SEC proposes tracking large traders' moves

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By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, April 15, 2010

The Securities and Exchange Commission on Wednesday proposed limiting the ability of hedge funds and other traders to swiftly buy and sell stocks, bonds and other securities without any record of their activity.

Under the proposed rule, all large traders would each be assigned a unique identification number, which would tag every trade they make. Their trading records would only be accessible to regulators investigating manipulative or abusive trading.

"This rule is designed to strengthen our oversight of the markets and protect investors in the process," SEC Chairman Mary Schapiro said. "It would give us prompt access to trading information from large traders so we can better analyze the data and investigate potentially illegal trading activity."

The proposal is one of several recent moves by the SEC aimed at curbing any potential advantages that new technology might give to sophisticated traders.

One area that has stirred intense interest on Capitol Hill and Wall Street is high-frequency trading, in which firms buy and sell stocks and other securities in split-second intervals, often using computer algorithms.

Regulators currently lack easy access to records that show the details of such high-frequency transactions. As a result, they can't determine whether firms are trading rapidly in order to manipulate the market or conceal bad behavior.

The new rule would close this loophole by requiring large traders to register with the SEC. Large traders would be defined as a firm or individual that trades 2 million shares or $20 million in a securities in a day, or 200 million shares or $200 million a month. Registered traders would receive a unique ID, which they would have to provide to their brokerages when they conduct transactions. The brokerages, in turn, would have to submit any data requested by the SEC.

The data from a day's transactions would have to be made available to the SEC by the next day, and brokers would be required to monitor whether firms qualify as large traders. The proposed regulation is not expected to take effect for at least several months.

Trading experts say that the SEC's actions are probably necessary, but could drive trading activity into less-regulated areas.

"Right now, it's incredibly difficult from a regulator's perspective to understand what's happening in the market," said Larry Tabb, chief executive of Tabb Group, a research and advisory firm.

But, he asked, "does this provide incentives for funds who don't necessarily want their transactions being looked over by the SEC to move out of regulated markets -- basically equities and exchange-traded derivatives -- and move toward" less-regulated ones?

The agency several months ago proposed banning flash orders, which give some traders a sneak peek at big, market-moving orders to buy or sell shares.

The agency also proposed that all information about an investor's interest in buying or selling a stock be made available to all other investors, not just a private group in a "dark pool."

And finally, the agency proposed that brokers should not give their clients unfettered access to their exchanges and trading system. The initiatives are still awaiting public comment and final agency action.


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