02.27.2012
By Terry Flanagan

Regulators Scrutinize Trade Automation

The SEC has turned eyes on the very same trading practices that hedge funds have come to enjoy.

In recent years, hedge funds have been demanding more advanced technology for bigger, better, and faster market access to breathe life into their esoteric and proprietary trading strategies.

As the normal flow of market conversation would have it, hedge fund services providers such as vendors and prime brokers have compiled more customized algorithms, and designed mechanisms to physically improve trading speeds, such as sponsoring exchange co-location data servers. BMO Capital Markets offers an array of quantitative execution services that range from advanced portfolio trading strategies, to transaction costs analysis tools and services. Neighboring RBC offers its RBC Dark platform, a dark pool aggregator that provides end users with advanced analytics and anti-gaming strategies.

Naturally, regulators, notably, the SEC (Securities Exchange Commission) is ever-present as the global capital markets’ watchdog, and has heightened their long-deemed “talk” about cracking down on such advanced and perhaps “unfair” trading practices. The SEC is reportedly proposing a rule that could possibly charge firms fees for canceled buy-orders, a common practice among high-frequency traders.

At a February 24 event, Daniel Hawke, the SEC’s head of the market-abuse unit, noted that the body will be particularly inspecting co-location, where exchanges allow hedge funds and other traders an advantage of lower latency executive time. Hawke also noted that sell-side incentives to draw-in high speed traders, such as exchanges offering rebates to boost transaction volume, will also be put into question, if they’re confirmed as being misused.

He said other practices under examination include the rebates that venues pay to spur transactions, direct market access where brokers let investors send orders to venues themselves, and whether the types of orders exchanges offer are being misused.

Like hedge funds, alternative trading systems and other dark venues that aren’t broker-dealer operated may need register with the agency, Hawke added, highlighting private order-matching systems.

Hedge funds contacted by Markets Media were unable to respond by press time.

Related articles

  1. The exchange's Bitcoin ETN future is most likely not going to be its last.

  2. Fixed Income Liquidity to Become More Centralized

    Clients will have the ability to interact with a larger liquidity pool while minimizing market impact.

  3. The exchange's derivatives segment will close for trading on Friday 28 January 2022.

  4. Exchange group aims to support new markets for digital assets, cryptocurrencies and NFTs.

  5. Regulatory reporting is an important part of MiFID II.