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June 5 The top U.S. securities regulator said on Thursday her agency is developing rules that target high-speed traders, less transparent trading venues and order-routing practices, to make equity markets more stable and fair for all investors.
U.S. Securities and Exchange Commission Chair Mary Jo White said she hoped to get some of the proposals before her fellow commissioners in the "coming months."
There have been wide calls for market structure reforms since the May 2010 "flash crash" in which the Dow Jones industrial average plunged 700 points before a sharp rebound.
The rise of high-speed traders has also raised concerns, with critics questioning if they have an unfair edge in the market and if they skew pricing.
"The SEC should not roll back the technology clock or prohibit algorithmic trading," White said during a speech in New York.
"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," she added.
The heads of the two major U.S. stock exchanges said they were optimistic after hearing what White had to say about the direction she is taking.
Traditional exchanges have been urging reforms to tackle the increasingly opaque markets, as they have lost market share to competitors such as dark pools and brokerage internalizers which do not publicly display their quotes.
"It was clearly not a classical lunchtime speech. It was a clear policy direction for the commission, probably for the next three to five years," said Nasdaq OMX Chief Executive Robert Greifeld, who was in the room as White delivered her remarks.
"I have less concerns now than I had before. Obviously the commission has to work to deliver their case, but these were words of action that she used."
White said she has numerous 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.
She also said her staff is working on measures to improve how trading firms manage risks around their use of computer algorithms.
Beyond high-speed trading, White also announced that the staff is drafting other market structure reforms.
One such rule would require alternative trading venues such as dark pools and firms that match customers' orders internally to tell regulators and the public about how they operate.
Dark pools allow investors to execute trades anonymously and only make trading data available afterwards.
Another proposal would seek to mitigate potential conflicts of interest at brokerages by requiring more disclosure on how they handle orders for large institutional investors.
Such a rule could level the playing field because brokers are now required to disclose how their retail clients' orders are handled, but they do not need to make the same disclosures for institutional investors.
For a full run-down of White's proposals, please see the FACTBOX:
To help craft the new rules, White said she is creating a special new market structure advisory committee.
She also called on exchanges to adopt a rash of measures, including a broad review of order types, and requiring exchanges to add a "time stamp" on public consolidated trading data feeds so users can see just how quickly they are getting the information.
Annette Nazareth, a former Democratic SEC commissioner who is now a partner with the law firm Davis Polk & Wardwell LLP, said White's speech was "significant."
"It should strengthen confidence that the SEC is well aware of the issues and has a plan to address them," she said.
White's fellow SEC commissioners also said they welcomed her plans and look forward to tackling the issues.
"The staff has discussed market structure issues for years. It is good to hear that the Chair has directed them to take action," said SEC Democratic Commissioner Luis Aguilar, who added he hopes they will work with "deliberate haste" to get things done.
Republican Commissioner Michael Piwowar said he welcomes a "comprehensive market structure initiative," but noted "the devil is still in the details."
"I look forward to engaging in a thoughtful dialogue," he added.
(Reporting by Sarah N. Lynch in Washington, D.C.; additional reporting by John McCrank and Herbert Lash in New York; Editing by Bill Trott and Susan Heavey)