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The Trading Mesh

The Potential Impact of Dodd Frank on HFT and Proprietary Trading Firms

Wed, 02 Nov 2011 05:29:00 GMT           

An Interview with Scott Parsons

Scott ParsonsIn this interview for the HFT Review, Mike O’Hara talks to Scott Parsons, Co-Founder and Managing Principal at Washington DC-based strategic advisory and lobbying firm, Delta Strategy Group. Earlier in his career, Scott was Chief of Staff and COO at the Commodity Futures Trading Commission (CFTC).

HFT Review: Scott, can you tell us a little about what you do at Delta Strategy?

Scott Parsons: Sure. We do two things. We analyze and translate what the folks in Washington are saying (regulators, Congress, whoever it may be), so that people in the market can understand how they’re expected to handle certain things. And we also help the policy makers understand the perspective of the market participants and industry folks.

So it’s a double function, we are trying to bring clarity to the politicians, the policy makers and the regulators on what’s really happening in the industry but we’re also providing clarity to the industry on what’s going on in Washington. 

HFTR: What are the key issues that you are focused on right now?

SP: There are several different things. Right now everything is about the implementation of the Dodd-Frank legislation.  The various financial regulatory agencies, particularly the CFTC and SEC, are consumed with its implementation and most of industry is watching and awaiting clarity on how the final rules come out.  Beyond regulatory reform however, we are looking down the road at various market structure issues, which for the most part were not addressed in Dodd-Frank. If the regulators didn’t have Dodd Frank to implement, our opinion is the dominant policy discussion would be around market structure.

As ironic as it sounds, we believe that with most of the regulatory bandwidth being taken up by Dodd Frank, it’s allowing some of the market structure issues that are not anywhere close to being mature, to mature a bit more. A better educated Congress and group of regulators will be much better at dealing with issues than policymakers reacting to perceived causes of market emergencies without having all of the facts..

And while Dodd-Frank is taking up a lot of resources today as the rules are being considered, once those rules are in place, the regulators will be free to consider other things. Our view is that the market structure issues will be a natural segue from Dodd-Frank into who’s using the markets, what the trading strategies are, how the markets have evolved, whether there is a need to update the regulatory structure around those markets and so on.

And once the regulators have more of an opportunity to focus on pure market structure issues, I expect we’ll get more into the role of high frequency trading firms; speed, technology, those sorts of issues. Particularly as under the new Dodd Frank world, there’s going to be more trading done on central platforms that previously was executed bilaterally.

HFTR: If we focus on the role of HFT and prop trading firms for a moment, how do you foresee those roles changing under Dodd Frank?

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