By Sarah N. Lynch, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- An economist at the Commodity Futures Trading Commission is trying to determine if some high-frequency trading strategies in futures contracts tied to the Standard & Poor’s 500 index may moderate price swings like those seen on May 6.

CFTC economist Andrei Kirilenko is working with California Institute of Technology mathematical finance professor Jaksa Cvitanic, and the two are looking at a trading strategy known as “sniping,” which entails quickly submitting buy and sell orders of a certain size and then immediately cancelling them if they cannot be executed right away. They are theorizing that this trading strategy actually moderates price swings.

Cvitanic said in an interview that they began the study in June 2009, but they haven’t yet begun to analyze the trading data to see if the theory holds true. Kirilenko couldn’t be reached for comment.

The two economists published their theoretical model on high-frequency trading in a March working paper. The study is still in its early stages. But the outcome could be important for regulators to consider as they examine the reasons why the Dow Jones Industrial Average fell nearly 1,000 points on May 6 before quickly rebounding. Regulators are studying, among other things, what role, if any, high-frequency traders who execute transactions at lightning speeds may have played.

CFTC Commissioner Scott O’Malia said Wednesday that Kirilenko will be asked to discuss this paper and others on which he’s working in July at the first meeting of a new technology advisory committee. The CFTC advisory panel of experts will study high-frequency trading, co-location services and other technology issues.

Proprietary trading firms have become an increasingly larger percentage of trading volume on equities and derivatives exchanges. A report released by the CFTC and Securities and Exchange Commission this week suggested that the May 6 price volatility may have been exacerbated after some electronic liquidity providers shut down or scaled back trading activity.

CME Group (CME), which lists the E-mini futures contract tied to the S&P 500, has said that trading of the E-mini didn’t spark the massive sell-off in the equities markets and that high-frequency traders were not to blame. High- frequency traders make up about 36% of all volume across CME’s various trading platforms and 40% on the E-mini, according to CME’s Executive Chairman Terry Duffy.

CFTC Chairman Gary Gensler said in March his agency plans to draft a proposal around co-location services, which allow traders to place their computers in the same building as the trading platform.

The SEC, meanwhile, is looking at high-frequency trading as part of a much broader review of market structure issues including co-location, dark pools and flash orders, among other things.

-By Sarah N. Lynch, Dow Jones Newswires, 202-862-6634; sarah.lynch@ dowjones.com

(Jacob Bunge contributed to this article.)

  (END) Dow Jones Newswires
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International Monetary Fund economists, reversing the fund’s past opposition to capital controls, urged developing nations to consider using taxes and regulation to moderate vast inflows of capital so they don’t produce asset bubbles and other financial calamities. It said emerging markets with controls in place had fared better than others in the global downturn.

The recommendation is the IMF’s firmest embrace of capital controls and a reversal of advice it gave developing nations just three years ago. The IMF has long championed the free flow of capital, as a corollary to the free flow of trade, to help developing countries prosper. But the global financial crisis has prompted the fund to rethink long-held beliefs. It recently suggested the world might be better off with a higher level of inflation than central bankers now are targeting…

The order finds that, beginning in the fall of 2006 and continuing through February 2008, respondents fraudulently operated a commodity pool, known as Pressio LP, which traded a variety of instruments, including commodity futures contracts. Riley solicited more than $3 million from approximately 19 individuals through false representations that the pool would be a conservative, diversified balanced asset fund. However, as the order finds, contrary to such claims, Riley lost approximately $2.5 million almost exclusively trading commodity futures and misappropriated the remainder of the funds for personal and business expenses and for paying back existing pool participants.

The order further finds that the respondents issued false account statements to pool participants to conceal the trading losses and misappropriations. Based on the false account statements, respondents then persuaded participants to invest additional funds in the pool.

In addition, the order finds that PCM and Riley violated CFTC regulations by failing to register as a Commodity Pool Operator and Associated Person and failing to comply with requirements for Commodity Pool Operators.

In a related criminal action, on January 12, 2009, Riley pled guilty to fraud in connection with a scheme to defraud or obtain money or property by means of materially false pretenses, representations or promises. Riley is currently serving a 41-month sentence. Criminal restitution was set at $3,044,384.59. (United States v. Riley, Case No. SA CR 09-0001 (C.D. Cal. filed Jan. 12, 2009).)

“Should a rise in the yen threaten to damp corporate and consumer sentiment and exacerbate deflation, the BOJ will probably expand the loan program,” said Masaaki Kanno, a 25- year veteran of the central bank who is now chief economist at JPMorgan Chase & Co. in Tokyo. “If that’s not enough, the bank may turn to more bond buying.”

While increased liquidity injections may help restrain the yen, an expansion of the monthly 1.8 trillion yen ($20 billion) of bond purchases may spark concern the BOJ is financing the government’s deficit spending. Central bankers would have to counter any such perception, and may need to stress the urgency for Prime Minister Yukio Hatoyama’s administration to rein in the budget gap, one of the people said.

