RPT-Concern grows as SEC mulls new U.S. market rules

(Repeating with no change to headline or text) (For related story click on [ID:nN11322575])

By Jonathan Spicer

NEW YORK, Sept 16 (Reuters) - With regulators poised to discuss potentially sweeping changes to U.S. stock trading, market operators and traders expressed concern on Wednesday about politics' growing role in the debate, but also confidence that high-frequency trading would survive intact.

Several industry speakers at a conference here said uncertainty over possible new regulation cast an unfair shadow over capital markets that ran smoothly throughout the financial crisis, which struck a year ago.

Many credited that success to high-frequency trading, where fully-automated firms use lightning-quick computer software to make hair-trigger trades in small amounts of stock, benefiting from market imbalances or inefficiencies.

"The fourth quarter of 2008 was a stellar example of high frequency traders stepping up" to provide liquidity even as markets tumbled, said Arzhang Kamarei, managing partner at Thesys Technologies, which assists trading strategists.

"Certainly high-frequency has passed that test with flying colors," he told the conference hosted by Aite Group.

Still, controversy has swirled in recent months around strategies such as high-frequency trading, as well as "flashes," which are orders that some venues show specific firms before rerouting them to the wider market.

The U.S. Securities and Exchange Commission is scheduled to meet on Thursday to consider a recommendation to eliminate flash orders, as well as "other related issues," according to an agenda on its website. "If adopted, the proposals would prohibit the practice of displaying marketable flash orders." [ID:nN10411227]

Over the summer, some exchanges "flashed" buy and sell orders to their member firms. Major alternative venue Direct Edge still offers flashes, which critics charge favor the most sophisticated traders at the expense of smaller, long-term investors.

The SEC is also investigating high-frequency trading, which has come under fire for giving rise to what some call a two-tiered market.

Defenders argue flashes make it easier to execute orders. The far more numerous defenders of high-frequency trading, which is involved in an estimated 60 percent of all equity trades, say it provides U.S. markets better prices and deeper liquidity than markets in any other country or region.

"I think we are on the right side of the facts here, and I tend to believe that that's very important in ultimately making policies," said Richard Gorelick, chief executive of proprietary high-frequency trading firm RGM Advisors.

'CREDIBILITY, FAIRNESS, CONFIDENCE'

Lawmakers, led by Democratic Senators Charles Schumer and Ted Kaufman, have asked the SEC to probe high-frequency trading and curb flashes so that smaller investors aren't exploited.

Kaufman this week called for a regulatory approach "that recognizes manipulation and wrongdoing before it metastasizes and leads to systemic failures or seriously undermines market credibility, fairness and investor confidence."

Direct Edge CEO William O'Brien said on Wednesday "the politicization of market structure" is among the biggest threats to the continued functioning of capital markets.

Joe Mecane, NYSE Euronext's (NYX.N) executive vice president of U.S. markets, said flashes were "a relatively small debate that evolved into a very large debate."

While NYSE Euronext's New York Stock Exchange did not adopt the flashes under scrutiny, Nasdaq OMX's (NDAQ.O) Nasdaq Stock Market and privately-held BATS Exchange recently canceled the services. At most, flashes represented less than 3 percent of U.S. equity trading volume.

The SEC -- a key part of the Obama administration's wider financial reform plan -- has said it will include options exchanges, where flashes are called "step-up orders," in its review. Any new proposal would typically lead to a public comment period of up to three months. (Reporting by Jonathan Spicer; Editing by Valerie Lee)