U.S. securities regulators are studying whether more proprietary high-speed trading firms should register as broker-dealers, which would subject them to greater oversight, a U.S. Securities and Exchange Commission official said on Friday.
Speaking at the Practicing Law Institute's annual SEC Speaks conference, John Ramsay, the outgoing acting director of the SEC's Trading and Markets Division, said that whether certain high-speed proprietary trading firms should be formally registered as brokers "is something we are looking at carefully."
High-frequency trading has come under more regulatory scrutiny over the past few years, in what has become part of a broader debate over whether the SEC's market structure rules are in need of a major overhaul.
Lightning-fast traders grabbed even more attention following the May 6, 2010 "flash crash," when the Dow Jones Industrial Average plunged more than 700 points before rebounding.
High-speed traders did not cause the crash. However, many hit the exits when the market soured, drying up liquidity and deepening the plunge.
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There is no clear definition of high-speed trading, making any rule-writing difficult. The rapid turnover of security holdings, especially the amount of securities held overnight, would likely be a key determinant.
Since the flash crash, some have since called for greater rules for high-speed traders, such as requiring them to act in a more formal capacity as market-makers, which help match buyers and sellers.
If more proprietary firms ultimately registered as broker-dealers, this could eventually put them on a path toward becoming designated market-makers.
Moreover, it would also subject them to the SEC and the Financial Industry Regulatory Authority's examination powers, which would mean they would need to open up their books to regulators on a routine basis.
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Whether or not a high-speed trader should register as a broker-dealer depends on a number of factors, Ramsay later told reporters on the sidelines of the conference.