The top U.S. securities regulator said on Thursday she is developing rules targeting high-speed traders, less transparent trading venues and order-routing practices, a move designed to promote fairness for investors, shine more light on the markets and bolster stability.
U.S. Securities and Exchange Commission Chair Mary Jo White’s ambitious proposals, unveiled in a speech in New York City, mark the first time she has articulated her plan for revamping equity market structure rules since she took over at the SEC in the spring of 2013.
It also marks one of the most ambitious equity market regulatory agendas since at least 2010, when the SEC rushed to install reforms to prevent a repeat of the “flash crash.”
White said she has numerous proposals in the works, including an “anti-disruptive trading” rule to rein in aggressive short-term trading by high-frequency traders during vulnerable market conditions, and a plan to force more proprietary trading shops to register with regulators and open their books for inspection.
She also said her staff is working on measures to improve how trading firms manage risks around their use of computer algorithms.
“The SEC should not roll back the technology clock or prohibit algorithmic trading,” White said. “But we are assessing the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them.”
White added the SEC is working on a handful of transparency measures beyond high-speed trading.
One such rule would require alternative trading venues such as dark pools and brokerage internalizers to disclose more to regulators and the public about how they operate.
Dark pools allow investors to execute trades anonymously and do not make trading data available until after the trade is complete.
Another proposal would seek to mitigate potential conflicts of interest at brokerages by requiring more disclosure on how they handle orders for large institutional investors.
Such a rule could level the playing field between retail and institutional order routing transparency.
Under current SEC rules, retail brokers routinely file reports about their order routing practices. But order flow patterns for institutional investors are far more opaque.
“The rule proposal would address this gap by requiring disclosure of the customer-specific information that a broker is expected to provide to each institutional customer on request,” White said.
The SEC has been exploring equity market structure reforms since early 2010. The agency’s review intensified later that year, after the May 2010 “flash crash” in which the Dow Jones Industrial Average plunged 700 points before it sharply rebounded.
Although no high-speed trading tactics were specifically to blame for the incident, it sparked a debate about the impact high-speed trading has on the marketplace, and whether the SEC’s major market rule changes in the early to mid-2000s have led to unintended consequences that gave some investors an edge over others.
One rule in particular, known as Regulation National Market System (REG NMS), was designed to promote competition and price improvement but has since been blamed for overly fragmenting the market and giving rise to high-speed trading.
The debate over high-speed trading was reignited this year with the publication of the book “Flash Boys” by best-selling author Michael Lewis.
In the book, Lewis alleges high-speed traders have rigged the market because they are able to see first how others are trading, jump ahead and pocket the spread. White has since refuted Lewis’ assertion that the markets are rigged.
Any SEC regulations that are ultimately proposed will have to be vetted through a public comment process and approved by a majority of the SEC’s five commissioners.
In her speech Thursday, White also outlined several long-term initiatives to better understand how the SEC’s past rules have shaped the present-day marketplace.
Those include a review of how REG NMS has fragmented the market. She said the SEC would re-examine the regulatory model for trading venues, including both exchanges and alternative trading systems.
Additionally, White said she is asking exchanges and the Financial Industry Regulatory Authority, which are tasked with self-policing their own markets, to come up with certain reforms.
One such reform, she said, would require more disclosures surrounding how the exchanges are using data feeds, such as telling the public which feeds are used to execute orders and route trades.
Exchanges will also be asked for a “comprehensive review” of order types to study how they operate and whether changes are needed.