SEC commissioner questions new market maker rules

WASHINGTON (Reuters) - A commissioner at the U.S. Securities and Exchange Commission questioned on Friday the value of saddling high-frequency trading firms with tighter market-making rules, which has emerged as a key possible response to the May “flash crash.”

Expanding the existing market-maker obligations to include the most active traders is seen as a way to ensure that these firms provide liquidity -- or the availability of buy and sell orders -- when markets plunge, helping to avoid a repetition of the May 6 breakdown.

Commissioner Troy Paredes, however, told a Security Traders Association conference that “the value of subjecting high-frequency traders to market-maker obligations is not self-evident” during times of stability.

“It would be unfortunate for investors if, as a result of burdening a wide swath of liquidity providers with new obligations, the quality of our markets actually deteriorated during the overwhelming majority of trading days when liquidity would be plentiful,” Paredes said.

The commissioner, one of five at the SEC, also questioned whether high-frequency algorithmic trading firms would continue to trade in the rare times of market stress -- even if they were saddled with market-maker obligations that would in fact require them to participate.

Exchanges, under regulatory and public pressure, last week submitted proposals to the SEC that would force market makers to quote closer to the price of the stocks in which they are registered to supply buy and sell orders.

These rules could expand to include high-frequency firms, whose rapid-fire trading now accounts for about half of all U.S. equity volumes.

SEC Chairman Mary Schapiro on Wednesday told the conference the agency was considering whether new rules were needed to govern the quoting and trading strategies of these firms.

Reporting by Jonathan Spicer, editing by Gerald E. McCormick