The Influence Of The For Profit Exchanges


The influence of the high frequency trading never ceases to amaze us.  Every time a finger is pointed at them, they usually roll out the big guns to quickly squash the issue.  Most of the time they roll out an academic to point out that HFT “adds liquidity and shrinks spreads”.  But this tactic has run into a problem with the revelation that some academics are having their research sponsored by HFT firms.  Now, it appears the HFT lobby has turned to the stock and commodity exchanges to do their dirty work for them.

The most recent example comes from the CME Group.  You may remember that recently the CFTC shut down an independent research program.  We wrote about this in a March 8th blog post titled “Why Did The CFTC Suspend Their Visiting Academic Research Program?” .  Specifically, we questioned who was the “outside person who raised questions about academic research that referenced CFTC data”?  Well, thanks to a Freedom of Information Act request from Reuters, we now know who it was that complained about the independent research program:  it was the CME Group. According to Reuters , the complaint read:

As you might expect, a number of customers of our client CME Group, Inc. have expressed their concern that … data has been shared with non-Commission employees,” said the letter, which was written by Skadden Arps attorneys Mark Young and Jerrold Salzman on CME’s behalf.

Reuters states that the CME letter caused the CFTC to temporarily shut down its independent research program.  It just so happens that this research program was producing critical academic evidence about abusive HFT activity.  In our blog from March 8th, we wrote:

Two of the best pieces of research on high frequency trading that we have read recently are Andrei Kirilenko’s  “The Trading Profits of High Frequency Traders”    and Adam Clark-Joseph’s ”Exploratory Trading” .  These two pieces of research are special because they use actual transaction level data from the CME and traced back to the original source of the trade.  Most of the rest of the HFT research reports out there rely on a sample set of data usually supplied by an exchange.

Was information really leaking from this program or is the CME just afraid that regulators are getting closer to figuring out that some of their largest clients could be manipulating the market?  According to Andrei Kirilenko, information was not leaking.  He told Reuters:

“I worked hard to ensure that this economic analysis was conducted in accordance with practices and procedures to ensure confidentiality of the data.  Analysis which was made available to the public was released in accordance with a process and in a form that was appropriate for the general public.”

It doesn’t sound like any information was leaked.  We read and reviewed the reports in question and no information about client identities was revealed.  Clients were bunched into categories but not named.  So, what is the CME afraid of?  Are they afraid that if more research is done that it might expose nefarious trading practices from some of their highest volume clients?  Shouldn’t an exchange encourage this type of research in order to make sure the public is being treated fairly?  Sure sounds like another conflict of interest has emerged at a for profit exchange.