The Bank of Japan may be unique in considering additional monetary stimulus among the Group of 20 major economies this year. Exporters have led the rebound from the country’s worst postwar recession as falling wages, job losses and factory overcapacity hamper spending and deepen price declines at home.

Expand Credit Program

Central bank Governor Masaaki Shirakawa and his colleagues, who begin a two-day meeting today, will leave the benchmark interest rate at 0.1 percent tomorrow, according to all of the 17 economists surveyed.

One of the analysts, Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo and a former BOJ official, said the bank may expand the 10 trillion yen lending program it introduced Dec. 1 in reaction to the yen’s climb to 84.83 per dollar. The currency jumped more than 1 percent at the end of last week, to as high as 89.79 in Tokyo trading, underscoring the risk to the nation’s exporters.

The emergency lending facility, which provides commercial banks with funds for three months at 0.1 percent, could be expanded in stages, one of the people said. Along with increasing the size, officials might extend the maturity of the loans to six months, and later to 12 months, the person said.

‘Crucial Challenge’

Governor Shirakawa said last week that stamping out deflation is a “crucial challenge” and the bank will persist with its low-rate policy to aid growth. He said he expects the economy to keep growing, fueled by overseas sales, though the revival of exports and output has yet to spur domestic demand.

When the yen was trading around 93 per dollar on Jan. 7, Finance Minister Naoto Kan said he wanted it to weaken “a bit more” and he will seek to cooperate with the Bank of Japan on the currency’s level. The yen’s gain last week made it stronger than the 90-to-mid-90s range that Kan has said manufacturers regard as “appropriate.”

There are “still various policy measures that could be taken” by the government and the bank, Kan said Jan. 14. Last week he said it “would be going too far if the government asked the BOJ to implement specific monetary policy measures.”

With a public debt that’s almost twice the size of the economy, Kan may have little room to increase spending beyond the record 92.3 trillion yen budgeted for the year starting April 1.

‘Put the Heat On’

“The government may put the heat on the BOJ should the yen gain rapidly and stocks slide before the fiscal year end,” said Mari Iwashita, chief market economist at Nikko Cordial Securities Inc. in Tokyo. “The government is overwhelmed by the task of passing next year’s budget bill, so it has no choice but to depend on the BOJ if the economy stumbles.”

So far, borrowing costs remain contained even as the fiscal condition deteriorates, as deflation attracts investors to government debt. The yield on the 10-year note was at 1.325 percent on Jan. 22.

“I see a 30 percent chance that the bank will buy more bonds,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “The BOJ at heart probably wants to prevent more bond purchases because any increase would fuel speculation” that it will monetize the debt, Ueno said.

Any consideration by the board to buy more government bonds may hinge on whether the bank sticks to a self-imposed rule of limiting its holdings of the securities lower than the amount of bank notes in circulation. Bank notes are decreasing and the room to increase bond purchases is narrowing, one of the people with knowledge of the situation said.

Another option is for the bank to specify the period for keeping rates low, one of the people said, adding that it’s not currently an urgent issue. When it introduced a quantitative easing policy of pumping cash into the banking system in March 2001, it said the step would stay until prices stopped falling.

–With assistance from Minh Bui in Tokyo. Editors: Chris Anstey, Russell Ward

To contact the reporters on this story: Mayumi Otsuma in Tokyo +81-3-3201-8966 or at motsuma@bloomberg.net; Masahiro Hidaka in Tokyo at +81-3-3201-3564 or mhidaka@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at +81-3-3201-7553 or canstey@bloomberg.net

-0- Jan/24/2010 15:01 GMT

The neverending dance is illustrated perfectly by events following the bankruptcy of the billionaire Hunt brothers in 1980, who stockpiled silver, causing its price to quadruple and then collapse.

The scandal prompted an irate US Commodities and Futures Trading Commission (CFTC) to impose position limits on how many contracts each market player may own.
This would supposedly spell an end to speculation by those who were not end users (like natural resources companies and airlines) of the physical assets.

Just one year later, the regulator granted its first “bona fide hedging” exemption – to the physical commodities arm of Goldman Sachs, the bank that also happens to be a major speculative trader.

The concessions continued until President Bill Clinton signed the de-regulation bill that gave rise to the so-called “Enron loophole”, enabling fraudulent commodity market manipulation activities at the turn of the century.

It is hardly surprising given the CFTC’s light-touch history that its new limits on positions in oil, natural gas, heating oil and gasoline this week provoked scarcely a murmur from the markets.

“Position limits are so generous that we do not expect any direct market impact,” analysts from Commerzbank said dismissively after the long-awaited announcement.

The CFTC’s unexpected retreat, despite forceful rhetoric, is good news for most market participants, grateful that it has not overly vilified speculators – who do, after all, provide liquidity and better price discovery on the exchanges.

