SEC prepares new curbs on high-speed trading

The Securities and Exchange Commission is looking to establish a broad new set of rules to better monitor high-speed traders and other less-watched corners of the market.

SEC Chairwoman Mary Jo White unveiled the sweeping new initiative Thursday, which aims to bring the regulator up to speed with a high-tech stock market dominated by computer algorithms that trade in fractions of a second.

White said the SEC has long endeavored to keep up with new technologies as they come into the market, but her push comes amid a renewed debate about the role of high-speed trading following accusations those activities are making the markets unfair to regular investors.

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“We must consider ... whether the increasingly expensive search for speed has passed the point of diminishing returns,” she said in remarks in New York.

The sweeping new initiative would bring high-speed traders that frequently escape regulatory oversight under closer supervision and require them to register with an industry body.

Furthermore, she said SEC staffers want to monitor the algorithms high-speed traders employ more closely to make sure they are not too risky, and develop rules to curb disruptive trading activities.

“It is time that our regulatory regime is updated to take better account of the risks when they are poorly designed or operated,” she said.

Critics of high-frequency trading say operating in fractions of a second have resulted in a skewed market.

In his latest book, business author Michael Lewis charged that high-frequency traders have carved out an unfair edge in the market, reacting to trades before they are even completed.

While the SEC is taking steps to ensure the high-tech markets of today are operating efficiently and fairly, White took pains to make clear she does not believe the current market is fundamentally unfair.

She jabbed at Lewis’s attention-grabbing accusations when she said markets are “not fundamentally broken, let alone rigged.”

White also said she wants to shine a light on “dark pools,” private trading venues that have not previously been subject to regulatory oversight.

“Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues,” she said.

In addition to taking new steps, White is directing SEC staffers to review existing rules to see if they are contributing to market structure issues. Specifically, she said the SEC is reviewing whether Regulation NMS, which requires orders to be routed to whatever exchange offers the best price, is exacerbating issues by spreading trading across several venues.

Critics of high-frequency trading charge that the rapid moves can allow the traders to gain an unfair edge by reacting to trades on one exchange by making lightning-quick trades on another to pocket a profit.

White said that she wanted to work with exchanges to make the data feeds more stable and consistent, and that she wants to see if there is a way to de-emphasize speed as the paramount factor in trading success.

Of course, the new SEC initiative faces a long road, as the regulator is just getting underway on a process that could span years.