The SEC has proposed a rule that would require high frequency computer-driven trading firms to register with the Financial Industry Regulatory Authority. Such firms have previously been treated as proprietary traders not required to register with FINRA because they trade from their own accounts rather than customer accounts.
Although several more steps need to be completed for the change to take effect, the move would significantly increase oversight of high frequency firms. The proposed rule is intended to update the financial industry’s regulatory framework to keep pace with today’s trading methods. SEC Chairwoman Mary Jo White commented:
[Current rules were] implemented at a time when our equity market structure was dominated by floor-based exchanges that could readily regulate all of their members’ trading activity. It was designed to accommodate exchange specialists and floor brokers that focused their trading on the floor of an individual exchange who might need to conduct limited hedging or other off-exchange activities ancillary to their floor-based business.
That is not our market today. Trading is now dominated by computer algorithms and active cross-market proprietary trading firms have emerged as significant market participants. These firms represent a significant portion of off-exchange trading, accounting for nearly half of all orders sent to alternative trading systems. The business of these firms is not focused on an exchange floor, and their off-exchange activity is far from ancillary.
Some have speculated that the SEC is responding to pressure to increase regulation of high-frequency trading in light of incidents like the 2010 “Flash Crash,” which caused the Dow to plummet almost 1,000 points. Previously, the SEC implemented “circuit breaker” rules that stop trading when stock prices experience wild swings in short periods of time.
A lawsuit pending in federal court in Chicago against the CME Group, the Board of Trade of the City of Chicago, and related parties claims the defendants violate the Commodities Exchange Act by providing high frequency traders with preferential access to futures markets. A motion to dismiss the complaint is pending.