U.S. Securities and Exchange Commission Chairwoman Mary Jo White unveiled the regulator’s most sweeping plan yet for reining in high-frequency trading and monitoring dark pools and other secretive trading practices in the world’s largest equity market.
Operators of dark pools, broker-owned venues that compete with exchanges and don’t publish bids and offers, would have to provide the regulator with their rules for matching buyers and sellers, White said.
The SEC is aiming to bring more transparency to markets and address claims of unfair advantages held by traders who account for about half of U.S. stock executions and have been blamed for everything from the flash crash of May 2010 to market volatility during the European debt crisis. The agenda outlined yesterday could affect stock exchanges, brokerages and a class of proprietary traders who have so far escaped oversight.
“The SEC should not roll back the technology clock or prohibit algorithmic trading, but we are assessing the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them,” White told the Sandler O’Neill & Partners Global Exchange and Brokerage Conference.
The SEC joins the Commodity Futures Trading Commission, which has previously said it was considering registration for high-speed traders of futures.
Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations, asked regulators to provide information on risks posed by high-speed traders in advance of a hearing this month, according to three people with knowledge of the matter.
Levin, a Michigan Democrat, sought responses from the SEC and CFTC to 13 questions on the effects, trends, concerns and regulatory reaction related to high-frequency trading, according to a copy of the letter obtained by Bloomberg News and confirmed by one of the people.
“We have remained concerned with those issues as public interest in high frequency trading in the U.S. capital markets, and apparent trading abuses in connection with high-frequency trading, have increased,” according to the April 11 letter signed by Levin and Senator John McCain of Arizona, the panel’s top Republican. They requested responses by May 1.
High-frequency trading has also drawn scrutiny from law enforcement. The Federal Bureau of Investigation is examining whether traders abuse information to act ahead of orders by institutional investors. New York Attorney General Eric Schneiderman is investigating whether U.S. stock exchanges and alternative venues give high-frequency traders improper advantages and has called on regulators to tighten oversight.
Schneiderman, in a posting on his Twitter account, said he was “pleased to see” White’s comments “calling for market reforms to curb unfair advantages for HFT.”
Automated trading has achieved wider renown since the publication of Michael Lewis’s book “Flash Boys” and an announcement by one of the biggest firms, Virtu Financial Inc., to go public. Virtu’s offering has since been postponed.
High-frequency trading accounts for about 48% of all U.S. share volume, according to research firm Tabb Group. Such firms include Chopper Trading LLC, Jump Trading LLC and Tower Research Capital LLC, all of whom have been subpoenaed as part of Schneiderman’s probe, a person familiar with the matter said in April.
The new registration requirements would apply to a subset of trading firms that aren’t registered as broker-dealers with the SEC. Rick Ketchum, chief executive officer of the Financial Industry Regulatory Authority, said last month that such unregulated firms are often responsible for manipulative or disruptive trading seen by regulators.
“There still are a lot of smaller players and by forcing these firms to register there is going to be increased oversight on what she terms destabilizing HFT,” said Sal Arnuk, co-founder of brokerage Themis Trading.
The SEC is preparing a new rule that would require more oversight by traders of their algorithms, formulas that automate the buying and selling of shares, White said. While White said she was wary of setting speed limits on traders, the SEC will consider options for minimizing the speed advantage that some proprietary traders have.