CFTC wants proximity-based advantages available to all

Date: Tuesday, June 15, 2010
Author: Investment Executive

U.S. derivatives regulators are proposing rules that require exchanges that offer co-location services to provide equal access to those services so that certain market players can't gain an unfair advantage.

The U.S. Commodity Futures Trading Commission proposed a rule Friday that specifies requirements for exchanges that offer co-location and/or proximity hosting services to market participants, which includes provisions relating to equal access, fees, latency transparency and third party proximity hosting service providers.

Specifically, the provision relating to equal access would require that co-location and proximity hosting services be available to all qualified market participants willing to pay for the services, the CFTC reports. The provision relating to fees “would ensure that cost is not used as a means to deny access to some market participants by pricing them out of the market”, it adds.

Additionally, the rule would mandate disclosure of the “longest, shortest and average latencies” for each connectivity option. And, the provision relating to third-party providers would ensure that they can continue to provide hosting services and that exchanges could obtain information about market participants, their systems and their transactions from third-party providers sufficient to carry out self-regulatory obligations.

The issue of co-location services and whether that can give some traders an unfair advantage is one that is preoccupying many securities regulators. At a conference of international securities regulators in Montreal Thursday, Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, indicated that regulators are examining the use of co-location, along with the proliferation of dark pools, and the rise of high-frequency traders, as critical elements of its work to bolster investor confidence by ensuring that the equity market structure is as fair as possible.

The CFTC said that it continues to study other issues related to high frequency trading, including evaluating the impact of high frequency trading on regulated markets and firms and on price discovery and risk management functions.