US watchdog the
Securities and Exchange Commission (SEC) plans to tap the expertise of a
high-frequency trading (HFT) firm to bolster its understanding of low-latency
As part of the
so-called Midas project, Tradeworx, a New Jersey-based proprietary trading
firm, will reportedly sell the watchdog technology that gives it access to
real-time bid and offer data from the US’ 13 stock exchanges.
Using the data,
the SEC will be able to determine how HFT strategies interact with the market.
According to the
reports, Tradeworx will offer the SEC the same data it sells to other clients,
as well as analytical tools the firm uses internally to analyse market
patterns. The HFT firm will not have visibility on how the SEC is using the
Although the SEC
already has a number of proposed or available monitoring tools that can be used
to keep tabs on the activity of different participants, industry observers
suggest partnering with an HFT firm will help it get up to speed a lot faster.
“The SEC, like any regulator, is nowhere near as
sophisticated as firms which specialise in particular areas like HFT and this
partnership appears to be a recognition of that,” Sean Owens, director of fixed income and derivatives at
financial consultancy Woodbine Associates, told theTRADEnews.com. “In this agreement, the SEC wants their surveillance to
be more timely. Like the large trader identification rule, they want to be
faster in the ability to spot potentially harmful market activity.”
The large trader identification (LTID) rule was proposed shortly after the 6 May 2010 flash
crash and was designed to bolster the oversight of market activity. The LTID imposes reporting requirements on market
participants that trade over a certain amount in US-listed stocks and is used
by the SEC to reconstruct and investigate significant market events.
The regulator is
also waiting for US exchanges, in their role as self-regulatory organisations,
to propose a consolidated audit trail (CAT) that will combine securities
trading data across multiple US equity markets into a single database for the
The CAT, which
is likely to be implemented in 2014, will help the SEC better detect insider
trading and market manipulation across multiple markets.