(Bloomberg) — U.S. Securities and Exchange Commission Chair Mary Jo White unveiled the regulators strongest plan yet for reining in high-frequency trading in the worlds largest equity market.
Proprietary traders who use automated strategies and are now exempt from SEC oversight would have to register with the agency and comply with its rules, White said today in a speech in New York.
The SEC is also developing safeguards to restrain aggressive trading that might lead to extreme price swings as other traders withdraw from the market, she said.
White is trying to add transparency to an industry that has accounted for as much as two-thirds of U.S. stock trading while operating outside of public view and often beyond the scrutiny of regulators. Linked by Michael Lewiss book Flash Boys and others to everything from the flash crash of May 2010 to market volatility during the European debt crisis, high-frequency traders would face new rules to address practices that critics say have disadvantaged market participants.
We have taken important steps to further strengthen the investing environment, White said in remarks to the Sandler ONeill and Partners Global Exchange and Brokerage Conference. As we move forward to the next phase of our efforts to enhance our market structure, I am recommending additional measures to further promote market stability and fairness, enhance market transparency and disclosures and build more effective markets for smaller companies.
Trading Failures
The SEC signaled it was weighing major changes in how stocks are traded in January 2010, when it published a paper that sought feedback on high-frequency trading, dark pools and the business practices of exchanges. Soon after, the agency turned its focus to protecting markets from automated trading failures, such as the one in May 2010 that temporarily wiped out $862 billion in market value.
Under the plan White outlined today, stock exchanges also will come in for more scrutiny. The SEC will review the exchanges dozens of order types, which have been criticized for adding complexity with little public benefit by Intercontinental Exchange Inc. Chief Executive Officer Jeffrey Sprecher, whose Atlanta-based company owns the New York Stock Exchange.
The SEC also will work with stock exchanges to address claims of unfairness in how order and price data reach the public. Traders using exchange-sold direct feeds get orders and prices faster than investors relying on the public ticker, a gap highlighted in Lewiss book and criticized by New York-based trading-platform provider IEX Group Inc. CEO Brad Katsuyama.
Dark Pools
Operators of dark pools, broker-owned venues that compete with exchanges and dont publish bids and offers, will have to provide more information about how they handle orders, White said. KCG Holdings Inc., based in Jersey City, New Jersey, and New York-based Liquidnet Holdings Inc., which both operate dark pools, have said they will publicize their dark-pool rule filings.
The regulator also will wade into the debate over how brokers route the orders of their institutional clients. The agency will develop a requirement that brokers tell investors where their stock trades go to be executed, White said. The initiative responds to complaints that routing decisions are sometimes made against a customers best interests.
The SEC still envisions examining whether its own rules have caused excessive fragmentation and complexity, White said. The agency will create a new advisory committee of investors and others to help inform its initiatives and rule changes, she said.
–With assistance from Sam Mamudi in New York.
