SEC Chairman Unveils Sweeping Proposals to Improve Markets

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Thursday, June 05, 2014 9.10 PM / WSJ


The US Securities and Exchange Commission Chairman, Mary Jo White today unveiled a sweeping set of initiatives to address mounting concerns about the impact of computer-driven trading on the stock market, including proposals that would extend oversight of high-frequency traders and dark pools.


Ms. White said the agency will launch a new committee to weigh proposed SEC initiatives and rule changes about how the stock market functions. The SEC will also review key market regulations and exchange practices such as the use of complex order types that can give certain investors an advantage, she said.


Among the most significant rules unveiled by Ms. White, in a speech to market, bank and exchange officials in Manhattan, was one that would require high-frequency traders to register with regulators as broker dealers, pulling them further under government scrutiny. Such traders have largely avoided direct oversight since they are typically private outfits trading on behalf of their owners.

Ms. White also directed SEC staff to develop a new anti-disruptive trading rule to prevent rapid-fire traders from engaging in short-term strategies that can aggravate market volatility.

The proposed measures will help the market "operate openly, fairly and efficiently to benefit investors and promote capital formation," Ms. White said.


Ms. White's speech was her most direct response to heightened concern that the growth of high-speed trading and expansion of trading away from public exchanges have substantially changed how the market functions. Critics say the firms at times have access to advantages that give them a leg up over other investors.


The new rules, if approved and implemented by the SEC, could force significant changes upon high-frequency traders, who now account for more than half of all stock-market volume, according to analysts.


Ms. White said the agency will launch a committee to weigh proposed SEC initiatives and rule changes about how the stock market functions. The SEC will also review key market regulations and exchange practices such as the use of complex order types that can give certain investors an advantage, she said.

SEC to Enhance Market Structure:

  • Finalize proposed Regulation SCI to put in place stricter requirements for the technology used by exchanges, alternative trading systems and others.
  • Develop a new rule for additional safeguards when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest.
  • Improve firms' management of the risks associated with the use of algorithms and the SEC's oversight of their use.
  • Examine whether the SEC's own rules, including elements of Regulation NMS, have contributed to excessive fragmentation across all types of trading venues.
  • Examine whether to further mitigate or eliminate potential sources of conflicts between brokers and customers.
  • Finalize terms for a pilot program to allow wider tick sizes for the stocks of smaller companies.

Many of the proposals are likely to trigger pushback from some high-speed firms and other market players. Defenders of high-speed trading say the firms help regular investors, because the traders stand ready to buy and sell under most market conditions.

The SEC will look into concerns about the resiliency and fairness of market data feeds, Ms. White said.

A public data feed for the Nasdaq Stock Market failed Last August, causing the exchange to shut down trading in Nasdaq stocks for hours, raising questions about the vulnerability of computer systems handling huge amounts of trading data at lightning speeds.

The agency will work with stock exchanges to minimize speed differences between the public data feed and high-speed direct feeds typically used by high-frequency firms, Ms. White said. SEC staff will also examine whether exchanges can de-emphasize speed as a key to successful trading.

The measure addresses some concerns, reflected in Michael Lewis's critique of high-speed trading, "Flash Boys," that high-speed traders using high-speed private data feeds can detect market orders before investors using slower public feeds and profit from the information.

"Current market structure is not fundamentally broken, let alone rigged," she said. "To the contrary, the equity markets are strong and generally continue to serve well the interests of both retail and institutional investors. The largely positive data on broad market quality does not mean, however, that the current market structure is without issues."

Ms. White also said the SEC would seek to expand disclosures by dark pools, off-exchange trading venues that don't post investors' buy-and-sell orders, only publicly reporting trades after they take place. Ms. White said the SEC will work with Wall Street's self-regulator, the Financial Industry Regulatory Authority, to expand trading disclosures by dark pools and other venues where traders swap stocks away from public exchanges.

The agency will also weigh new rules to require brokers to disclose routing decisions for large, institutional orders, including orders sent to exchanges and dark pools, the SEC chairman said. Nearly 40% of all trading takes place away from exchanges, according to Tabb Group.

Dark-pool operators say the off-exchange venues help big investors trade, because they can post large orders without alerting the rest of the market to their intentions.

Ms. White said she will also direct the agency's staff to examine whether SEC rules such as Regulation National Market System have in ways worsened market quality by spreading trading across multiple venues. Critics say the system, which requires buy-and-sell orders to be routed to whichever venue has the best price, has spawned the growth of new exchanges and dark pools and put a premium on speed. Ms. White said the agency will weigh whether regulations should be altered to reflect recent changes in the market, such as the rapid expansion of turbocharged computer-driven trading.

The SEC will also direct exchanges to conduct a comprehensive review of order types and to make rule changes to clarify how they interact, Ms. White said. The SEC's enforcement division is investigating whether some high-speed traders are using order types—commands that exchanges provide that determine how traders' buy-and-sell orders will be handled—in ways that can give them an advantage over less-savvy investors.


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