WASHINGTON Feb 21 U.S. securities regulators
are studying whether more proprietary high-speed trading firms
should register as broker-dealers, which would subject them to
greater oversight, a U.S. Securities and Exchange Commission
official said on Friday.
Speaking at the Practising Law Institute's annual SEC Speaks
conference, John Ramsay, the outgoing acting director of the
SEC's Trading and Markets Division, said that whether certain
high-speed proprietary trading firms should be formally
registered as brokers "is something we are looking at
High-frequency trading has come under more regulatory
scrutiny over the past few years, in what has become part of a
broader debate over whether the SEC's market structure rules are
in need of a major overhaul.
Lightning-fast traders grabbed even more attention following
the May 6, 2010 "flash crash," when the Dow Jones Industrial
Average plunged more than 700 points before rebounding.
High-speed traders did not cause the crash. However, many
hit the exits when the market soured, drying up liquidity and
deepening the plunge.
There is no clear definition of high-speed trading, making
any rule-writing difficult. The rapid turnover of security
holdings, especially the amount of securities held overnight,
would likely be a key determinant.
Since the flash crash, some have since called for greater
rules for high-speed traders, such as requiring them to act in a
more formal capacity as market-makers, which help match buyers
If more proprietary firms ultimately registered as
broker-dealers, this could eventually put them on a path toward
becoming designated market-makers.
Moreover, it would also subject them to the SEC and the
Financial Industry Regulatory Authority's examination powers,
which would mean they would need to open up their books to
regulators on a routine basis.
Whether or not a high-speed trader should register as a
broker-dealer depends on a number of factors, Ramsay later told
reporters on the sidelines of the conference.
If the firms are out "in the market on pretty much a
continuous basis" and "if they are providing quotes to other
participants," Ramsay said, "then they look like firms that are
registered and are required to be registered."
TICK SIZE PILOT ALSO COMING
There is not any formal rule-making in the works
specifically targeting high-speed traders, largely because the
SEC is still studying market data to see if new rules are even
But on Friday SEC Chair Mary Jo White announced that the
agency will proceed with another market structure initiative: a
test program to allow the stocks of small-cap companies to trade
in wider increments.
The "tick size" pilot will "widen the quoting and trading
increments and test, among other things, whether a change like
this improves liquidity and market quality," White said.
The SEC has been mulling over whether to do a pilot program
ever since it completed a study on the issue that was required
by the 2012 Jumpstart Our Business Startups, or JOBS Act, which
loosens securities rules to help small businesses raise capital.
In 2001, the SEC required so-called decimalization, in which
all listed stocks must be traded and quoted in one-penny
increments instead of in fractional increments such as
one-sixteenth of a dollar.
But Congress wanted the SEC to revisit this pricing amid
concerns it may be harming the liquidity of smaller companies.