March 25, 2015 / 4:51 PM / 5 years ago

U.S. SEC proposes more oversight for high-speed traders

WASHINGTON/NEW YORK (Reuters) - High-speed stock trading firms that execute transactions away from exchanges would be subject to greater regulatory oversight under a proposal unveiled on Wednesday by the U.S. Securities and Exchange Commission.

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The plan, which the regulator is issuing for public comment, would require as many as 125 SEC-registered broker dealers, many of which are high-speed trading firms, to register as members of the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-funded regulator.

The rules are expected to affect firms such as Virtu Financial, Jump Trading, and Tradebot.

As FINRA members, these firms would be required to open up their records for routine compliance examinations.

The plan marks the first time the SEC has officially sought enhanced market surveillance of proprietary high-speed trading firms, and is one of a series of measures the regulator is proposing to update equity-market structure rules.

The SEC has been exploring equity-market structure reforms since early 2010. The review intensified in May that year following the “flash crash,” in which the Dow Jones Industrial Average plunged 700 points before rebounding sharply.

Although no high-speed trading tactics were to blame for the incident, it sparked a worldwide debate about their role in the marketplace.

SEC Commissioner Luis Aguilar, a Democrat, said on Wednesday that the plan is important because it will improve FINRA’s surveillance efforts. That is because when proprietary trading shops now execute trades away from public exchanges, the firms’ identities are not reported to FINRA, he said.

“This will ensure that these (high frequency traders) can be held responsible for any potential misconduct,” he said.

All five SEC commissioners voted in favor of the plan, though some voiced concerns about its potential costs and effectiveness, and encouraged market participants to comment on the proposal.

“At a time when we are losing broker dealers on a regular basis due to the crushing load of regulation, we must be sure that the benefits of this proposal outweigh the costs,” said Republican SEC Commissioner Daniel Gallagher.

Most trading firms are highly automated and use pre-programmed instructions, known as algorithmic trading strategies, to make lightning-fast decisions on which securities to buy and sell, with little human intervention.

Worries that poorly designed algorithms could harm investors or be designed to intentionally manipulate the market led FINRA last week to propose a separate rule that would require those who design, develop or significantly modify trading algorithms to register as equity traders.       

Reporting by Sarah N. Lynch in Washington and John McCrank in New York; Editing by Peter Galloway

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