CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

Participants

• Joan Manley, George Pullen – CFTC

• Sean Castette – Getco LLC

• Colin Clark – NYSE Euronext

• Chris Concannon – Virtu Financial LLC

• Joseph Saluzzi – Themis Trading

• Larry Tabb – Tabb Group

• Greg Wood – Deutsche Bank Securities Inc

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CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

What is the definition of high frequency trading within the context of 

automated trading systems (ATS)?

• The term “HFT” has many connotations. We have approached the 

above question by focusing on how HFT provides a mechanism for 

various types of interaction with a marketplace.

• The definition is intentionally neutral with regards to trading 

strategies and avoids mentioning the following:

– Holding times

– Cancellation ratios

– Good or bad behavior, e.g. liquidity provision or market abuse.

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CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

What is the definition of high frequency trading within the context of 

automated trading systems (ATS)?

Draft Definition, May 2012:

High frequency trading is a form of automated trading that employs: 

(a) algorithms for decision making, order initiation, generation, 

routing, or execution, for each individual transaction without 

human direction; 

(b) low-latency technology that is designed to minimize response 

times, including proximity and co-location services; 

(c) high speed connections to markets for order entry; and

(d) high message rates (orders, quotes or cancellations).

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CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

The draft definition is intended to:

• Utilize carefully chosen language that has a recognized legal

interpretation.

• Emphasize a mechanical description of high frequency trading that 

is deliberately neutral regarding types of trading strategies and how 

they interact with the marketplace;

• Utilize cumulative criteria, so that only a trading system that meets 

all 4 criteria can be defined as “high frequency”;

• Provide a broad basis for other working groups to build upon, 

notably Working Group 2 (Multiple Categories of HFT) and Working 

Group 3 (Oversight, Surveillance and Economic Analysis);

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CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

(a) algorithms for decision making, order initiation, generation, 

routing, or execution, for each individual transaction without 

human direction; 

• Orders sent to an electronic marketplace1 must be generated by 

computer-based decision making – “the algorithm” - as opposed to 

being sent by a human (e.g. “point-and-click”). 

• This broad definition can include any automated trading system 

including broker- or vendor-supplied execution algorithms.

• A transaction is defined as a bid, ask, order or trade. This is 

intended to cover providing liquidity to the market as well as taking 

liquidity from the market.

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1 An electronic marketplace can be an exchange, alternative trading system, swap execution facility or other source of 

electronic liquidity.
CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

(b) low-latency technology that is designed to minimize response times, 

including proximity and co-location services; 

• The algorithm must utilize low latency technology to minimize its 

time to access the marketplace.

• This covers a broad range of solutions specifically deployed for 

reducing latency, including the hardware and software utilized to 

run the algorithm.

• To minimize network latency the algorithm should be as close as 

possible to the marketplace, and will utilize proximity and colocation solutions2 depending on what is available for the market 

place or appropriate for the trading strategy employed.

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2 Proximity and co-location services include those provided by an exchange, broker or vendor to reduce the latency of 

accessing an electronic marketplace.
CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

(c) high speed connections to markets for order entry; 

• The algorithm must utilize a high speed connection to the 

marketplace.

• This covers direct access to a market, whether through 

membership or sponsorship, or a broker or vendor supplied 

software designed to facilitate trading speed.

• If the algorithm utilizes latent broker DMA connections to the 

marketplace then it does not meet this criteria.

• Note that the definition intentionally focuses on the speed of order 

entry as opposed to the speed that an algorithm may require for 

market data, including bids, asks, trades and news feeds. 

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CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

(d) high message rates (orders, quotes or cancellations).

• Many algorithms3 meet the criteria defined in (a), (b) and (c), but to 

be considered high frequency, the algorithm must employ high 

rates of messages submitted to the market.

• The question of what constitutes a “high message rate” requires 

wider discussion since it incorporates factors such as:

– the beneficial owner behind the activity;

– the length of the observation period;

– comparison with the overall market activity during that period;

– relative concentration or fragmentation of activity.

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3 It would be challenging to tag individual trading strategies sent to the marketplace, though it is straightforward to 

identify types of connections – e.g. denoting a connection that is used for broker execution algorithms or DMA, 

vendor-specific systems, or a single participant’s proprietary trading system. Where multiple participants share the 

same broker connection, each individual firm should be clearly identified to facilitate market surveillance.
CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

Summary

• It is important to recognize that high frequency trading is a means 

rather than an end in itself, and that there are many types of 

market activity that can be potentially labeled as “HFT”;

• The definition is intended to be used in context with the findings of 

Working Groups 2 and 3, particularly with regards to identifying 

specific types of strategies that require HFT, as well as identifying 

abusive practices that should be prohibited.

• A broader definition of HFT allows for inclusion of future practice as 

well as current practice.

• A narrower definition of HFT may lead to a regulatory arbitrage. 

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CFTC Technical Advisory Committee

Sub-Committee on Automated and High Frequency Trading –

Working Group 1

Sample Reference Papers:

• Findings Regarding The Market Events of May 6 th, 2010. Report of the Staffs of the CFTC and SEC To The Joint 

Advisory Committee on Emerging Regulatory Issues, September, 2010.

• The Flash Crash: The Impact of High Frequency Trading on an Electronic Market. Kirilenko, Kyle, Samadi and 

Tuzun, May, 2011.

• The Microstructure of the ‘Flash Crash’. Easley, Lopez de Prado, O’Hara, October 2010.

• Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency. IOSCO, 

October 2011.

• The Synchronized and Long-lasting Structural Change on Commodity Markets: Evidence from High Frequency 

Data. Bicchetti and Maystre, UNCTAD, March 2012.

• Rise of The Machines: Algorithmic trading in the Foreign Exchange Market. Charbourd, Chiquoine, Hjalmarsson

and Vega, October 2009.

• Identifying Informed and Liquidity traders in Futures Markets. Fishe and Smith, September 2010.

• The Impact of High Frequency Trading on Stock Market Liquidity Measures. Kim and Murphy, July 2011.

• Low Latency Trading. Hasbrouck and Saar, October 2010.

• The Activity of High Frequency Traders. Brogaard, December 2011.

• High Frequency Trading and the New Market Makers. Menkveld, August 2011.

• A Dysfunctional Role of High Frequency Trading in Electronic Markets. Jarrow and Protter, March 2011.

• Direct Market Access in Exchange Traded Derivatives: Effects of Algorithmic Trading on Liquidity in Futures 

Markets. Karagozoglu, March 2012.

• The Volume Clock: Insights into the High Frequency Paradigm. Easley, Lopez de Prado, O’Hara, March 2012.

• High Frequency Trading and Price Discovery. Hendershott and Riordan, February 2011.

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