SEC To Tackle High-Speed Trading, Dark Pools With New Initiatives

U.S. Securities and Exchange Commission Chairman Mary Jo White said that the regulator is working on new rules that would target dark pools, high-speed traders, order-routing practices, and trading venues that don’t offer much transparency. Her proposed regulations mark the first time she has spoken about her plans to overhaul equity market structure rules since becoming head of the SEC last year.

Included in White’s proposals are an “anti-disruptive trading” regulation to curb high-frequency traders from making aggressive short-term trades when the market is vulnerable, as well as a strategy to make proprietary trading shops register with the regulators and share their books for inspection. The SEC chairman also said that her team is working on enhancing the way trading firms handle the risks involved with computer algorithms.

To improve oversight over high-speed traders, White wants to shut a loophole that lets trading firms get out of registering with the Financial Industry Regulatory Authority if they trade off traditional exchanges. Also, while noting that it wasn’t the job of the SEC to forbid algorithmic trading, White said that the Commission is trying to determine if there is anything about a computer-driven trading environment that works against the best interests of investors.

She also spoke about the development of a proposed rule that would make dark pools, brokerage internalizers, and other alternative trading venues disclose more about they way that they are run, as well as another proposal that would require brokers to reveal more about how they handle orders for big institutional investors. The latter would potentially decrease conflicts.

White said that the new measures would ideally create greater market fairness and stability, improve transparency and disclosures in the market place, and create markets that are more effective for smaller companies. Requiring greater transparency should hopefully even up the market for institutional investors and retail ones. Currently, retail brokers must report on their order routing practices while institutional investors’ flow patterns tend to be more opaque.

The agency has been assessing equity market structure reforms for the last few years, especially in the wake of the 2010 flash crash when the Dow Jones Industrial Average dropped 700 points before rebounding abruptly. Although high-speed trading tactics weren’t directly blamed for that event, much discourse about this type of trading has occurred since. In particular, the Regulation National Market System (REG NMS) was blamed for excessively fragmenting the market to such a degree high-speed trading occurred.

Meantime, some dark pools appear to be opting for greater transparency on their own. These private, lightly regulated venues are where sellers and buyers can trade under more anonymity than on stock exchanges. Along with internalizers, which are firms that make trades for retail brokerages, dark pools make up close to 40% of stock trading.

While critics of dark pools have said this type of off-exchange trading damages the market’s ability to price securities accurately because sell and buy orders aren’t published, their supporters have said that they give large institutional investors a chance to trade without altering the price as much as if their orders were shown on an exchange.

On Monday, Credit Suisse Group AG (CS) and Goldman Sachs Group Inc. (GS), which are two of the biggest opaque trading venue operators, made available documents that explain the way their venues work. Their disclosures arrived the same day that FINRA made available to the public data about the volume of share trades that are made on dark pools.

SEC Chairman Targets Dark Pools, High-Speed Trading, The Wall Street Journal, June 6, 2014

Finra makes dark pool data available for free, Credit Suisse leads in first week, FierceFinanceIT, June 3, 2014

FINRA Makes Dark Pool Data Available Free to the Investing Public, FINRA, June 2, 2014

More Blog Posts:
SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud, Institutional Investor Securities Blog, June 4, 2014
Second Circuit Overturns Judge’s Decision to Block Citigroup’s $285M Settlement With the SEC, Stockbroker Fraud Blog, June 4, 2014