The need to ensure the integrity and oversight of U.S. markets is of paramount importance. That was the focus of a Tuesday (May 13) hearing of the Senate Agriculture Committee.

The hearing came on the heels of the need to reauthorize Commodity Futures Exchange Commission (CFTC) authority to continue oversight of the markets. It also came following a high profile piece on CBS’s 60 Minutes (http://www.cbsnews.com/videos/is-the-us-stock-market-rigged/) alleging the gaming of high-frequency trades in the stock market by manipulating computer systems.

Michigan Sen. Debbie Stabenow, chairwoman of the Senate Agriculture Committee, acknowledged concerns that government oversight is in an “arms race” with markets when it comes to new technologies. “When we look at (commodities) markets, on the one hand, we know it’s different -- it isn’t fragmented like the securities market. On the other hand, we’re talking about greater and greater technology and speed and whether, or not, the risks of higher trading speeds outweigh the benefits both in terms of managing risk and price discovery.”

This is not an idle concern testified Andrei Kirilenko, MIT professor of finance. “What we found empirically by looking at very important futures contracts is … firms that operate in the industry are highly concentrated. What happens when markets become concentrated like this is it creates a ‘winner takes all’ environment.

“Instead of focusing on the needs of customers, intermediates start focusing on how to outcompete their peers. Whoever is one nanosecond late won’t get the trade. Therefore what we might be witnessing is potentially socially inefficient investment in technologies that don’t necessarily benefit the end users.”

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Would the smaller retail investor notice if the market slowed down by milliseconds or nanoseconds?

“The technological advancement -- faster and cheaper computer power -- is bearing the fruit of making the prices, operating around the clock, having market quality indicators,” said Kirilenko. “Smaller investors, when executing a few contracts in futures, may be benefiting. But their pension fund managers who are trying to execute in size, trying to manage risks of their entire portfolio, may be paying the cost that, empirically, could be higher. It isn’t necessarily clear how much higher. … But on the whole, the benefits may be disproportionately shifting towards smaller trades and a few people inside the markets instead of a much broader constituency.”