Proposed SEC Rules Aim to Rein in High-Frequency Traders

Regulator says algorithmic trading requires expanding the definition of a dealer to level the playing field.



The Securities and Exchange Commission has proposed two rules that would require market participants who assume certain dealer functions, particularly those who act as market liquidity providers, to register with the SEC, become members of a self-regulatory organization, and comply with federal securities laws and regulatory obligations.

The SEC said the new rules were necessary because technological advances in electronic trading have allowed certain participants who may not be registered dealers to play an increasingly significant role providing liquidity in overall trading and market activity.

The regulator is concerned about how the use of algorithmic trading have made market transactions so fast that high-frequency trading firms are participating significantly in markets such as the Treasury cash market. The SEC said high-frequency traders account for 50% to 60% of the volume on the inter-dealer broker platforms in the Treasury markets, and often account for a large percentage of total volume of the broader secondary markets.

However, because not all these participants are registered as dealers or government securities dealers, the SEC warns that key investor and market protections it provides through registration and regulation are inconsistently applied to firms engaged in similar activities.

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SEC Chair Gary Gensler said that in recent years, the regulator has seen “high-profile events” in markets with significant participation by high-frequency traders, including “tremors” in the Treasurys  markets in 2014, 2019, and at the beginning of the COVID pandemic in 2020.

“Requiring all firms that regularly make markets, or otherwise perform important liquidity-providing roles, to register as dealers or government securities dealers also could help level the playing field among firms and enhance the resiliency of our markets,” Gensler said in a statement.

The rules, 3a5-4 and 3a44-2, would define the phrase “as a part of a regular business” to identify activities that would deem those engaging in them to be “dealers” or “government securities dealers” and thus subject to the registration requirements of Exchange Act. However, the proposed rules do not attempt to address all circumstances under which one may be acting as a dealer or government securities dealer.

The proposed rules would exclude anyone who has or controls total assets of less than $50 million, as well as an investment company registered under the Investment Company Act of 1940. 

“While I have deep reservations about the breadth of today’s proposal, it addresses some important issues on which public comment will be valuable,” SEC Commissioner Hester Peirce said in a statement. “I particularly appreciate the use of the rulemaking process to clarify the scope of the term ‘dealer.’”

The public comment period for the proposed rules will be open for 60 days following its publication on the SEC’s website, or 30 days after the proposed release is published in the Federal Register, whichever is longer.

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Inflation: Why the Late 1940s Better Matches Today, Says Guggenheim

Not the 1970s, which is most often cited as the historical precedent, says firm CIO Scott Minerd. If so, that’s good news for us.



The disco era is notorious for its economy-disrupting high inflation, and a lot of folks fear that this 1970s nightmare is recurring now. But perhaps a better—and for investors and consumers today, more encouraging—comparison is the big band period of the 1940s, specifically when the troops came home from World War II.

That’s the take of Scott Minerd, global CIO of Guggenheim Partners, in an essay on the firm’s site.  He pooh-poohs current references to the 1970s as a precursor to today’s situation. “America has suffered through bouts of inflation before, but most ‘experts’ are only looking back at the precedent from their lifetime: the inflation of the late 1970s and 1980s,” Minerd writes. 

The root causes of the 1970s double-digit inflation aren’t present nowadays, he reasons. Funding the Vietnam War and the Great Society, uncoupling the dollar from gold, and the Arab oil embargo that triggered an energy crisis “were a decidedly different set of circumstances,” Minerd finds.

His argument: Today’s imbalances find better parallels in the years right after World War II, with a big crisis (the war, the epidemic) that led to manufacturing upheavals, supply disruptions, catapulting monetary growth, and savings explosions. America in the war years was essentially in lockdown, complete with price controls (one aspect that the early 2020s doesn’t share with the late 1940s).

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The Consumer Price Index hit 16% in 1948, double the 2022 level. Still, the CPI surge was “transitory,” Minerd observes, an appellation that applies to right now, in his view. The Federal Reserve tightened credit in the late 1940s, although not by raising interest rates as it is doing now, Minerd relates. Back then, it allowed the market to set short-term rates, which isn’t the case now. Those rates climbed on their own. But the Fed also shrunk the size of its balance sheet—which had ballooned as it bought Treasury bonds during the war—the same as today.

By 1948, Minerd notes, pent-up demand had ebbed, supply of goods grew, and production shifted back to a peacetime economy. “In other words, the market’s ‘invisible hand’ worked as expected,” he writes. The economy had a brief and mild recession in 1949.

Contrast all that with the 1970s and early 1980s when Fed Chair Paul Volcker jacked up the benchmark federal funds rate to over 20%. That produced a vicious recession, far worse than the 1949 downturn.

One other difference is that, unlike in Volcker’s time, nowadays (and also in the late 1940s), there is no popular mindset that expects ever-spiraling inflation. Minerd points to the three-month Treasury bill, now yielding 0.51%, only a tiny bit higher than a year ago. The latest CPI reading is 7.9%.

The three-month moves roughly in line with inflation, he declares. To Minerd, its failure to do so now shows investors and the public don’t think the present inflation will persist: the three-month and inflation never have “diverged like we see today,” he says, which is “a sign of confidence in the transitory nature of the current inflation spike.”

Times do change, and the world of Bing Crosby was a lot different from that of the Bee Gees. In terms of inflation, though, Minerd sees 75 years ago as more in tune with the age of … Beyonce, perhaps.

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