature, it is really difficult 

to find what is the actual value of it. 

When you have multiple exchanges trading the exact same product and you have Reg NMS requiring people to go to the best bidder offer, it is really difficult to say who has the best bidder offer 

at any given time, sir, because the markets are moving so quickly. 

One exchange could be showing IBM at a certain price plus a 

penny, another exchange that is the best bid and offer, a half a second later the other exchange is the best bid and offer, you have not 

done working your order at the first exchange yet. 

I think the system itself needs to be looked at, streamlined, and 

more efficient. I do not think it is HFTs that are the problem. I 

think market structure is the problem, sir. 

Senator CASEY. Have you detected, Mr. Duffy, in your markets, 

you have indicated, look, it cannot happen or—I do not want to 

paraphrase for you. But you do everything you can to make sure 

it does not happen in your markets. 

21 

Have you detected, do you see at times in your systems that 

some organizations have tried to figure out how to do that? I mean 

can you see that? 

Mr. DUFFY. The only way it can happen, sir, and just to make 

sure we are perfectly clear on this. The only way it could happen 

is if someone is acting on your behalf. You have given them the 

ability to act on your behalf to enter an order. 

They decide to enter an order for themselves first, yours second. 

That is the way it can happen in our world, and that is against the 

law, and we rigorously police against that type of activity. 

But on an electronic system if you are to enter your order, Senator Donnelly enters an order into the CME system, you are the 

only person that knows about that order so it is impossible to frontrun something that nobody else knows about. 

Senator CASEY. Okay. Mr. McGonagle, in today’s markets where 

millions of dollars can change hands in milliseconds, we have a system where if there are violations, the maximum penalty is $1.4 

million? Do you think that is enough to deter manipulation? 

Mr. MCGONAGLE. Thank you, Senator. The enforcement penalty 

standard looks at per violation and I think an evaluation of how 

many violations have occurred is part of the rubric that the Division of Enforcement has. 

From our perspective, we enforce authority that we have, and I 

would have to defer to others about whether more penalties are appropriate for deterrence or there are other mechanisms available. 

But looking at a penalty per violation increased recently to 1 million per violation, that is our current mandate. 

Senator CASEY. Okay. Well, I want to thank the witnesses for 

being here. 

Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

As we close, I do have one other question as a follow-up to what 

Senator Donnelly was talking about, and this regards disruptive 

trading practices. 

Mr. McGonagle, if you could tell us as we are looking at the 

Commodities Exchange Act, as we are looking at CFTC reauthorization, we gave the CFTC more authority under Dodd-Frank, to go 

after practices like spoofing and banging the close and in some 

cases changed the criminal standard from intent to reckless disregard. 

Do you think we need to revisit that? Do you think the CFTC has 

sufficient authority to go after market participants who are knowingly or recklessly disrupting the market? 

Mr. MCGONAGLE. Thank you, Chairwoman. The CFTC recent increase in authorities through substantial manipulation authority as 

well as the new disruptive trading practices, those investigations 

and associated litigation are now starting to come on line. 

We see the mandate that the Division of Enforcement has. We 

take that very seriously and we think the markets do as well. We 

are prepared to work within the jurisdiction that we have. Further 

strengthening the manipulations standard would have costs on 

market participants. I think for clarity that they would have to be 

evaluated, and I am not in a position to sort of offer another proposed recommendation. I think the authority that we have is very 

22 

useful to the agency and we are in the process of effectively utilizing it. 

Chairwoman STABENOW. Thank you. 

Mr. Duffy, did you want to respond to that? 

Mr. DUFFY. No. I think that was well said. 

Chairwoman STABENOW. Okay. Well, thank you very much we 

are about to have a vote on the Senate floor. Let me thank each 

of you for coming. This is an incredibly important topic. 

As we consider all the benefits of technology, we have got to 

make sure that market oversight is keeping up. That is our job. We 

need to work together to ensure the markets are safe for trading 

and that the regulators have the resources necessary to keep them 

safe. 

Any additional questions for the record should be submitted to 

the Committee clerk five business days from today. That is five 

p.m. on Wednesday, May 21, and the meeting is adjourned. Thank 

you. 

[Whereupon, at 11:11 a.m., the Committee was adjourned.] 

(23) 

A P P E N D I X 

MAY 13, 2014 

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(53) 

DOCUMENTS SUBMITTED FOR THE RECORD 

MAY 13, 2014 

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(61) 

QUESTIONS AND ANSWERS 

MAY 13, 2014 

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