The SEC is preparing a series of recommendations that would tighten oversight of high-frequency trading (HFT), better regulate trading during periods of rapid market movements and help ensure fairness for all traders, even as those who use algorithms seek technological advantages, the commission chairman has said.
In a speech to a global conference of exchanges and brokers in New York, Mary Jo White announced that she had ordered a series of reports to combat the perception of unfairness in today’s markets, help ensure stability at times the markets may be more vulnerable to sharp swings, and improve risk management at HFT firms.
‘Algorithmic traders, which include HFT firms and a large percentage of institutional traders, likely represent well more than a majority of trading volume,’ White said. ‘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.’
She said she has ordered staff to draft an ‘anti-disruptive trading rule’ that would prevent firms from taking advantage of periods of market chaos, such as amid sharp swings over natural disasters, major economic announcements and other events, to further destabilize prices to their own advantage.
‘Such a rule will need to be carefully tailored to apply to active proprietary traders in short time periods when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest,’ White said. ‘Instability arising during a broad market event may simultaneously affect hundreds or thousands of stocks, triggering many trading pauses and reopenings over a short period of time.’
She also said the SEC will closely follow the efforts of exchanges and the Financial Industry Regulatory Authority (FINRA) to minimize consolidated data latency to help ensure all traders receive important trading information at the same time. This may include the use of a time stamp on consolidated data feeds to increase the transparency of trading timing.
The commission may also require exchanges to outline how they use data feeds, encourage FINRA to expand its trading volume disclosure regime to include off-exchange market makers and broker-dealers, and will consider broader questions, such as ‘whether the current regulatory model for exchanges and other trading venues makes sense for today’s markets.’