The proposals will grant exemptions to the companies that need physical commodities for their daily operations and be lenient towards the banks that hedge risk for them. Hedge and index funds will be the main losers, but there have been suggestions that breaking up into smaller funds could circumvent the new measures.

The main source of worry for observers is some of those funds hit by regulation will migrate to the “dark” side of the market known as “over-the-counter” – fundamentally less transparent and harder to monitor. Michael Dunn, CFTC commissioner, even believes that the new rules may, overall, “result in less transparency in the futures markets”.

After all, funds have been anticipating them for a good six months and already taken preparatory measures.

The CFTC noted that only 10 market players will have to rein back their holdings, out of 200-plus active in the energy futures market. It is here that the most obscurity – of much more concern than speculation in itself – is to be found, both among paper and physical commodity traders. These derivatives are traded directly between parties, without the cost and interference of a clearing house or regulated exchange. They are more complex and risky, with US observers such as Brooksley Born blaming them for uncertainty about junk assets lurking on balance sheets in the credit crisis. Nobody – not the regulators nor the funds themselves – could see who had built up the riskiest positions, adding to the seizure of the markets.

It appears that some of the funds usually trading on the regulated exchanges have already swapped to trading over-the-counter futures.

Since the CFTC and European regulators began sabre-rattling about an end to speculation, the US Natural Gas Fund, the world’s biggest exchange trader in its field, started to reduce its positions on the exchanges and began to build up over-the-counter positions. More than $2.4bn (£1.4bn) in assets out of its $4.5bn fund are traded on dark markets.

More monitoring of over-the-counter trades could be on its way. New legislation in the US and Europe looks set to force as many contracts through clearing houses and official platforms as possible. The key benefit of this is more data on the activity of traders rather than limiting any transactions they make.

Those against these laws have argued that business could migrate from the West to other financial centres if the rules were too draconian. With 80pc of commodities traded in the US and Europe, it would be a major and unlikely shift for traders to seek loopholes in the looser markets of Asia and the Middle East.

The jury is still out on whether speculation had any part to play in the oil price spikes of 2008, with most analysts and academics arguing that speculation, in itself, was not a big factor.

Given that opacity is the enemy of free markets, better information about both physical and paper traders who work in this corner of the market is surely the best way to find out.

If, as so many argue, speculation is not responsible for commodity spikes, then traders can have nothing to hide.

The Commodity Futures Trading Commission is deeply involved in a debate over the regulation of speculative trading on energy and other markets. Jeffrey Harris, chief economist for CFTC, who last year claimed he could find no direct link between speculation and high energy prices, is leaving the agency to return to academia, according to a Dow Jones report.

CFTC is about to unveil a major proposal to impose new trading limits on crude oil and other energy futures products, Harris departure timing comes at a critical time. CFTC Chair Gary Gensler has been quoted saying it is the CFTC’s duty to protect the American public from excessive speculation and he is pushing for a consideration of new limits, even though the agency’s economic team never reportedly found evidence of a causal link between excessive speculation and the 2008 price run-up.

There was a concern that Harris’ original conclusion might be politically motivated since CFTC was run by a Republican appointee at the time; however an investigation by the inspector general found no evidence of political meddling. The Dow Jones report notes that Harris has been under considerable pressure as the agency has looked into speculation issues.

Gensler’s move to limit speculation – which is what many surmise will come with the latest proposal – would be a reversal for CFTC. Expect the proposal to come out early in 2010, which is later than the original fall timeframe first announced.

The SEC’s complaint alleges that Jaschke violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of the broker-dealer books and records provisions, Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder. The SEC’s complaint seeks a permanent injunction and disgorgement with prejudgment interest and a financial penalty.

Statement of Treasury Secretary Tim Geithner on Passage of H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009

The U.S. Department of the Treasury today released the following statement from Secretary Tim Geithner on the passage of H.R. 4173 – The Wall Street Reform and Consumer Protection Act of 2009:

“I commend the House for passing H.R. 4173 – The Wall Street Reform and Consumer Protection Act of 2009. President Obama called on Congress to enact comprehensive reform of our Nation’s financial regulatory system in response to last year’s financial collapse. The President set forth clear objectives and principles for reform that were endorsed by Congressional leaders. House passage of this bill moves us an important step closer to meeting the President’s objectives for reform. Comprehensive reform must establish clear rules of the road with strong enforcement for our nation’s financial institutions and markets; end loopholes that allowed big Wall Street firms to escape supervision; make it clear that no firm is “too big to fail;” and provide strong consumer and investor protections for American families. As with any legislation of this scale and complexity, the Administration looks forward to continuing its close work with Congress to strengthen key provisions as the legislation moves toward final passage.“

-If NFA believes that a Member’s internal controls are inadequate at any time, NFA’s Compliance Director may require it to provide to NFA an internal control report that is prepared and certified by an independent public accountant who is registered under Section 102 of the Sarbanes-Oxley Act. -