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High-Speed Traders Face Order Reporting Requirement From SEC

Date: Thursday, April 8, 2010
Author: Bloomberg

The Securities and Exchange Commission may give some firms that engage in high-frequency stock trading identification codes to better track transactions accounting for more than 60 percent of U.S. volume.

SEC commissioners will vote April 14 on a proposal to require companies that exceed a volume threshold to report their executions to regulators, the agency said in a statement yesterday. Brokerages would have to maintain records on the orders, the SEC said.

The agency is evaluating whether strategies used at high- frequency trading firms and hedge funds are degrading the quality of markets by causing volatility or making it more difficult or expensive for investors to complete transactions. Any new rules could impose additional reporting requirements on large brokers, proprietary trading firms such as Getco LLC and RGM Advisors LLC, and hedge funds.

“We support well-regulated markets where regulators have the tools and information they need to effectively conduct surveillance and better understand market participants,” said Richard Gorelick, chief executive officer of RGM Advisors, an Austin, Texas-based firm that trades multiple asset classes. Gorelick said he hopes the SEC’s definition of large traders “will be broad enough to give regulators the insight they’re looking for.”

New rules are likely to affect both brokers and non- brokers. The SEC hasn’t said what the threshold would be under what it calls its large trader reporting authority. The SEC gained this authority from the Market Reform Act of 1990, which Congress adopted after the stock market crash in October 1987.

Electronic Blue Sheet

Efforts to institute a reporting system for large firms were abandoned in favor of easier access to transaction data from brokers’ customers, including proprietary trading firms and hedge funds. The SEC uses what’s called an Electronic Blue Sheet system to request the information it seeks on customers whose behavior it’s investigating.

Brokers in the U.S. are already under the jurisdiction of the SEC and submit audit trail data to the Financial Industry Regulatory Authority for Nasdaq-listed stocks and to NYSE Regulation, a unit of exchange operator NYSE Euronext, for securities listed on the Big Board.

Chairman Mary Schapiro announced her staff was working on the proposal in October, saying the agency wanted “better baseline information” on high-frequency traders. Lawmakers, including U.S. Senator Ted Kaufman, have questioned whether market participants who send orders for thousands of shares in milliseconds hurt returns for long-term investors.

Less Risk

The commission’s plan is “not a bad idea,” said Jamie Selway, founder and managing director of white Cap Trading LLC in New York. “If the SEC doesn’t know enough about certain market participants and strategies, and they need more data and insight to do their job properly, getting them more information is better than risking hasty or uninformed rule writing.”

The SEC is examining high-frequency trading, private trading venues known as dark pools and the structure of U.S. markets to determine whether it should stiffen regulations. New rules could make certain practices less profitable for some firms and hurt U.S. exchanges or alternative venues, where revenue depends on the liquidity attracted and the number of transactions executed.

“In general, it makes sense for the SEC to try to get more customer-level information,” said Cameron Smith, general counsel at Quantlab Financial LLC, a Houston-based quantitative research and trading company that does business around the world. “Hopefully they will also look at current reporting requirements and rationalize what they’re doing here so they don’t duplicate reports.”

End-of-Day Report

Selway said he hopes the SEC will institute a process such as a report filed at the end of the day instead of a requirement that orders be tagged with data, which would be more cumbersome for exchanges and trading firms. He would also like audit data to be more streamlined.

The equities industry already has “different flavors of audit trail data, as opposed to other markets like credit default swaps that some claim produced multi-billion-dollar holes in the economy,” Selway said. He added that an efficient effort to gather information could also spur the commission’s plans to create what it describes as a consolidated audit trail across markets and asset classes.

Any proposal would require a subsequent vote by SEC commissioners to become a binding rule.