SEC Mulls Changes To High-Speed Trading

September 23, 2010

The SEC takes aim at high-frequency traders on the eve of releasing far-reaching recommendations aimed at helping prevent the next flash crash.

Securities and Exchange Commissioner Mary L. Schapiro discussed ETF circuit breakers and took aim at high-frequency traders in a pair of speeches this month, ahead of the release of far-reaching regulations expected by the end of the month.

Since the “flash crash” of May 6, the SEC has convened a host of panels, solicited public comments and implemented a handful of piecemeal reforms—including stock-by-stock and single-ETF circuit breakers—designed to prevent a repeat of that event. An SEC representative told that the final report, due out by month-end, would include recommendations for comprehensive future action.

In a speech to the Economic Club of New York on Sept. 7, Schapiro described a sea change in
capital markets since the advent of high-frequency trading more than a decade ago.

“In the old manual market structure, the market participants with the best access to the markets—the specialists on the dominant exchanges—were subject to significant trading obligations that were designed to promote fair and orderly markets and fair treatment of investors,” Schapiro said.

Specialists have largely disappeared, replaced by high-speed computers that automatically execute millions of orders each day according to sophisticated algorithms.

The inherent problems with large liquidity providers—many of whom operate outside the SEC’s purview—became clear on May 6, when the U.S. equity market experienced its worst one-day price decline and reversal since 1929. A total of 324 securities suffered so-called broken trades—price moves of 60 percent or more from their last good sale. About 70 percent of those broken trades were in ETFs.

New Obligations For High-Frequency Traders?

Although Schapiro did not lay out the details of forthcoming regulation, she suggested that the SEC was considering imposing traditional market-maker obligations on the new breed of automated liquidity providers.

“We should consider the relevance today of a basic premise of the old specialist obligations—that the professional trading firms with the best access to the markets (and therefore the greatest capacity to affect trading for good or for ill) should be subject to obligations to trade in ways that support the stability and fairness of the markets.”

Schapiro said that the steps her agency has taken are a start, but that there is more work to do.

“We must look closely and comprehensively at the full range of issues, identify where the market structure is not fulfilling its mission, and take appropriate steps so that it does.”


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