What’s SEC’s Next Move on HFT?

Terry Flanagan

SEC chair Mary Jo White’s June 5 speech on equity market structure indicates that regulators are taking a rational, measured approach to high-frequency trading and other changes that have swept the markets in the last few years.

“As much as the common rhetoric on television these days seems to be that everything is horrible and we should burn it to the ground, Commissioner White realizes that is rhetoric and not reality and is saying, ‘Let’s take a look at the markets, take a look at the data, let’s dive through it, and let’s start looking at places where we already have fair markets,” said Peter Nabicht, adviser to Modern Markets Initiative, an HFT advocacy group.

The speech indicates that “everything is open and on the table, from market structure to connectivity to current rules and regulations,” said Nabicht.

White said that the SEC would review Regulation National Market Structure (Reg NMS), and possibly allow crossed markets. “I think some of the changes made to the markets due to Reg NMS will actually be rolled back,” Nabicht said.

Keith Ross, CEO of PDQ Enterprises, which operates an ATS, said he welcomed “the openness to review Reg NMS. It’s good to hear that a rule that’s 10 years old now might need to be updated.”

The speech contained a number of ideas such as an anti-disruptive trading rule, registration of non-Finra traders, improved risk management, fairness of latency between direct data feeds and SIP, reporting dark pool trades to the consolidated tape, and reducing the number of order types.

White also indicated the need for market structure decisions to be based on data. “Going forward, more and more decisions will be made similar to the way trading firms and investors make their decisions – based upon data,” said Nabicht. “I think we’re going to start seeing a lot more regulatory decisions based on data, and providing more data to regulators so they can make those decisions.”

Ross agreed that the SEC’s commitment “to do data-driven analysis to try to make an intelligent decision about the shape of the market is absolutely the right way to go.”

With regard to HFT, White said that she would direct SEC staff to develop an anti-disruptive trading rule that would apply to active proprietary traders in short time periods when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest.

Ross said that such a rule could be difficult to enforce because it would require making judgments about the output of trading algorithms, which in turn would require evidence of intent.

“An anti-disruption trading rule may give them the freedom to just look at the behavior of an algorithm or a trading process and say, ‘We think that this is disruptive, therefore it has to be regulated or turned off, or disciplined,’” he said. “If an algorithm you are using does something that they deem to be disruptive, even if maybe you didn’t intend it, this will give them opportunity to correct it and discipline the market.”

The speech provides “a template for issues that they’re going to focus on and address,” Ross said. “They basically already announced that they’re going to do a tick-size pilot starting later this year. I would expect that to be put into place. Finra has already started to disseminate volumes for ATSs.”

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