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Tim Quast
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We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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April 1, 2002

Single Stock FuturesThe Complete Guide

By Gregory Bresiger

Also in this article

  • Single Stock FuturesThe Complete Guide

by Steven A. Greenberg

(Traders Press, Greenville, South Carolina, 194 pages) $29.95

reviewed by Gregory Bresiger

Government bureaucracies usually have two speeds - slow and slower.

However, when facing the prospect of losing some of their funding or authority, or when in danger of going out of business - a danger a public sector entity rarely faces in these days of leviathan government - they have one speed: superfast.

In the case of deciding which group of nannies would oversee single stock futures, the lawmakers and regulators took about as long as it sometimes takes for the U.S. government's legal monopoly postal service to deliver a letter.

It took close to 20 years for our hired help in D.C. to decide the regulator or regulators that would oversee single stock futures. This is an interesting part of this slender book, which also details some of the basics as well as the trading strategies of this financial product.

Cause Celebre

Back in 1982, when stock index futures began to be traded, the idea of the single stock future came to the fore. But Greenberg details how the battle to regulate single stock futures became a bureaucratic cause celebre. Greenberg writes that, "the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission became deadlocked as to which one of them would have regulatory authority over this hybrid product of a near security clone trading on a futures exchange." (page 5).

The deadlock lasted almost 20 years until Congress, at the behest of the battling regulators, finally passed legislation. And even then, only competition from European exchanges finally goaded Congress into settling the issue and ending the turf battle between these regulatory bodies. Congress passed the Commodities Futures Modernization Act two years ago.

How and why was this difficult issue finally resolved? Well, first the CFTC had the most important reason in the world to finally compromise: Its authority was going to run out on Sept. 30, 2000 and something that never ever seems to happen in modern America might have happened - a government body would have gone out of business.

So CFTC and the SEC started moving as fast as they could. Treasury Secretary Lawrence Summers acted as a mediator to ensure that the two agencies didn't become the bureaucratic equivalents of Israel and the PLO. Greenberg details the Camp David Accords of Single Stock Futures.

"The CFTC would be the primary regulator of futures markets and futures commission merchants (FCMs); the SEC would be the primary regulator of securities markets and broker dealers," Greenberg writes. (page 110). Still, the devil was in the details. And there were many details to this peace treaty.

But besides general principles, there were exacting rules for ensuring there would not be another outbreak of regulatory war. Broad-based indices would come under the authority of the CFTC provided that an indice was in Path A or Path B.

Path A:

1)The index has ten or more securities.

2)No single component constituted more than 30 percent of the weighting.

3)The five largest components by collective weight comprised no more than 60 percent of the weighting.

4)The bottom quarter of component stocks has a combined average daily dollar trading volume of more than $50 million, or $30 million if the index includes at least 15 securities.

Path B: