Mary Jo White, chair of the Securities and Exchange Commission, has outlined proposals for new rules to reduce the potential negative impacts of high-frequency and computerised trading on market stability.
In a speech yesterday, the top US securities regulator also listed new measures designed to increase transparency in an equity market structure characterised by liquidity fragmentation, conflicts of interest and complexity.
At the Global Exchange and Brokerage Conference in New York, White also unveiled plans for a new Market Structure Advisory Committee of experts “to review specific initiatives and rule proposals”.
On high-frequency trading (HFT), White said SEC staff were developing a recommendation for an anti-disruptive trading rule that would apply to the use of aggressive short-term trading strategies by active proprietary traders in short time periods of high volatility “when liquidity is most vulnerable”. White said the SEC is also developing measures to ensure active proprietary trading firms come under increased regulatory oversight through dealer registration and membership of the Financial Industry Regulatory Authority (FINRA), an independent regulatory body.
In addition to rules aimed specifically at HFT, White said the SEC was preparing recommendations to improve the risk management and regulatory oversight of all algorithms used by participants in the US equity markets. She said the commission was also working with FINRA and exchange groups on ways of providing greater clarity on the uses and latency of exchange data feeds, due to concerns about the potential unfairness to investors of faster feeds.
Noting increased levels of off-exchange trading in the US equity markets, White said the SEC was looking into increasing the amount of operational information provided to it by alternative trading systems. She also backed FINRA plans to extend its new ATS trading volume disclosure regime to off-exchange market makers and other broker-dealers as registered ATSs account for less than half of off-exchange activity.
“While this expanded information will be an important tool for investors, we must continue to examine whether dark trading volume is approaching a level that risks seriously undermining the quality of price discovery provided by lit venues,” she said.
White acknowledged that the plethora of trading venues and other developments in US equity market structure was forcing the SEC to reassess its approach to the regulation of exchanges and trading venues. She also pointed out that broker-dealer ownership stakes in venues had the potential to cause conflicts of interest and as such said the SEC was looking into the development of a rule that would improve disclosure of order routing.
“Rule 606 of Regulation NMS currently requires some public disclosure of broker order routing practices, but it does not cover the large orders typically used by institutional investors. The rule proposal would address this gap by requiring disclosure of the customer-specific information that a broker is expected to provide to each institutional customer on request,” said White.
On the basis that the number or order types currently available from exchanges – many developed to meet the needs of HFT strategies – were a source of both conflicts of interest and complexity, White said exchanges had been asked to conduct a comprehensive review of their order types and how they operate in practice.
“I expect that the exchanges will consider appropriate rule changes to help clarify the nature of their order types and how they interact with each other, and how they support fair, orderly, and efficient markets,” she said.