SEC eyes new HFT oversight
SEC Chair Mary Jo White at a May 2014 meeting of the
Financial Stability Oversight Council. (Alex Wong, Getty Images)
SEC
Chair Mary Jo White Thursday outlined plans
for new regulations to address
the market impact of high-frequency trading and other computer issues.
Speaking
at a New York City conference, White said the agency would soon propose rules
that ultimately could:
- Require high-frequency traders to register as broker dealers, extending new regulatory control over a sector that has largely avoided oversight.
- Establish an “anti-disruptive trading rule” that could restrict high-frequency traders from executing short-term strategies that might disrupt markets.
- Require firms to improve their management of trading algorithms and enhance regulatory oversight of their use.
“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,” said White.
To
that end, SEC will also work with stock exchanges in an effort to reduce
disparities between the public data feeds used by small traders and the faster,
proprietary feeds typically used by high-frequency traders, White said.
The
market regulator will also examine the reliability and fairness of market data
feeds, White said in her speech at the Sandler O’Neill & Partners Global
Exchange and Brokerage Conference. The proposal is aimed at addressing alarm
raised last August when a Nasdaq public data feed failed, halting trading in
Nasdaq-listed stocks for hours.
Additionally,
the SEC will work with Wall Street’s self-regulator, the Financial Industry
Regulatory Authority, in an effort to expand disclosure by so-called dark pools,
where trading takes place away from traditional stock exchanges. FINRA this week
for the first time made some dark pool trading data available to average
investors on a delayed basis.
The
proposals mark the SEC’s broadest public response so far to rising public
questions about the impact of high-frequency trading and other computer-driven
transactions, which together account for a majority of U.S. trading. Those
concerns have intensified since the recent publication of Flash
Boys, a book in which author Michael Lewis argued the stock market is
rigged against average traders.
White
said the proposals would “further promote market stability and fairness, enhance
market transparency and disclosures, and build more effective markets for
smaller companies.”
However,
some of the initiatives could face opposition from high-frequency traders. Many
of the proposals would also require a vote by the full, five-member commission
after a public comment period. That likely means enactment could be months or
years away.
“In
general, it’s a very reasonable regulatory approach to improving and
strengthening the markets,” said Peter Nabicht, senior advisor of Modern
Markets Initiative, an advocacy group organized by firms involved in
quantitative or high-frequency trading.
But
he cautioned any regulatory changes pressed by the SEC should seek speed
improvements in the public data feeds used by average investors, rather than try
to slow the proprietary feeds that facilitate high-frequency trading. MMI will
support “a reasonable, data-driven approach to improving the markets for
investors,” said Nabicht.
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Lawsuit targets financial exchanges over HFT
(Photo: STAN HONDA
AFP/Getty Images)
Thirteen
major U.S. financial exchanges, including the New York Stock Exchange and
Nasdaq, are targets of a recently-filed federal lawsuit that accuses them of
improperly giving high-frequency traders priority access to trading data over
other investors.
Filed
in Manhattan federal court in New York, the civil action said the stock and
options exchanges and their subsidiaries enabled high-frequency traders equipped
with lightning-fast data feeds to get vital market data — and trade on it — in
advance of other investors.
"This
is a case about broken promises," said the 37-page complaint, which seeks
class-action status. The data "is still en route from the exchanges" to average
investors long after high-frequency traders "have received, and acted on, the
information to their advantage."
The
financial exchanges have not yet filed responses to the allegations because the
lawsuit is in a very early court stage.
Nonetheless,
the case potentially represents a major legal challenge amid rising public
concern about high-frequency trading. That concern has been spurred by the
recent publication of Flash
Boys, the book in which author Michael Lewis argued that U.S. stock markets
are rigged.
The
complaint comes days after Securities and Exchange Commission Chair Mary Jo
White announced plans that could rein in high-frequency trading with new
regulations.
England's The Guardian and U.S.-based Marketwatch first reported the filing Saturday.
The
lawsuit is led by prominent lawyer Michael Lewis, who gained fame from
successfully wrestling billions from the tobacco industry through legal actions
20 years ago. The attorney is unrelated to the author.
In
an interview with the Guardian's weekend magazine, attorney Lewis characterized
the action as a skirmish in a larger war against concentrated wealth and
political power.
"The
illusory market – the market that the investor sees when he looks at his monitor
– is anywhere from 1,500 to 900 milliseconds old," said Lewis. "That doesn't
sound like much, because the blink of an eye is 300 milliseconds. But that's a
long, long time in the world of HFT."
Senators fret over high-frequency commodity
trades
Laurel White, Medill News Service, May 14,
2014
(Photo: Susan Walsh,
AP)
WASHINGTON
— Senators are fearful that high-frequency traders are getting an unfair
advantage and endangering the stability of the U.S. futures market, the
financial exchange for commodities like corn and gold. But industry experts warn
against rushing to impose new regulations.
"These
markets have changed dramatically over the years – for a 21st century market, we
need a 21st century regulator," said Sen. Debbie Stabenow, D-Mich., who called a
hearing of the Senate Agriculture Committee she chairs to consider the
issue.
High-frequency
trading, the practice of utilizing high-speed fiber optic connections and
computer algorithms to trade, has become a hot topic in recent months. Some say
high-frequency traders have unfair advantages, "jumping the line" before other
traders. Industry experts worry about a repeat of the 2010 "flash crash," which
saw a precipitous drop in the market. A federal report found that high-frequency
trading accelerated and contributed to the crash.
The
Justice Department and the Securities Exchange Commission are
investigating alleged abuses by
high-frequency traders in the equities market. Stabenow said she is concerned
about the potential for similar abuses in the futures market, which operates
separately.
Some
experts say increased regulation of high-frequency trading isn't the answer to
ensuring integrity in the commodity futures market.
"What
is really driving this is a fear that (electronic trading) could go out of
control," said Scott Irwin, professor of agricultural and consumer economics at
the University of Illinois Urbana-Champaign. "I don't believe that's a valid
concern."
"I
think you have to be very careful in evaluating regulatory changes," said Pete
Kyle, professor of finance at the University of Maryland.
Instead,
Kyle said serious concern should be given to dwindling staffing levels at the
federal agency that oversees the futures market, the Commodity Futures Trading
Commission.
"They
don't have the staff to do what they're required to do," he said.
The
commission, which picked up a raft of new responsibilities under the 2009
Dodd-Frank Act , has lost staff in recent years. Its division of market
oversight, which is responsible for rules enforcement and market surveillance,
is operating with "about 109 employees," down from 130 or so in 2012, according
to Vince McGonagle, director of the division.
"We
do face substantial staff shortages," McGonagle said at the hearing.
The
president of CME Group Inc., which runs the nation's largest futures exchange,
told the senators he would welcome increased oversight by the CFTC.
"I
don't believe the CME has a credible business if we don't have a credible
regulator," Duffy said.
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