High-Frequency Trading

US SEC chair plots major rules for high-speed traders, dark pools

Mary Jo White: Market's not rigged

The top U.S. securities regulator said on Thursday she is developing rules targeting high-speed traders, less transparent trading venues and order-routing practices, a move designed to promote fairness for investors, shine more light on the markets and bolster stability.

U.S. Securities and Exchange Commission Chair Mary Jo White's ambitious proposals, unveiled in a speech in New York City, mark the first time she has articulated her plan for revamping equity market structure rules since she took over at the SEC in the spring of 2013.

U.S. Securities and Exchange Commission Chairman Mary Jo White.
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White said she has numerous regulatory proposals in the works, including an "anti-disruptive trading" rule to rein in aggressive short-term trading by high-frequency traders during vulnerable market conditions, and a plan to force more proprietary trading shops to register with regulators and open their books for inspection.

White also said the SEC is working on a handful of transparency measures.

One such rule would require alternative trading venues such as dark pools and brokerage internalizers to disclose more to regulators and the public about how they operate.

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Dark pools allow investors to execute trades anonymously and do not make trading data available until after the trade is complete.

Another proposed measure would seek to mitigate potential conflicts of interest at brokerages by requiring more disclosure on how they handle orders for large institutional investors.

"Investors and public companies benefit greatly from robust and resilient equity markets," White said in prepared remarks. "I am recommending additional measures to further promote market stability and fairness."

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The SEC has been exploring potential equity market structure reforms since early 2010. The agency's review intensified later that year, after the May 2010 "flash crash" incident in which the Dow Jones Industrial Average plunged 700 points before it sharply rebounded.

Regulators traced the rapid plunge back to the trading strategies of a computer algorithm that started in the futures market and quickly spread to the equities markets.

Although no high-speed trading tactics were to blame for the incident, it sparked a worldwide debate about the impact high-speed trading has on the marketplace, and whether the SEC's major market rule changes in the early to mid-2000s have led to unintended consequences that gave some investors an edge over others.

How the SEC will look at high-frequency trading

One rule in particular, known as Regulation National Market System (REG NMS), was designed to promote competition and price improvement but has since been blamed for overly fragmenting the market and giving rise to high-speed trading.

The debate over high-speed trading was reignited this year with the publication of the book "Flash Boys" by best-selling author Michael Lewis.

In the book, Lewis alleges high-speed traders have rigged the market because they are able to see first how others are trading, jump ahead and pocket the spread.

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White has since refuted Lewis' assertion that the markets are rigged.

However, she has repeatedly pledged since her U.S. Senate confirmation last year to bring certain "data-driven" changes to the equity markets to promote more confidence and stability.

Any regulations that are ultimately proposed will have to be vetted through a public comment process and approved by a majority of the SEC's five commissioners.

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In her speech Thursday, White also outlined several long-term initiatives to better understand how the SEC's past rules have shaped the present-day marketplace.

Those include a review of how REG NMS has fragmented the market. She also said the SEC would re-examine the regulatory model for trading venues, including both exchanges and alternative trading systems.

—By Reuters