SEC Delves Into High-Frequency Trading Restrictions

(September 22, 2010) — Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro has said her agency is considering a number of major changes to equity markets and will look into whether market participants who buy and sell thousands of shares in milliseconds could face restrictions on their trading strategies.

The investigation into high-frequency trading started last July, when a former Goldman Sachs computer programmer was arrested for allegedly stealing proprietary high-frequency computer code. Subsequently, during the “flash crash” on May 6, the Dow Jones Industrial Average dropped nearly 1,000 points before closing with a 348-point loss.

The top securities regulator said the new market for swaps trading would benefit from “competition, access, liquidity and transparency” already established in the cash equities market, according to Reuters. “As it takes shape over time, we will be working to embed into the security-based swap market the broad principles that have brought important benefits to the equities market,” Schapiro said at a Security Traders Association conference in Washington. She added that because high-frequency trading firms are subject to minimum obligations, the regulator will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies, TheStreet.com reported.

In the wake of the financial reform legislation passed by Congress in July, the SEC is additionally considering expanding market circuit breakers that thwart trading, as well as curbs on algorithmic trading programs that execute electronic orders automatically. Finally, the SEC will review the role of market “fragmentation” and the impact of dark pools of liquidity that fall outside the traditional market structure.

Both the SEC and the Commodity Futures Trading Commission (CFTC) are responsible for implementing new rules for the derivatives market that emerged from the Dodd-Frank Wall Street reform bill, passed this summer. A report on the causes of the flash crash is due by the end of September.